Tech Winter Investing

11/21/2003 12:00 am EST


Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

"Historically, tech stocks outperform the market for the four months from November through February," says mutual fund guru Dan Wiener. "It isn’t 100% certain, but it’s darned near. I refer to this four-month period as Tech Winter and if the markets keep plugging ahead as they have so far, we may be in for an especially warm one."

"Why the tech heat wave? Well, while it may seem strange that tech stocks follow a seasonal pattern, there are actually a number of factors I’ve found that can lead to their historical outperformance year after year. The first has to do with fourth quarter spending by corporations. Many information technology managers will have something of a nest egg squirreled away in their budget in case of an emergency or to spend on some technological innovation or product that becomes necessary for the company to stay competitive. At the end of the year, this unspent money is burning a hole in managers’ pockets, because they know that next year, come budget allocation time, if they have something left over, they’re likely to see a cut. So, rather than see their kitty cut, they spend in the year’s final months. This sales surge is duly noted and the tech stocks that benefit from this spending rise on expectations of higher earnings.

"A second factor is Europe. European purchasers account for approximately 35% of US technology orders, and during the fourth quarter they do a significant amount of buying. Why? Blame it on those lengthy, lazy European summer vacations—orders drop during the summer as workers take time off. When vacations end, orders begin rising in the fall and through the winter, often hitting a peak in the last few months of the year.

"The final catalyst for Tech Winter may be the discounts hardware companies apply to existing inventories as they begin retooling for new product launches. This allows corporate purchasers (especially those who have an eye for the ‘leading,’ as opposed to ‘bleeding,’ edge of technology)—to buy the cheap, well-tested products still sitting on manufacturers’ shelves. Tech Winter ends as technology companies rebuild their inventories after the start of the new year and a new purchasing cycle begins. When this happens, tech stocks don’t necessarily return less than the stock market as a whole, but they do become less predictable in their behavior, not following the historical pattern typically seen between November and February.

"Of course, I do not recommend making wholesale changes to your portfolio just to benefit from the Tech Winter phenomenon. While the evidence overwhelmingly shows that the trend exists, Tech Winter is not a guarantee—year-to-year results can vary wildly, and not all funds with heavy tech weightings are worthy of your investment. My favorite choices in this category are Capital Opportunity (VHCOX) and PRIMECAP (VPMAX), which both carry a significant tech weighting (34% and 26% of assets, respectively). MidCap Growth (VIMSX) is another tech heavy, with 30% of assets in the sector, and of course Growth Index, (VGAGX) at 25% of assets, is another. Though funds like Growth Equity (VGEQX), with 23% of assets, and US Growth (VWUSX), with 27% of assets) also favor technology stocks. So far this year, Capital Opportunity has been near the top of the Vanguard performance range and I continue to see it as a sound investment going into this Tech Winter and beyond.

"You also don’t have to play the technology phenomenon with open-end mutual funds. You can use exchange-traded funds, or ETFs, as decent stand-ins. The NASDAQ 100 Trust (QQQ ASE) , nicknamed the Cube, returned 2.5% in last year’s Tech Winter. S&P’s Technology SPDR (XLK ASE) dropped 1.4% and the Dow Jones Technology iShares (IYW ASE) gained 1.0%. The SPDR and iShare are both invested completely in tech, spreading their assets across a variety of sub-sectors including software, semiconductors, telecommunications. The Cube, by contrast, has a little more diversification, holding about 70% in tech, with the other 30% mainly in healthcare and retailers. This can offer a higher degree of protection than the SPDR and iShare when tech stocks fall, but could also hamper performance when tech is sailing. And the new Vanguard Technology VIPER is a new option for those looking to jump on the tech train."

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