Investing as Interest Rates Fall

N E W   Y O R K, Jan. 12 -- Conventional wisdom holds that when interest rates are comingdown, investors should start buying into companies that are either interest-ratesensitive, like financial stocks, or benefit from the shot in the arm the economy gets from lower rates, such as retail and technology.

But that doesn't mean investors should go out and start blindly buyingthese sectors, even if the market has beaten them down. Although many fundmanagers see continued Federal Reserve rate cuts helping the slowingeconomy this year, earnings disappointments are still expected to hauntmany companies during the first half of this year, and fund pros arecarefully picking and choosing their spots.

"You really want to stick with the better stocks," says Chris McHugh,senior portfolio manager at Turner Investment Partners. "You want to bewith the market leaders versus just buying some of the stocks that lookcheap on valuation."

Tech Winners

McHugh, co-manager of the Turner Technology, Turner Wireless and Technology and the Turner B2B E-Commerce funds, says he sees some attractive opportunities among the more established Internet storage, software, fiber optics and B2B companies.

McHugh says he's focusing on firms he thinks will benefit from brickand mortar companies' efforts to develop their technology to improveefficiency. Though the next few months could be rocky for these stocks,McHugh says he sees light at the end of the tunnel for more establishedtech companies later on this year, especially as lending rates tick downand companies find funding their tech efforts less costly.

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"Companies that all help out within the supply chains will see significantgrowth over the next couple of years," says McHugh.

Among the names McHugh likes include Internet software company MercuryInteractive, storage companies Brocade and EMC, and B2B softwaredeveloper I2 Technologies.

Abel Garcia, portfolio manager of the AIM Global Telecom and Technology fund agrees that sometech companies will benefit in the new environment. He sees value in firmslike fiber-optics parts maker JDS Uniphase and B2B applicationsprovider Siebel Systems.