A virtual float, and the technology tide turns

'Tech" and "fund" are still four-letter words for ordinary investors who got their fingers burnt at the turn of the century. Many lost thousands of pounds after a giddy spell in which people stampeded to put money into funds backing hi-tech firms, dot-com businesses and web technology.

'Tech" and "fund" are still four-letter words for ordinary investors who got their fingers burnt at the turn of the century. Many lost thousands of pounds after a giddy spell in which people stampeded to put money into funds backing hi-tech firms, dot-com businesses and web technology.

At the sector's peak during the ISA (individual savings account) season in March 2000, a staggering £880m poured into these funds, and companies couldn't cope with the number of applications. But the bubble burst and, as company prices fell, so did the stock markets. Many people sold out of collapsing funds such as Aberdeen Technology in disgust; others decided to make the best of a bad job and nurse their losses.

The collapse of a number of smaller companies in the sector has meant that technology funds have generally proved poor performers over the past five years, says Tim Cockerill of independent financial adviser (IFA) Rowan & Co.

"At least if Marks & Spencer's share price fell heavily, you would know there was still intrinsic value there and you might get your money back in the medium to long term," he explains. "This was not the case with some technology companies bought in the late 1990s."

Today, the sector is a shadow of its former self. Even Vodafone's glitzy launch last week of its 3G mobile phone services has failed to persuade IFAs to suggest anything other than caution to clients who want to buy into technology funds.

"Although there is a role for such specialist funds as a small part of a portfolio, there are better places to invest right now," says Phil Clements of IFA Towry Law.

Investment figures for the sector make depressing reading. The Nasdaq 100 index of hi-tech US companies has fallen over the past year (-4.13 per cent), three years (-15.3 per cent) and five years (-51.37 per cent).

Compare this to the FTSE All Share index of UK companies, which has seen rises of 12.28 per cent over one year and 5.94 per cent over three (although poor performance before then has resulted in an 8 per cent fall over five years).

An investor putting £1,000 in the average technology unit trust five years ago would today have only £443.40 left, according to figures from the rating agency Standard & Poor's.

Despite the gloomy figures, Mr Clements reports that technology funds enjoyed a bounce-back over the summer, with strong sector earnings and a successful stock market listing by the Google search engine.

"A common question from clients is what should they do with their [existing] tech funds," he says. "We believe investors should hold on to them, as there will be growth in the future."

Where once investors piled into specialist funds for exposure to technology companies, many general UK, US, Japan and Asia funds now buy the same hi-tech businesses for their own portfolios, says Mr Cockerill.

So by choosing a specialist technology fund, there is a danger that investors could be doubling up, warns Robert Burdett, joint head of Credit Suisse Asset Management's Multi-Manager Portfolio.

"Investors are likely to hold technology companies already through their core funds," he says. "For example, many managers have recently spotted opportunities in both hardware and software companies.

"Doubling up is a mixed blessing: [you] gain enhanced returns when technology does well but increase losses when it suffers."

Fund managers stress that investors should take a global view when investing in technology funds. If the world economy slows next year, as many experts predict, this will hit technology shares. If you do want to take a punt, make sure you appreciate these risks.

"Technology is for higher-risk investors who put a small proportion of their portfolio in this sector," says Darius McDermott of IFA Chelsea Financial Services.

To research technology funds, go to www.trustnet.co.uk. This website will tell you what each fund invests in and compare its performance with its peers.