With corporate America flush with cash, and now that state and federal governments have turned on the IT spending spigot, the Gartner Group found U.S. IT spending in 2011 rose 4.8%, breaking the trillion-dollar mark.
But the sector's outperformance reflects both its potential volatility and how far it fell during the financial crisis. Bottom-up value investor Greg Estes, who manages the Intrepid All-Cap Fund, which rose 23.6% annually over the past three years, saw tremendous value in tech shares in early 2009 after they were beaten down well below their fundamental value. Currently overweight in tech with more than 26% in the sector, Estes thinks the spending cycle will continue for the rest of the year. But he sees prices starting to reach fair valuations, with cash flow peaking. And that's the time he typically begins to start selling.
Philip Tasho, who manages the Aston-Tamro Diversified Equity Fund, whose three-year returns are up nearly 24.6%, explains that as a high-beta play, tech shares are more exposed to disruptive innovation than any other sector. "As seen with Nokia and RIM," Tasho says, "this phenomenon is capable of humbling any industry leader." Regardless of product or service, this makes technology shares more speculative than the other more defensive sectors described above.
1. This assessment was reconfirmed by a separate study of U.S. sector fund performance over the past year, prepared by Morningstar. It found the same three groups were among the top four-performing sectors.
2. Reflected in share performance, domestic businesses are spending and growing again.
3. James O'Shaughnessy, who manages his own firm with $4.4 billion in assets, studied the long-term market performance between 1968 and 2009. He found that consumer staples led the market, having delivered an average annualized return of 13.6%. And it did so with the second-lowest volatility. "Industries that make goods and services that people have to buy, regardless of economic circumstances," says O'Shaughnessy, "are bound to do well whatever the economic conditions."
4. Though there is no guarantee that investing in consumer staples, health care and utilities will bulletproof a portfolio, they have been relatively stable sectors that have generally outperformed the market with less volatility.