MUTUAL FUNDS

At a recent holiday party, I happened in on a conversation about

Invesco's Telecommunications Fund. The fund, with stellar performance in 1998

and 1999, has performed dismally over the past two years just like other

funds in its sector have. Shareholders of the fund at the party said the

fund's lousy performance was due to one stock held in its portfolio. I said,

in a diversified mutual fund, that's not likely to be the case. The party

guests looked at me in disbelief.

One of things mutual funds have going for them is diversification. The theory

behind diversification is simple: Not putting all of your eggs in one basket

helps spread of risk of investing. Invest in a sector fund, like Invesco's

Telecommunications Fund, (800-525-80850), and while diversification is still

an integral part of the game, there's added risk and volatility because of

the fund’s targeted investment focus.

"Investors have to look at sector funds much differently than they do other

types of funds, " says Brian Hayward, portfolio manager of the Invesco

Telecommunications Fund, (ISWCX). "That's because there will be times when

the sector will be in favor, as we saw in the late 1990's for telecom. And

then there will be times when it will be out of favor---dramatically out of

favor---as we've seen in 2001. "

As for whether it was one stock that the party shareholders identified as JDS

Uniphase, that brought Invesco's Telecommunications Fund to its knees,

Hayward said that the answer is no.

"In late '99 and 2000, the combination of JDS and Uniphase (before they

merged) were the (fund's) two largest holdings totaling about 6 percent of

the portfolio,’ says Hayward. "And that's when they were flying high. By the

time late 2000 came around, we had gone from 6 percent down to 2 percent in

the portfolio by our own actions ---not by the market doing it for us."

Hayward explained that the fund’s prospectus reads that one stock can make up

as much as 25 percent of the portfolio but that that’s not something he's

ever come close to practicing. That 25 percent holding comes from the

Investment Act of 1940. It states that diversified funds can be made up of

two baskets of holdings; a 75 percent basket and a 25 percent basket.

In the 75 percent basket, a fund can’t own more than 10 percent of the voting

securities of any one issue, i.e. company, and that any one holding can't

comprise more than 5 percent of the fund's assets. In the 25 percent basket,

a holding may be greater than 5 percent but no more than 25 percent of the

fund's assets.

Keep in mind that sector funds, as well as any other kind of fund in which

the fund’s name specifies a particular type of investment, have to have at

least 65 percent of their assets invested in their respective types of

securities. ( That percentage is being upped to 80 percent in April 2002.)

So, you can see how easily market downturns can make mush out of hot sectors

turned cold.

"The market has been horrible for the last 18 months, " says Hayward. " Of

the roughly 250 ( telecommunications) names that we track here, 20 are up

for the year. And more than half are down more than 50 percent."

But not is all doom and gloom for telecom stocks. Hayward says U.S wireless

companies have done well this year and that some previously high priced

telecom companies that were hit hard have moved up and even doubled in price

so far this year. Regarding his fund, Hayward doesn't think its performance

will return to the lofty 144 percent return experienced in 1999. Once

companies start spending again, he figures that the fund's returns ought to

swing back to their normal long-term levels.

If you're wondering what the moral to this story is, it's this: Invite a

mutual fund columnist to a party and who knows what will come of it.

Dian Vujovich is a nationally syndicated mutual fund columnist, author of a

number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.