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Beware of fund rumors

At a recent holiday party, I happened in on a conversation about Invesco's Telecommunications Fund. The fund, with stellar performance in 1998 and 1999, has performed dismally over the past two years just like other funds in its sector have. Shareholders of the fund at the party said the fund's lousy performance was due to one stock held in its portfolio. I said, in a diversified mutual fund, that's not likely to be the case. The party guests looked at me in disbelief.

One of things mutual funds have going for them is diversification. The theory behind diversification is simple: Not putting all of your eggs in one basket helps spread of risk of investing. Invest in a sector fund, like Invesco's Telecommunications Fund, (800-525-80850), and while diversification is still an integral part of the game, there's added risk and volatility because of the fundís targeted investment focus.

"Investors have to look at sector funds much differently than they do other types of funds, " says Brian Hayward, portfolio manager of the Invesco Telecommunications Fund, (ISWCX). "That's because there will be times when the sector will be in favor, as we saw in the late 1990's for telecom. And then there will be times when it will be out of favor---dramatically out of favor---as we've seen in 2001. "

As for whether it was one stock that the party shareholders identified as JDS Uniphase, that brought Invesco's Telecommunications Fund to its knees, Hayward said that the answer is no.

"In late '99 and 2000, the combination of JDS and Uniphase (before they merged) were the (fund's) two largest holdings totaling about 6 percent of the portfolio,í says Hayward. "And that's when they were flying high. By the time late 2000 came around, we had gone from 6 percent down to 2 percent in the portfolio by our own actions ---not by the market doing it for us."

Hayward explained that the fundís prospectus reads that one stock can make up as much as 25 percent of the portfolio but that thatís not something he's ever come close to practicing. That 25 percent holding comes from the Investment Act of 1940. It states that diversified funds can be made up of two baskets of holdings; a 75 percent basket and a 25 percent basket.

In the 75 percent basket, a fund canít own more than 10 percent of the voting securities of any one issue, i.e. company, and that any one holding can't comprise more than 5 percent of the fund's assets. In the 25 percent basket, a holding may be greater than 5 percent but no more than 25 percent of the fund's assets.

Keep in mind that sector funds, as well as any other kind of fund in which the fundís name specifies a particular type of investment, have to have at least 65 percent of their assets invested in their respective types of securities. ( That percentage is being upped to 80 percent in April 2002.) So, you can see how easily market downturns can make mush out of hot sectors turned cold.

"The market has been horrible for the last 18 months, " says Hayward. " Of the roughly 250 ( telecommunications) names that we track here, 20 are up for the year. And more than half are down more than 50 percent."

But not is all doom and gloom for telecom stocks. Hayward says U.S wireless companies have done well this year and that some previously high priced telecom companies that were hit hard have moved up and even doubled in price so far this year. Regarding his fund, Hayward doesn't think its performance will return to the lofty 144 percent return experienced in 1999. Once companies start spending again, he figures that the fund's returns ought to swing back to their normal long-term levels.

If you're wondering what the moral to this story is, it's this: Invite a mutual fund columnist to a party and who knows what will come of it.


Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.

To read more articles, please visit the column archive.

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