Price issues caution on a standout fund


The last thing most people expect to find in their mailbox is a letter from their mutual fund company telling them that their star fund may be a little too good to be true.

But that's exactly what about 100,000 owners of T. Rowe Price Associates Inc.'s Science and Technology fund found in their mailboxes last week, as Price moved to head off the customer-relations problems it fears could come when a force older and more powerful than a Pentium chip finds its way into the technology-stock market. Gravity, that is.

"We believe science and technology stocks will continue to be rewarding for the long-term investor," said the July 12 letter from the fund's president, Charles A. Morris, which cost Price up to $50,000 to mail. "However, this average conceals wide variations in returns from year to year and often from month to month. Science and technology stocks can be a 'hold on to your hat' investment."

The letter is the first of its kind that Price has sent out about a fund since 1993, when the Baltimore firm grew concerned that its New Asia Fund was attracting customers who didn't understand how risky emerging-markets investing can be, but were diving into the funds on the assumption that the past year's star performers would keep skyrocketing.

This year's hot fund is Science and Technology, and this is not only true at T. Rowe Price. According to Lipper Analytical Services Inc. of Summit, N.J., which tracks mutual fund performance, Science and Technology's 40.3 percent gain so far this year ranks 11th out of 33 similar funds. For the past 12 months, the Price fund's 71.6 percent gain ranks only 18th of 38.

Ed Bernard, Price retail market ing vice president, said the letter grew out of a hallway conversation in late June between himself, Price Managing Director James S. Riepe and Jane White, shareholder communications director.

Two facts amazed the trio, he said: Price's technology fund was going to be up 68 percent for the year ending June 30, success so strong that half the fund's customers had signed up in the last six months.

Which presented a serious question: Could all these folks really know what they were doing?

"We just want to make sure new shareholders who are dazzled by the numbers really understand what they own," Mr. Bernard said. "If shareholders need their money in the next two to three years, they might want to consider the long term."

"You have a number of things going on in science and technology that have made it just astounding," Lipper spokesman Jon Teall said, pointing to strong demand for computers as well as emerging technologies.

Price's letter points out that the leading technology stock index has had at least a 10 percent downward correction every year since 1985. Price technology analyst Jill Hauser notes that some declines have been much larger, in years marked by news like Iraq's 1990 invasion of Kuwait or other big bear stories.

"I don't think it's necessarily that we see big problems on the horizon," Ms. Hauser said. "We believe all the bull[ish] stories about the pervasiveness of technology and how it's becoming a consumer item. But we've gone through a long period without any retrenchment and that's not usually how it works."

Mr. Teall said the letter was a good idea for two reasons.

Investment firms are supposed to make sure they do not sell customers investments that are inappropriate for their financial situation, a task that's especially hard for mutual fund companies because most customers pick their own funds. The letter can serve as a needed warning, and also keep customers from getting mad at Price whenever the next downturn finally comes, he said.

"No law has been passed that these funds can't go down," he said. "You've got to be able to talk to investors when the market is down as well as when it's up. You do that by being candid -- even blunt -- about the risk."

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