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Sector Funds Aspire To 401(k) Presence


Pure-play, or sector funds, are beginning to show up along with the usual investment options of 401(k) plans: large-, small- and mid-cap, growth and value investments, according to industry executives.

Due to plan participants' increasing appetite for more investment options and their increasing curiosity about the incredible bull run of some sectors - particularly technology - otherwise conservative 401(k) plan sponsors are breaking down and beginning to allow their plans to include these volatile investment options, according to fund executives.

Recently-released data on 401(k) investors compiled by the Investment Company Institute supports the contention that the 401(k) investing public has an appetite for equity funds, over money, bond and balanced funds. (See related story, page 2) A full fifty percent of American workers' 401(k) assets are in equity funds, according to the ICI data. No data exists that indicates what proportion of these equity investments are in sector funds.

Some sector fund complexes, such as the Orbitex Group of Funds of New York, are hoping to satisfy this growing appetite for high-return/high-risk 401(k) investing by trying to place Orbitex sector funds in 401(k) plans.

Orbitex is in the early planning stages of introducing its sector funds - its Information-Tech & Communications, Strategic Natural Resources and Health & Biotechnology funds - to the 401(k) market, said John Davidson, executive vice president and chief investment officer of the firm. Davidson discussed the company's strategy at its headquarters in New York last week.

The firm is currently planning to try to persuade plan sponsors that style adherence is hard to assure in 401(k) plans designed around small-, mid-, large-cap, growth and value funds, Davidson said. Style drift is actually more the norm in today's market, where, for instance, value stocks are out of favor and a value portfolio manager may gravitate towards growth stocks, Davidson said.

"For the last five years, growth has dominated value, so, actually, the best value portfolio manager is a closet growth guy," Davidson said.

Thus, besides giving 401(k) investors an additional investment category and the opportunity to participate in some high-growth areas, sector funds give investors some assurance of style adherence, Davidson said.

In 1999, value stocks rose 13 percent, small-caps were up 12.5 percent and mid- caps were up 14.5 percent, Davidson said. But, large-cap growth stocks, up 28 percent, really drove the overall market. At the same time, the S&P 500 Index rose 21 percent, he said.

The technology sector, meanwhile, surged 76 percent in 1999, he said. For investors with an eye towards current trends in the market, technology funds would have been a nice addition to their 401(k) portfolio in 1999.

But, not all sectors performed well in 1999. The utility sector, for example, declined nine percent last year, Davidson said.

"The potential for picking the right sector is great," Davidson said. However, because of the volatility of many pure-play funds, sector funds should have an auxiliary role in 401(k) portfolios and plan participants should be prepared to hold them for the long term, Davidson said.

Last week, top executives of Orbitex were on a retreat with another Orbitex affiliate, Circle Trust Co. of Stamford, Conn., to map out a 401(k) strategy for sector funds.

"Sector funds are becoming more popular in 401(k) plans," said Ralph Peluso, vice president for retirement plans at Circle Trust. Peluso's main responsibility at Circle Trust is to manage a year-old trade system extranet that links 110 mutual fund companies with 65 third-party 401(k) plan administrators and the National Securities Clearing Corp./Depository Trust Co., Peluso said. Orbitex is exploring a linkage with this trading system that would make it easier for 401(k) plan sponors to clear and trade the Orbitex sector funds, Peluso said.

If Orbitex succeeds in getting its sector funds on the roster of substantial numbers of 401(k) plans, the firm will be in the company of a growing number of other companies with sector funds that have done the same, Peluso said. The AIM Family of Funds of Houston, Texas, American Funds of Los Angeles and the Munder NetNet Fund of Munder Funds of Providence, R.I. are all included in 401(k) plans, Peluso said. Spokespeople for AIM, Munder and American Funds did not return phone calls.

"You simply have to convince the plan administrator that [a sector fund] is a viable option, and I don't think that is a problem because certain types of sector funds are becoming more mainstream because of their popularity and their size," said Denis Dolego, director of research for Optima Group, a mutual fund distribution consulting firm in Fairfield, Conn. "Technology funds may be volatile, but technology overall is becoming so important to the capitalization of the market."

However, not everyone is convinced that pure-play funds are appropriate for people saving up for their retirement through 401(k) plans.

"Because sector funds are hot at any one time, many have sex appeal," said Burton Greenwald, president of B.J. Greenwald Associates, a mutual fund consulting firm in Philadelphia. But, that appeal is short-lived, because all too often investors move into hot sector funds after seeing a strong one-year track record, and by then, the wind is out of that sector's sails, Greenwald said.