Tiptoe back to hi-tech funds

Pick technology stocks with care and this time you could be a winner

Many of us learn about investing the hard way. This has particularly been the case with technology stocks. Over the past 12 months these once popular investments have suffered spectacularly. Those who rushed to put their individual savings account (ISA) allowance into technology, in the run-up to the end of the last tax year - following the sector's fine performance - realised too late that they hadn't understood the risks involved.

Many of us learn about investing the hard way. This has particularly been the case with technology stocks. Over the past 12 months these once popular investments have suffered spectacularly. Those who rushed to put their individual savings account (ISA) allowance into technology, in the run-up to the end of the last tax year - following the sector's fine performance - realised too late that they hadn't understood the risks involved.

Some of those who invested in technology at the beginning of last year saw their holding fall in value by more than 30 per cent. Technology stocks are now much cheaper than they were at the beginning of last year - which is encouraging a number of investors to pile into the sector again.

"Technology is here to stay and is going to play an increasingly important part in our lives, so you can't ignore it," says Craig Whetton, chief executive of independent financial adviser (IFA) Chartwell Investment. However, Mr Whetton says it is crucial you fully understand the risk, the strategy of the fund and the way it is managed, and don't just consider past performance. "Some people can cope with the volatility [of the tech sector] but others can't. If they won't be able to sleep at night a technology fund isn't for them."

Despite the fact that there has been a considerable correction in technology stocks, there is every likelihood that we have not yet seen the bottom of the market.

"It's not a bad time to be looking at the technology sector but be aware that it could fall further," warns Michael Owen, director of IFA, Plan Invest Group. "I'm still a bit wary [of the tech sector] and feel that there are a lot of technology companies that are still over-valued and have still got further to go down."

It is crucial, because of this volatility, to understand what you are investing in, rather than just base your decision on a tempting advertisement. The technology sector does have great potential for long-term growth. Baring Asset Management (BAM) predicts that it will be one of the fastest growing sectors globally this year. And there is more to technology than dot-com stocks; companies such as ARM Holdings, Logica, Cisco Systems, Infineon, Intel and Cap Gemini, all appear to be good prospects for the future.

There is certainly no lack of tech fund launches. Recently, Credit Suisse Asset Management added a Global TMT (technology, media and telecommunications) fund to the range available. Ian Chimes, chief executive of CSAM, says they held off the launch of a tech fund last year through concern about TMT valuations.

Mr Chimes says: "However, having seen the dot-com 'froth' being removed from many valuations, and by moving away from the restrictive nature of single sector funds, the timing is now much more opportune."

Mark Thomas, sales director at CSAM, says: "We think there will be further volatility in the short term, but in the longer term we believe there'll be great opportunities in these stocks.Activity and flexibility is the key. It's not about buying the whole sector but looking more deeply and picking stocks carefully."

It does appear as though confidence is slowly returning to the technology sector.

Richard Craven, partner at discount broker HCF Partnership, reports that his company has seen an increasing number of clients "erring once again towards the realms of technology". He adds: "Not missing the boat has to be an issue in a sector which can move so dramatically ... it has to be at least worthy of consideration."

Nevertheless, you should proceed with caution and look for long-term investment since the road ahead is likely to be rocky - technology stocks have shown that they can rise and fall significantly in a very short space of time.

Mr Owen suggests investing monthly or with a couple of lump sums in case there are further falls to come. It is possible to have tech exposure with less risk by investing in a multi-sector fund. Mr Whetton said: "Just because it doesn't have tech in the title doesn't mean a fund does not invest in that sector." Many European and global funds have considerable technology exposure but as they also invest in other sectors the risk is lessened.

Whichever sector you invest in, the key is to research thoroughly and seek advice if you need to - but invest only after you have fully understood the fund manager's strategy and level of risk involved.

* Contacts: Baring AM: 020 7628 6000; Chartwell: 01225 321700; Credit Suisse AM: 020 7426 2626; HCF Partnership: 0800 908938; Plan Invest: 01625 429217.

* 'The Independent on Sunday' has produced a free guide to ISAs, in association with The ISA Shop. The booklet, by Melanie Bien, personal finance editor, is available on 0115 958 7555 (quote ref IND). Or send a postcard with your name and address to: The ISA Shop Ltd, Freepost Mid 17891, Nottingham, NG1 6YA (quote ref IND).