(PUB) Investing 2015

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4 • Fund Family Shareholder Association
AS SURE AS COLD WEATHER returns
to northern climes in November, so does
a hot season for technology stocks.
The November to February period I
refer to as TechWinter is upon us, and on
a valuation basis, big techs still look rel-
atively good despite this year’s market-
beating performance by Information
Technology ETF, up 6.8% through the
end of October versus a 1.8% gain for
Total Stock Market Index.
Last year I told you pretty much
the same thing. Tech stocks looked,
on the whole, to be pretty good val-
ues, and over the ensuing four-month
Tech Winter from November through
February, tech indeed outperformed
quite handily.
If we’re to see a repeat, then, would
I advise that you simply buy Vanguard’s
tech index fund or its ETF twin? Not
a chance. Passive investment strate-
gies tied to technology don’t always
show their best sides during the season-
ally strong Tech Winter, when the stocks
of companies involved directly in the
digital revolution typically exhibit good
relative strength. Based on that record, it
pays to go active.
When you look back over 23 dif-
ferent Tech Winter periods (the data
for MSCI’s tech index, the bogey for
Information Technology Index, only
goes back that far), it has not paid to be a
tech-only indexing investor—Vanguard
funds with heavy allocations to tech
have consistently outperformed the
market, while Information Technology
Index has not. It may be hard to see in
the chart on this page, but the tech index
has nicely outperformed the market
over the full 23-year period (by almost
2 percentage points per annum) despite
the calamity of the bursting of the tech
bubble in 2000, but its record during
the four-month Tech Winter is not con-
sistent.
Though pronounced prior to the tech
bubble, the index’s market-beating ways
during Tech Winter haven’t held a can-
dle to the performance posted by some
of the active managers running typically
tech-heavy Vanguard funds.
Tech Winter Heating Up
The coming Tech Winter remains a
toss-up between the active and passive
portfolios, as the tech index’s largest
company, Apple, has outperformed so
far in 2015.
But I’m not that concerned about
the index doing well or not, because I
believe we have plenty of top, hand-
picked technology stocks in our port-
folios. Between Capital Opportunity,
Dividend Growth and Selected Value
in the Growth Model Portfolio, for
example, we have a bit more than Total
Stock Market Index’s 16.0% weight
in tech—and don’t forget that’s well-
chosen tech, not index tech. So, as in
years past, I’m loath to make trades to
reallocate for the months ahead. Still,
it’s worth keeping your eye on this
seasonal tech ball, since, relative to the
overall market, technology can have an
outsized impact on our returns.
As always, before I get into the
nitty-gritty of the numbers, let’s talk a
bit about what this Tech Winter thing
is and why it occurs. Let me start by
saying that I take full responsibility
for coining the term “Tech Winter” to
refer to the four-month period between
the end of October and the end of
February. I know you won’t find it list-
ed on Wikipedia, and a quick Google
search suggests that others have either
ignored or missed the phenomenon
completely.
So, why is technology historically
hot during these coolest of months?
While it may seem strange that tech
stocks follow a seasonal pattern, there
are actually a number of factors I’ve
found that can explain the outperfor-
mance.
The first has to do with fourth-quarter
spending by corporations. Information
technology managers (the guys and gals
who tend to your in-house desktop
and myriad other corporate comput-
ing functions) usually hold back some
of the money in their budgets during
the course of the year in case of a late
emergency, or to spend on some tech-
nological innovation or product that
becomes necessary for the company to
stay competitive as the year progresses.
A company, for instance, may take
months to decide that yes, they do want
salespeople to carry the new iPad, or
that a new cyber-security system must
be put in place, but when the decision
is made, the buying must begin imme-
diately, or someone’s head goes on the
block.
As the calendar draws closer and
closer to year-end, there may be unspent
money that needs to be used. Why?
Because the tech managers know that
next year, come budget allocation time,
if they have something left over from
the previous year, they’re likely to see
those budgets cut. They don’t want that,
so they spend liberally in the year’s final
months, upgrading a server here or an
office full of smartphones there.
That spending also has tax implica-
tions for companies that want to cut
down on what they owe the government.
Whatever the rationale, this spending
surge, referred to by its practitioners
as a “budget flush,” is often noticed in
the markets. And the tech stocks that
are expected to benefit from this sea-
sonal year-end spending begin rising
on expectations of increased earnings
SEASONALITY
Tech Winter: When Active Wins
Over 23 TechWinters, Index
Only Outperformed in 10
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
2.75
3.00
3.25
3.50
3.75
10/9310/9510/9710/9910/0110/0310/0510/0710/0910/1110/1310/15
Tech Winter:
November–February
MSCI Technology Index
vs. Total Stock Market