The Best Mutual Fund in Tech Owns Zero Shares of Apple or Google

The best mutual fund in tech has notched annual returns of nearly 11% without owning a single share of a big tech darling.

The performance of this fund, the Fidelity Select IT Services Fund (MUTF: FBSOX), makes it the tech sector's best mutual fund for the past 15 years.

Scour the list of this tech fund all you want. You'll find no Apple Inc. (Nasdaq: AAPL), no Amazon.com Inc. (Nasdaq: AMZN), no Google Inc. (Nasdaq: GOOGL, GOOG), no Facebook Inc. (Nasdaq: FB).

"This is a very concentrated fund. And while it has companies like IBM that people have heard of, it has a mixture of small and mid-cap companies that will fly below the radar for most investors," Todd Rosenbluth, director of mutual fund research at SP Capital IQ, told Reuters.

best mutual fundInstead, the fund seeks out tech stocks in decidedly un-flashy information technology businesses like web hosting, cloud-based solutions, data-driven marketing and payment processing.

Kyle Weaver, the fund manager since 2009, says that 80% of the Fidelity Select IT Services Fund is invested in such tech services. The absence of any sexy tech titans is very much on purpose.

"We're looking for companies that have a high degree of recurring revenue that aren't very glamorous and operate in the background of our lives instead of front and center," Weaver told Reuters.

You can't argue with the results.

Since March 10, 2000 - the peak of the tech bubble - the fund has posted an average annual return of 10.9%. According to Lipper, that's more than double the second-best mutual fund in the tech sector.

The fund's total return over that 15-year span is 176.58%. The Nasdaq Composite Index meanwhile has been flat, having only recently gotten close to the all-time high it reached back in 2000.

So what are the stocks at the heart this mutual fund?

How the Best Mutual Fund in Tech Was Built

While the FBSOX fund shuns the big names of tech, it does own quite a few recognizable names...

It's just that these companies aren't the first that spring to mind when you think of tech stocks. This kind of tech is back-end stuff, not the gadgets one associates with consumer tech.

Take the top two holdings, for example: Visa Inc. (NYSE: V) and MasterCard Inc. (NYSE: MA). The two credit card giants comprise about 30% of the FBSOX fund's holdings.

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Visa and MasterCard might not seem like tech stocks, but think about what happens when you charge something on a credit card. The physical card has a stripe or chip that communicates with the point-of-sale machine.

After that, the transaction must be approved and authorized by the credit card company and the issuing bank. All that is done by multiple computerized systems linked together. Not very exciting, but it's certainly tech.

Other familiar names held by the FBSOX fund include H&R Block Inc. (NYSE: HRB), Xerox Corp. (NYSE: XRX), and Verifone Systems Inc. (NYSE: PAY), which makes point-of-sale systems.

Of course, most of the 65 or so stocks are not household names. Many are business-to-business operations. For instance, the fund's third-largest holding is data analytics company Cognizant Technology Solutions Corp. (Nasdaq: CTSH).

The fourth-largest holding is Endurance International Group Holdings, Inc. (Nasdaq: EIGI). EIGI provides cloud-based services.

The obscurity of most its holdings actually explains how FBSOX has become the best mutual fund in tech. While all these companies have solid businesses, Wall Street pays them little attention. That keeps valuations down and makes many of these stocks bargains.

While popular tech stocks like Facebook usually have elevated price-to-earnings ratios, the low-key stocks in the FBSOX fund often have P/E ratios below the Nasdaq average. That means they have more potential upside.

And you end up with returns that crush the competition.

The Bottom Line: The Fidelity Select IT Services Fund earned the title of best mutual fund in tech not by packing its portfolio with flashy tech titans, but by focusing on behind-the-scenes tech. Because such stocks are mostly of Wall Street's radar, they can be bought at lower prices and have more upside.

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Fidelity Select IT Services Fund (MUTF: FBSOX) Top 10 Holdings (as of Jan. 30, 2015)

Stock Industry % of Net Assets
Visa, Inc.  Credit services 16.2%
MasterCard, Inc. Credit services 10.8%
Cognizant Technology Solutions Corp. Business software & services 7.6%
Endurance International Grp. Holdings Application software 5.0%
Fidelity National Information Services IT services 4.8%
Accenture PLC IT services 3.8%
IBM Corp. IT services 3.7%
Alliance Data Systems Corp.  Business services 3.2%
Exlservice Holdings, Inc.  Business services 3.0%
Vantiv, Inc. Business services 2.3%

About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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