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For technology investors, it's been yet another roller coaster year on the markets.

In January, semiconductor companies thought the boom was back. The Philadelphia Semiconductor Index had more than doubled from the dog days of late 2002. But by the end of July, the index had slumped badly.

Earlier this month, shares of bellwether and semiconductor king Intel Corp. of Santa Clara, Calif., hit a new 52-week-low.

The sector's recent decline even seemed to weigh on the initial public offering from Internet giant Google Inc. this week, as the company cut the size and price of the offering. Yet the stock jumped 18 per cent in its Thursday debut -- suggesting investors still have a taste for tech stocks if the price is right.

"We've had a big correction in tech, particularly since June. However, what you now have is a trade-off between more attractive valuation but the outlook isn't as rosy as you would have said a year ago," says Ian Ainsworth, senior vice-president at MacKenzie Financial Corp.

So, is it time to rebalance your equity portfolio, picking up some cheap tech stocks in expectation of better days ahead? Or, is there worse to come for the tech stars, and should you look elsewhere?

Bob McWhirter, president and portfolio manager at Selective Asset Management Inc. says your view on the sector is likely coloured by your outlook for overall markets. As markets move up, tech stocks tend to outperform. But as markets weaken, tech issues tend to get punished a little more than other sectors.

"At the moment, we are cautious with regard to our outlook for 2005," Mr. McWhirter says. "We think there are pretty good buys within the tech patch, but over all, tech is a market-neutral at best."

Gavin Graham, vice-president and director of investments at the Guardian Group of Funds, takes an even more bearish view. He says investors may want to look at something other than technology.

"You want to be very cautious. The easy money has been made," he says. If you want to overweight a particular sector, Mr. Graham likes consumer staples, financials or energy. "All of these are boring. Tech is sexy. But if you'd been boring, you would have made money."

Mr. Graham believes technology won't be attractive again for another nine months to a year.

Duncan Stewart is not waiting that long. He's in technology full time, running some technology funds at Tera Capital Corp.

Mr. Stewart believes technology should be part of every equity portfolio, if only because the sector makes up about 20 per cent of equity markets and about 20 per cent of economic activity.

"You want to build your portfolio with a certain amount of discipline and even if you really hate a sector, you probably shouldn't zero-weight it. You might half-weight it," Mr. Stewart says. He suggests that investors might still want to have 5 to 10 per cent of their equity holdings in technology. "Zero-weighting is always incredibly risky because you might be wrong."

If and when you feel good about technology, perhaps a weighting of 20 per cent within the equity portion of your portfolio would be appropriate, Mr. Stewart suggests.

Mr. Ainsworth describes his current mood as "neutral going to overweight" on the sector. The tough question, though, is how to reduce risk and maximize potential returns in one of the market's most volatile sectors.

"We've had a pretty strong weight in . . . types of companies that are big-cap, quality defensive companies that don't have to rely on financial markets to raise capital to continue to survive," he says.

Stephen Masson, vice-president of equities at Natcan Investment Management Inc., looks for quality names with a price-to-earnings ratio that is about the same as the broader market. His thinking is that because tech companies' earnings typically grow faster than the overall market, they should trade at a premium. So, with the overall market trading at about 19 times earnings, Mr. Masson would consider a top-tier tech name such as International Business Machines Corp., with a P/E as of midweek at 18.22, or Accenture Ltd., at a P/E of 22.15.

Of course, professional fund managers such as Mr. Ainsworth and Mr. Stewart are able to reduce their risk by buying a diverse basket of tech stocks. That may not suit all investors, Mr. Stewart cautions.

"If you're not capable of owning more than 20 different names -- and that's not in your overall portfolio, that's just within technology -- you shouldn't own the sector. If you're picking one or two, it will be too volatile. You'll be too exposed to sector, geography and industry downturns."

That is why sector-specific mutual funds exist, and there are dozens of science and technology funds available to Canadian investors. There are also exchange-traded funds that track the performance of specific sector indexes, such as the S&P/TSX information technology index.

"For investors, if you just want to own technology and be a little sleepy about it, go buy the index units. They have very low management fees and very low transaction fees," Mr. Stewart says.

Mr. Stewart argues that over the long term, managed technology funds, such as his own, will outperform the index funds. "My job, and my colleagues' jobs, is to go out there and try to pick the next Cisco. We can't do it every time but if we do it even occasionally, we will tend to beat those index funds," he says. "This is not true of the overall market. By and large, if you're picking the Dow Jones index or the S&P 500, it's very difficult for an active fund manager to beat that benchmark."

However, Mr. Stewart is the only manager of the 126 science and technology funds tracked by Globefund.com to beat the one-year return of the iUnits S&P/TSX Capped IT Fund, an index fund that tracks the S&P/TSX capped information technology index. As of July 31, Mr. Stewart's Tera Capital Global Technology U.S.-dollar fund had an one-year return of 62.9 per cent, while his Capital Global Technology Fund had a one-year return of 54 per cent. The iUnits fund showed a 47.1-per-cent one-year return.

Looking over the past three years, Mr. McWhirter was tops. His Northwest Specialty Innovations fund had a three-year annual return of 18.6 per cent at July 31, compared with the iUnits annual return of negative-6.8 per cent. It was one of only two science and technology funds tracked by Globefund.com that showed a positive three-year annual return. The other was TD Asset Management Inc.'s Entertainment and Communication U.S.-dollar fund, which eked out a 0.9-per-cent annual return.

Some of that sluggish performance goes back to the bursting of the tech bubble at the beginning of the decade. Mr. Masson thinks the technology sector can still outgrow the overall market, but he warns investors not to expect a return of the kind of growth that fuelled tech stocks in the 1990s.

"My fear with tech is that the market is slowly awakening to the fact that tech stocks are cyclical. They're not the growers that they were five or 10 years ago," Mr. Masson says. "They're not going to be growing twice as fast as the market or two times GDP. Probably 20 to 30 per cent quicker than the overall market is fair."

David Akin is a CTV correspondent and a contributing writer to The Globe and Mail.

Some top picks

Fund manager Bob McWhirter's Northwest Specialty Innovations Fund was the top three-year performer among the 126 science and technology funds tracked by Globefund.com. Here are three stocks he likes:

CSI Wireless Inc. (CSY-TSX): The company's global positioning system products help farmers plough, fertilize and plant fields more efficiently. "Farm income in North America has been good. Farmers have cash in their jeans, therefore they've got the financial wherewithal to buy this stuff."

Draxis Health Inc. (DAX-TSX): The company's unique manufacturing process, used to produced freeze-dried injectable drugs, "is showing extremely strong response from their customer base."

MacDonald Dettweiler (MDA-TSX): While the stock's strength, relative to its peers, has been on the rise since January. "Since that time, it has outperformed the Nasdaq by over 14 per cent."