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By Gretchen Rupp | 03-06-2017 02:00 PM

3 Tech Funds for Patient Risk-Takers

Bronze-rated AllianzGI Technology, Columbia Seligman Communications & Information, and T. Rowe Price Global Technology add spice to a diversified portfolio.

Gretchen Rupp: The funds found in Morningstar's technology category invest in innovation. The types of companies found in technology funds create software, support cloud computing and data storage, and manufacture semiconductor chips, to name a few examples. They range from large-cap stocks, such as Apple, Facebook, and Google, to mid- and small-cap stocks like Square and CDW.

Morningstar awards Bronze analyst ratings to three open-end funds: AllianzGI Technology, Columbia Seligman Communications & Information, and T. Rowe Price Global Technology. Each of these medalists have been able to beat their respective benchmarks over their managers' tenures but they have followed unique paths. Paul Wick at Columbia built an overweight to the semiconductor sector several years ago, and this move paid off in 2016 as that industry's returns were higher than the typical technology stock's. Joshua Spencer at T. Rowe Price typically invests more in non-U.S.-based tech stocks compared to his peers. As of December 2016, about 10% of his fund was held in Alibaba, China's largest e-commerce site. Meanwhile the managers at AllianzGI have grown more cautious and have spread out fund assets more evenly across their top 10 holdings, even compared to a passive ETF like Vanguard's Information Technology fund.

The open-end Morningstar technology sector fund category is a small subset of the overall market, consisting of just over 50 funds. The funds are top-heavy, averaging about 40% of assets in their top 10 holdings. And, funds tend to land in the large-cap growth area of the Morningstar Style Box.

Because the funds tend to be top-heavy, combined with the riskiness of the companies in which they invest, this sector often carries higher-than-average volatility. They can be quick to react to downturns as well as corrections. As a result, the category's 10-year average standard deviation of 20% is well above the S&P 500's 15% over the same period.

Although they can deliver above-average returns, investing in technology funds requires patience and an appetite for risk. For these reasons, a good tech sector fund should serve a supporting role in a diversified portfolio rather than a core holding.

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