(PUB) Investing 2015

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The Independent Adviser for Vanguard Investors • November 2015 • 5 FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641
in the coming year. Whether, in fact,
this “flush” will occur is always a ques-
tion mark. And by the time the question
has been answered, stock prices usu-
ally already reflect that—so you want a
manager who knows how to get ahead
of that move on your team.
A second and wholly separate factor
is Europe. European purchasers have in
the past accounted for a significant per-
centage of U.S. technology orders. It’s
typically the fourth quarter when they
do a lot of buying. In most years, this
occurs because of the longer summer
vacations European companies give
their workers, during which time orders
slack off. When workers return, orders
begin rising in the fall and through the
winter, often hitting a peak in the last
few months of the year. Now, given that
Europe appears to be in what I can only
hope is a relatively shallow recession,
the euro factor may not play into Tech
Winter this year.
However, let’s add in one more cata-
lyst that has typically helped tech stocks
late in the year: Discounting. Hardware
companies, beginning to retool for new
product launches, start offering dis-
counts on existing inventory to speed
sales. These discounts allow corporate
purchasers looking for proven tech-
nology to buy the cheap, well-tested
products still sitting on manufacturers’
shelves.
The net effect is that technology com-
panies begin to see increased demand,
and tech stocks rally in advance of
earnings news. Tech Winter draws to
a close after the start of the new year,
when technology companies restock
their inventories and a new purchasing
cycle commences. As this happens, tech
stocks don’t necessarily underperform
the stock market as a whole, but they
do become less predictable in their
movements, not following the pattern
commonly seen between November and
February.
As you know, Vanguard’s only tech
funds are Information Technology
Index and its ETF sibling. But over at
Fidelity, where active managers run a
host of tech-oriented funds, the evi-
dence that a smart tech investor can do
well during the four months of Tech
Winter is pretty compelling. Take a
look at the chart to the right showing
the average four-month returns for a
number of tech-related Fidelity funds.
(Jim Lowell, editor of Fidelity Investor,
supplied me
with this information.)
I think the evidence is pretty strong
that good tech managers can (and do)
outperform. But of course, there are
definitely periods when Tech Winter
freezes up completely. As a chill swept
through the tech sector in the Nov.
1, 2000 to Feb. 28, 2001 period, for
instance, Fidelity’s sector funds faced
losses ranging from Select Software ’s
33.2% decline to the 45.2% loss for
Select Computers, compared to a 12.9%
drop for the S&P 500. As has been said
many times, there’s no free lunch and
no guarantees when it comes to the
stock market.
If four-month losses that dire aren’t
enough to keep you from hastily mak-
ing a winner-take-all, loser-go-to-the-
poorhouse bet on a Tech Winter repeat,
remember what I said at the start: The
MSCI Information Technology index,
upon which Vanguard has based its
Information Technology Index fund
and ETF, has only a bit better than a
40% record of beating the stock market
over the four-month Tech Winter period.
Over the past 10 Tech Winters, the tech-
nology index has outperformed just four
times. So it’s not a sure thing, but giving
active managers a hand in making tech-
nology stock choices increases the odds
in your favor.
Weighing the Options
Whenever I speak about this phe-
nomenon, I always say that I don’t rec-
ommend investors make major portfo-
lio or investment decisions based upon
short-term trends, such as those we see
during Tech Winter.
Should you want to both own great
funds run by great managers, and try
to make a bet on a good tech sea-
son, my favorite choices are the
PRIMECAP Management-run funds:
Capital Opportunity, PRIMECAP and
PRIMECAP Core. The funds’ tech-
nology weights stood at 31.2%, 33.4%
and 27.3%, respectively, at quarter-end.
Obviously, with all of these funds closed
to new investors, I recommend you get
yourself some shares in PRIMECAP
Odyssey Growth (POGRX) before it
closes as well.
Would I bet on other tech-heavy
active funds in the Vanguard firma-
ment? Nope. Despite heavy tech hold-
ings ranging from 23.7% to 34.0% of
assets at Explorer, Morgan Growth
and U.S. Growth, their multimanager
amalgams don’t make them particularly
attractive over the long haul. (Though
I have to say I’m open-minded about
the new, new U.S. Growth now that the
management musical chairs has slowed
there.) They may outperform during
Tech Winter, but who’d want to own
them for longer than that?
My goal this Tech Winter remains
consistent with my philosophy as a
long-term investor: To stick with the
disciplined strategy for long-term
growth that I employ in my Model
Portfolios and take any short-term gains
or losses in stride. We can’t count on a
predictable gain every winter, but we
can count on solid management and
proven results, which is why I like the
PRIMECAP-run options. And if we get
a bit of a tailwind over the next four
months, then all the better for us. n
Fidelity Tech Fund Dominance
(Average November to February Returns for 30 Years)
Electronics Technology Software Computers 500
&Comp.Svcs. Index
0%
2%
4%
6%
8%
10%
12%
14%
If you want to bet on a
good tech season, my
favorite choices are the
PRIMECAP Management-
run funds.