(PUB) Investing 2015

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 , www.FidelityInvestor.com, 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.

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

Fidelity Tech Fund Dominance (Average November to February Returns for 30 Years)

14%

12%

10%

8%

6%

4%

2%

0%

Electronics Technology Software Computers

500

&Comp.Svcs.

Index

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 If you want to bet on a good tech season, my favorite choices are the PRIMECAP Management- run funds. 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

The Independent Adviser for Vanguard Investors • November 2015 • 5

FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641