The recent zig zags in technology stocks have not hurt the top-performing stock mutual funds in the Pensions & Investments ranking of funds most popular with defined contribution plans.
But in bonds, long-term corporates and plain-vanilla government securities were the stars during the year ended Sept. 30.
Over the one-year period, the top stock fund - T. Rowe Price Science & Technology - left competitors in the dust with a 66.1% return. Next was Twentieth Century Vista Investors with 54.31% and Putnam OTC Emerging Growth (A shares) with 47.16%.
The top stock funds also were in the top quartile on a risk-adjusted basis over the five-year period, as measured by Pension Research Institute, San Francisco.
T. Rowe Price Science & Technology also took top honors in the five years, with a compound-annualized 37.4%, followed by Keystone Small Company Growth Fund (S-4) with 30.4% and Twentieth Century Ultra Investors, with 29.3%.
In bond funds, the top performer for the year was Vanguard Long-Term U.S. Treasury, with 22.5%. Another Vanguard fund, Long-Term Corporate, ranked second with 19.9%, and MFS Bond was third with a 17.4% return on its A shares. In the five years, MFS was again third, with a compound-annualized 17%. It was joined at the top of the list by another total return fund, top-ranked Kemper Diversified, with an 18.2% return on its A shares; and Fidelity Capital & Income, with 17.8%.
All of the top stock funds handily outperformed the Standard & Poor's 500 Stock Index amid strong asset growth this year.
Twentieth Century Ultra, which held $9.8 billion on Jan. 1, ended the third quarter with $14 billion. The fund's technology weighting has also increased during the year to 65% from 35% to 40%, both because of stock appreciation and new investments.
"I don't see anything on the horizon that will derail the earnings of these stocks," said Christopher Boyd, vice president and co-portfolio manager for Twentieth Century Ultra.
Semiconductor companies make up the lion's share of technology holdings, including Micron Technology Inc., Texas Instruments Inc. and Intel Corp. although Mr. Boyd has lightened up the weighting recently.
Among Ultra's newer holdings: Schering-Plough Corp. and American Express Co. Inc. Still, Mr. Boyd said 8 out of 10 of the most attractive picks in Ultra's database are in technology.
Jim Callinan, portfolio manager of the $1 billion Putnam OTC Emerging Growth fund - which had only $450 million at the start of the year - differs from the other top managers in one key respect. He usually invests 20% in initial public offerings. Right now, the pickings in that market are slim. "There are very few really good deals and those that are really hot you can't get enough shares on the deal," he said.
But Mr. Callinan is willing to pay up for stocks he feels strongly about. A recent example was Desktop Data Inc., which went public last summer.
"I was one of the first to visit the company after the quiet period. I had the confidence to pay up for it. We got a nice allocation and I didn't flip it. The stock has continued to do well," Mr. Callinan said.
In Putnam OTC, 30 names account for 60% of the fund and 65% or more of the companies trade on Nasdaq.
Among the fund's newer positions: Computer Horizons Corp., a technology services company, and Endosonics Corp., a medical device company.
Putnam OTC's technology weighting is 34%. Mr. Callinan's largest holding is U.S. Robotics Inc., which represents 7% of the fund. Mr. Callinan recently cut semiconductor exposure to 4% from 10%, in favor of computer software and services.
But Glenn Fogle, vice president and co-portfolio manager of the $1.6 billion Twentieth Century Vista fund, is still bullish on semiconductors and semiconductor equipment suppliers. The fund, which --like Putnam OTC -- began the year at about half its size ($820 million), invests close to 20% in semiconductors. Its largest holding, LSI Logic Corp., represents 5% of the fund. Other names include Maxim Integrated Products Inc. and Amtel Corp. Suppliers include KLA Instruments Corp. and Ultratech Stepper Inc.
Vista has a huge 70% allocation to technology stocks, using a broad definition of the term, "but we're not uncomfortable with that," Mr. Fogle said, noting that stocks in various sectors of the technology market don't move in tandem.
The fund's median price/earnings ratio of 26 is eclipsed by its annualized growth rate of 57%, based on the most recent quarter's earnings reports for each holding. Mr. Fogle expects next quarter's earnings growth rate to be even faster.
The $1.8 billion Keystone Small Co. Growth fund (S-4) also has stuck with its technology weighting -currently 41%.
"We think the technology correction began in late July," said Christopher Ely, senior vice president and senior portfolio manager of the fund, which began 1995 with $1.223 billion. As the summer wore on into September it broadened to a wider array of tech stocks. We think we're in the final stages... We haven't seen any fundamental breakdowns in the companies we own. Most went through the third quarter with flying colors."
He has sold Integrated Silicon Solution Inc. and reduced Lam research Inc., both semiconductor stocks, an area he considers riskier than software and telecommunications.
"There's no shortage of new ideas, not just in technology. We're seeing more in health care. At some point the economy will rebound and we might see opportunities in retail," he said. The fund already owns such eclectic retailers as Staples Inc. and Discount Auto Parts Inc.
Its biggest holding is HFS Inc., a franchisor of hotel chains.