(PUB) Investing 2016

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 >

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)

8%

7%

6%

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4%

3%

2%

1%

0%

PRIMECAP Explorer

Morgan Growth

MSCI

500

Info Tech

Index

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

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.

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

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

Tech Winter: November–February MSCI Technology Index vs. Total Stock Market

10/92

10/94

10/96

10/98

10/00

10/02

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10/16

14 • Fund Family Shareholder Association

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