ANALYSIS: INVESTORS FACE NEW REALITY OF TECHNOLOGY FUND PERFORMANCE

NEW YORK -- Second-quarter earnings reports from the technologyindustry are in and the numbers aren't pretty.

Investors will just have to accept the fact that returns ontechnology mutual funds aren't going to match the performances ofpast years. Young investors had grown accustomed to high double-digit and even triple-digit returns. But that won't be the casethis year.

While most technology companies lived up to Wall Street'sexpectations, either barely surpassing or equaling analysts'estimates, the numbers didn't impress investors.

Amazon.com is a case in point. When the Internet retailerannounced late last month that second-quarter sales had fallen belowpredictions, investors pummeled the stock, pushing it to its lowestlevel in nearly two years.

The pounding came in spite of the fact that Amazon beat WallStreet's estimates for overall losses by 2 cents per share.

And when a sector bellwether like Amazon disappoints, investorshave a tendency to exact their vengeance on the entire technologysector. The pattern has repeated itself over and over sincecompanies began reporting second-quarter results in early July.

A similar dynamic dragged down the broader markets whenMicrosoft, Apple and Intel reported results that lived up to WallStreet estimates but failed to meet investors' lofty sights.

In that sense, investors who have been transfixed by individualtechnology stocks are similar to their peers who rely on mutualfunds in that their expectations have grown so high in recent yearsthat anything short of spectacular is seen as a disappointment.

All of this is bad news for that unfortunate breed of mutual fundinvestors who placed their faith exclusively in the tech sector.

A look at some recent statistics shows why.

For the year, science and technology funds are up a scant 3.2percent as of July 31, according to Lipper Inc., a Summit, N.J. firmthat tracks mutual fund performance.

In 1999, science and technology funds far outpaced any of theirsector rivals, generating average gains of 132.3 percent for theyear, primarily on the strength of a handful of funds that focus onInternet stocks.

And mid-cap growth funds, or ones that focus on the stocks of mid-sized companies with strong growth potential, were down 2.8 percentthrough the end of July, according to Lipper. That same categoryrose an average of 70.1 percent in 1999. Finally, small-cap growthfunds, which rose an average of 59.3 percent in 1999, were up just4.3 percent on July 31.

Mid-cap and small-cap growth funds are laced with technologystocks that surged in value during the past two years as investorsscrambled to invest in anything related to the Internet.

But that was then and this is now.

Analysts attribute the reversal of fortune to the market downturnthat began late in the first quarter and has shaved more than aquarter of the value off the technology-dominated Nasdaq stockmarket since it hit a high of 5,049 in mid-March.

The selloff in the science and technology sector has lentcredence to numerous warnings issued by industry professionals whocautioned against an apparent shift away from long-term investing toone that sought short-term profits by chasing hot sectors.

Vanguard Group chairman John Brennan was especially prophetic.

"People chase yesterday's performers regularly, but it's a losersgame. Investors need to step back from the frenzy and invest for thelong term," Brennan said during a speech in New York, less than amonth before investors soured on technology stocks.

For evidence of Brennan's prescience, consider the currentperformance figures of two of 1999's hottest tech funds.

The Monument Internet fund posted an astronomical 273 percentgain in 1999, its first year in existence. But the fund is down 23percent in 2000, placing it among the worst performers of any fundcategory, according to Lipper. And Amerindo's Technology fund, whichsoared 251 percent in 1999, is down 33 percent for the year.