Information technology (IT) stocks rebounded during the third quarter, outperforming the broad stock market average. In particular, the sector benefited from better second-quarter earnings and an improved IT spending outlook.
The Technology Fund posted a total return of 11.18% for the quarter, compared with 5.24% for the Funds benchmark, the S&P 500® Index. With the majority of the Fund invested in the outperforming IT sector, Fund performance outpaced the broad-based benchmark. In addition, stock selection contributed favorably, as our higher-quality growth stocks improved after lagging the value-oriented and turnaround stocks that performed well in the first half of the year.
We expect companies benefitting from cloud-computing, mobile applications, social networking and big data, particularly in the Internet and software sectors, to outperform most legacy IT companies, given the shift in demand trends to support emerging digital business models. We remain positive on the technology sector, based on secular spending themes, strong margins and cash flow, increasing dividends and share repurchases, and attractive valuations relative to historic levels and the broader market.
Risks to our positive outlook include deflationary pricing; business model challenges associated with the transition to cloud-computing; rising debt levels to support increased mergers-and-acquisitions activity and cash returns to shareholders; potentially rising component costs; high offshore cash balances, which limit financial flexibility; and currency volatility, given the sectors high exposure to international markets. The latest federal budget battle also represents a risk, not only on government IT spending, which has been weak all year, but also on overall business confidence, which could affect IT spending.
If you're a growth-oriented investor intrigued by the appreciation potential of technology-driven companies, you may want to explore the opportunities this Sector Fund offers. It is designed for investors with a long-term time horizon, who are willing to withstand inevitable short-term market swings and who understand the risks and potential rewards of sector investing.
- Buy stocks that develop, produce or distribute products and services related to technology.
- Base stock picks on financial condition, market share, earnings growth rates, product leadership or market niches, as compared to competitors, market valuation and price trends.
- In addition to traditional technology companies, the Fund may also invest in biotechnology, health care and health-care equipment, aerospace and defense and financial administration.