(PUB) Investing 2016

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14 • Fund Family Shareholder Association
market. I’d call that a big loss for the
active-management camp.
The fact that tech-heavy funds
didn’t even match, much less beat the
stock market during last year’s Tech
Winter doesn’t mean it’s a strategy you
should ignore.
I think the evidence is pretty strong
that good tech managers can (and do)
outperform. But, of course, there are
periods when Tech Winter freezes up
completely, just like last year. As a chill
swept through the tech sector during
the November 1, 2000 to February 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, com-
pared 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.
But if you’re betting on Tech Winter,
I wouldn’t necessarily go forVanguard’s
tech index fund or its ETF twin. Passive
investment strategies tied to technology
don’t always show their best sides dur-
ing the seasonally strong Tech Winter,
even though it’s the stocks of com-
panies involved directly in the digital
revolution which typically exhibit good
relative strength. Based on the record, it
pays to go active.
When you look back over 24 dif-
ferent Tech Winter periods (the data
for MSCI’s tech index, the bogey for
Information Technology ETF, 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
ETF has not. It may be hard to see
in the chart below, but the tech index
has nicely outperformed the market
over the full 24-year period (by better
than two percentage points per annum),
despite the calamity of the bursting of
the tech bubble in 2000. Still, its record
during the four-month Tech Winter is
not consistent.
Though pronounced prior to the
tech bubble, the index’s market-beating
ways during Tech Winter haven’t held
a candle to the performance posted by
some of the active managers running
typically tech-heavy Vanguard funds.
Modeling Tech
Does this mean Jeff and I want
to bulk up some funds in the Model
Portfolios ? Well, we don’t really have
to. We have plenty of handpicked
technology stocks in our portfolios
already. Between Capital Opportunity,
Dividend Growth and the mid-cap
index funds in the Growth Model
Portfolio, for example, we have frac-
tionally more than Total Stock Market
Index’s 16.5% weight in tech—but
don’t forget that these are well-chosen
tech companies, not the broader col-
lection found in an index. 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, I want to give you the
history of the Tech Winter phenomenon.
But 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 listed on
Wikipedia, and a quick Google search
suggests that others have either ignored
or missed the phenomenon completely.
So, you may ask why tech stocks are
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 outper-
formance.
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 cor-
porate computing 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 technological 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
newest iPad, or that a new cyber-secu-
rity system must be put in place, but
when the decision is made, the buying
must begin immediately, or someone’s
head goes on the block.
3 Decades of Outperformance
(Average November to February Returns)
PRIMECAP Explorer Morgan MSCI 500
Growth Info Tech Index
0%
1%
2%
3%
4%
5%
6%
7%
8%
Over 24 TechWinters, the
IndexOnlyOutperformed 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
10/9210/9410/9610/9810/0010/0210/0410/0610/0810/1010/1210/1410/16
Tech Winter:
November–February
MSCI Technology Index
vs. Total Stock Market
>
If you’re betting on Tech Winter, I wouldn’t necessarily
go for Vanguard’s tech index fund or its ETF twin.
Passive investment strategies tied to technology
don’t always show their best sides.