TIME MAY BE RIGHT TO RETHINK SCIENCE AND TECHNOLOGY SHARES

BEATEN-DOWN SECTOR

Remember science and technology? Is now the time to get back into the very sector that battered your portfolio in 2000, and is now causing you to worry that you’re once again overweighted — this time in energy and financial holdings?

While a tech turnaround isn’t imminent, it could be less than a year away. A combination of two events — the explosion of the Internet and fear that gripped the world about computers not being able to handle the arrival of Y2K — led science and tech firms and funds to triple- digit returns in 1999 and early 2000. But Y2K spending had siphoned money out of research and development, leaving little new product coming on stream. So after years of spending to upgrade or replace existing equipment, and with no new product to buy, spending on information technology dried up.

The tech-laden Nasdaq composite index fell 39%, 21% and 32% from 2000 through 2002, respectively.

But the theory was that everybody would have to start replacing their electronics by 2005, and indeed the Nasdaq rebounded 50% in 2003 and 8.6% in 2004.

Larry Berman, chief technical strategist with CIBC World Markets, said a few months ago that technology was poised to start a recovery. The sector had a bit of a spurt, but the Nasdaq is down 1.8% year-to-date.

Morningstar, a fund-rating agency, reports that during the past three months, technology has performed the second-worst of 31 sectors, down 2.3%, better only than foreign bonds, which were down 3.8%.

In its August portfolio strategy outlook, Mr. Berman’s own firm recommended investors be underweight in technology, saying: “ The sector continues to exhibit poor relative performance despite the new highs in the U.S. technology sector. The sector has shown periods of support, but when U. S. tech corrects, there won’t be much holding it together.”

So, will a tech recovery ever happen? Brian Ashford-Russell, founder of U.K.-based Polar Capital, which manages several funds including Mackenzie Universal World Science and Technology Capital Class, says we are nine to 15 months away from a bottoming out of the tech sector and that returns could be very strong from late 2006 through 2007.

His reasoning is that conditions have forced weaker players out of the market and survivors to trim costs.

At the same time, consumer spending on electronic gadgets continues to grow, especially in Asia’s emerging middle class.

And market trends show that tech fund redemptions peaked during the past year, causing some people to believe the sector is finally reaching bottom.

Furthermore, Ashford-Russell feels certain industries are attractive and poised for growth due to key demographic trends and emerging themes, such as the effects of rising health-care costs on an ageing population and new applications for broadband communications.

His Mackenzie Universal World Science fund is up 4.8% year to date, and 6.2% since he began managing it about two years ago.

For investors, the question is when to venture back into an area that caused so much pain.

While there is apparently no rush to return, the lesson learned from the past is that once technology takes off, it does so like a helicopter, not a jetliner. At some point in November — after the usual fall swoon in the stock markets — people may want to test the tech waters on a small basis and continue dollar-cost averaging through 2006.

In many cases, what happened in 2000 was not that investors had ploughed too much money into science and tech, but that when their investments increased so much to overweight their portfolios, they didn’t rebalance and were vulnerable to the sudden downturn.

If your energy and financial holdings have overtaken your portfolio like zucchini and rhubarb, the time may be right to move some of your winnings into sectors that have been beaten down.

Science and technology would certainly qualify.