The next BIG thing

In a stock market that charges ahead on even the slightest hint of good news, no sector generates as much electricity as technology.

For the first quarter of 1999, high-tech funds ruled the category roost - soaring 17 percent, according to Lipper Inc., compared with broader market measures that rose an impressive 5 percent.

Nor is such dazzling performance a fluke. High-tech has led the pack throughout the late 1990s, up an average 27 percent a year during the past five years, beating the Standard & Poor's 500 Index, the primary market gauge, along the way. The S&P's annual gains averaged just under 26 percent.

And experts expect more of the same from firms that produce the likes of computers, chips, cell phones, satellites, and Internet access.

"I'm bullish on technology," says Stephen Dalton, senior portfolio manager with First Capital Group in Philadelphia.

He oversees roughly $1 billion in investment assets and says that while tech stock prices look high and volatile, they represent a megatrend that is altering the landscape - economic, corporate, global, and domestic.

"I expect the technology sector to continue to grow fairly rapidly" during 1999, he says.

William Keithler, manager of Invesco Technology Fund, in Denver, agrees, although he wonders whether tech funds will continue outpacing the rest of the market.

Recent volatility in the sector doesn't faze him, since turbulence frequently occurs as companies report their earnings, as they are doing now, he says.

The important factor, he says, is that technology continues to play a growing role in the nation's economic output, providing opportunities for investors.

Many analysts recommend general-purpose funds that have a broad exposure to technology, rather than those that limit their technology investments to computer and Internet companies. Such broad-based funds tend to do better in downturns.

Mr. Dalton says selectivity is important for investors looking to raise their exposure to high-tech. He likes companies that add bandwidth - bigger communications capacity into homes and offices. He is wary of personal-computer companies and firms involved in Internet commerce.

And technology is "going to be even more important in the years ahead," says Rao Chalasani, chief strategist for investment firm Everen Securities Inc., Chicago.

A recent report by investment firm Donaldson, Lufkin & Jenrette in New York says growing pressure for productivity will cause corporations to invest even more in technology.

Still, many analysts are wary that the high-flying sector might slump in the weeks ahead.

The stock price of Microsoft, reigning champion of the high-tech sector, is now 80 times higher than its 1998 earnings, compared with 60 for the tech sector in general and 33 for the overall S&P 500. Similar valuations for Internet stocks sail off the charts.

"The Nasdaq composite Index, which is in many ways a proxy for the high-technology sector, is up around 18 percent this year," says Arnold Kaufman, editor of The Outlook, an analytical review published by Standard & Poor's. "That follows a gain of 70 percent to 80 percent since the lows last October. An increase like that is probably unsustainable."

Mr. Kaufman suggests a high-tech correction would be short-lived, followed by a fast rebound, as occurred in mid-1998.

But technology companies have become so influential that even a minor tech correction could hurt the overall market, he says.

Technology companies now represent about 21 percent of the 500 companies in the S&P 500 Index.

More mainstream funds, which previously shunned tech stocks as too risky, are also jumping on the bandwagon.

"I've now got some technology holdings," says Don Ross, chief investment officer for National City Investment Management Co. in Cleveland. And just about every fund investment manager is turning to technology, he adds.

Some red-hot fund groups, such as Janus Group, increasingly tilt many of their funds to go-go tech companies.