As investors tread warily back into technology stocks, the sector that was the cause of so much pain, there are fears the recent gains are not sustainable For investors who got burnt in the dotcom boom of a few years ago, the thought of buying into technology stocks may bring back painful memories. Yet figures show a sharp jump in technology funds in the second quarter. Most investment advisers, however, are taking a cautious approach to the rally as there are fears the gains are not sustainable. In the three months to June, information and technology funds available in Hong Kong jumped 21.78 per cent, according to Lipper, which regularly surveys the industry's performance. But a glance over the longer-term performance reminds investors these funds are not for the faint hearted. In the 12 months to June they rose only 1.05 per cent and on a three-year basis they have slumped 70.17 per cent. 'Globally it would appear technology stocks are performing well,' said Investec Asset Management managing director Stewart Aldcroft of the recent gains. 'In our Asian equity fund we have been increasing the weighting of technology stocks since the beginning of this year. And one of the reasons was because they appeared to be very cheap with very low price-earnings multiples.' Investec's Asian equity fund now has about 15 per cent of its holdings in technology. Despite the recent strong performance in the sector, Mr Aldcroft cautioned investors against putting all their investment eggs in the technology basket. Bridgewater chief executive Stephen Gollop also sounded a warning about technology funds. He believes recent stock market rallies will falter as there is no data to suggest an economic turnaround. 'When it does start to come off again - which we firmly believe it will - then technology is likely to come off harder as it has come up that much better,' said Mr Gollop. 'Be very wary if you are looking to purchase now, and if you are holding it might well be a good time to take profits or lower your losses from a year ago.' For Allianz Dresdner Asset Management's chief marketing officer for Asia, Mark Konyn, the future performance of technology stocks will be mixed. He sees the global economy recovering soon but at a much slower pace than the stock market is predicting. However, as the market has predicted a strong recovery, this has led to a rally in all technology firms of varying quality. Snapping up stock regardless of the quality of earnings is not the way to get long-term gains from technology, Mr Konyn says, as when the economic rebound fails to materialise, the stocks with weaker earnings will fall away. However, Mr Konyn believes some software stocks are appealing. 'Software that can improve the efficiency of business and can deliver their returns quite quickly, that software is selling,' he said. '[Companies] are willing to spend on software that can help control their costs.' Some of the few Internet firms that have begun to prove they can make money are also attractive, he says. 'There are companies in that space demonstrating good revenue now. Those companies as well are figuring in our portfolio.' Mr Aldcroft sees the chance of further rises in technology stocks, but only if they report strong first-half earnings in the coming weeks. However, there are signs that information and technology funds are slowing, rising only 1.82 per cent last month, compared to more than 20 per cent for the second quarter, according to a Lipper report. 'In the sector industry funds arena the technology surge calmed down in June,' the report said. 'The recent run-up in the technology sector has set the pace for stock markets elsewhere, but questions remain as to whether it can continue rallying at the frantic pace that it did in the second quarter.' Last month information and technology was the fifth worst-performing equity category out of 18. Over all, funds have performed well in the first half of the year, racking up returns of 10.87 per cent despite the economic difficulties due to Sars and the Iraq war. 'The first half of 2003 was one of the dejected periods in Hong Kong's history - the city was overshadowed by slow economic growth, negative assets, war, disease and the governance crisis,' according to the report. 'However, during this difficult time, Hong Kong-authorised mutual funds on average posted the best first half-year returns since 1999.' In June, Asia-Pacific equity funds rose 5.96 per cent and for the second quarter gained 18.24 per cent. 'Virtually all the Asian-Pacific equity markets contributed gains to June's equity fund performance, with especially strong showings from India, Philippines and Thailand,' Lipper says. Earlier this year bond funds were performing strongly but Lipper's data shows this may be ending, with an average fall of 0.53 per cent in June. Japanese bonds have been sold heavily recently but the money has not flowed into equities yet - at least from domestic institutions, according to Mr Konyn. Looking across all bond and equity funds, Lipper analysts believe the strong performance will at least slow. 'The overall fund performance delivered a mixed message but with one clear signal - the unbelievable run-up in equities has softened and the favour to bond funds is experiencing a correction,' the report said.