Tech stock funds might lead the next bull market

— -- If you got to work via jet pack today, or simply took the Trans-Infindibulum Expressway to visit your relatives on Neptune, you know that technological advances can happen overnight. Either that, or you need to dial way back on the nutmeg in your morning latte.

Great technological advances can change daily life and, in the process, make some people very rich. Unfortunately, figuring out which advances are going to succeed and which aren't isn't easy. If you want to take a bet that science will take a great leap forward, then you probably should own a science and technology fund. But a better reason to buy a tech fund is that the tech companies that have survived the past decade are surprisingly strong, and their stocks are relatively cheap.

Investing in technology can be insanely lucrative, as Microsoft founder Bill Gates could tell you. But for every Microsoft, there are a dozen Wang Laboratories and Digital Equipment Corporations, all of which are in the great Spare Parts Department in the sky. Sometimes, the big success stories outweigh the big losers. Many times, they don't.

Consider this: The term "World Wide Web" first appeared in 1989, although the Internet had been around for some time previously. (Strictly speaking, the World Wide Web is just one service available on the Internet.) In 20 years, the World Wide Web has transformed how we share and use information. In that same period of time, entrepreneurs have created vast arrays of hardware and software to make Web browsing faster and easier.

One would think, then, that science and technology funds would have clobbered the Standard & Poor's 500-stock index. One would be wrong. The average tech fund has gained an average 6.9% a year the past 20 years, vs. 7.1% for the S&P 500 with dividends reinvested. The technology-laden Nasdaq composite has gained an average 6.4% a year.

The main reason for the relatively poor performance: Many companies have yet to recover from the enormous tech bubble in the 1990s, which was quickly followed by the enormous tech wreck in the earlier part of this decade. Microsoft stock, for example, has fallen 57% in the past decade. Intel has plunged 52%.

The companies that have survived, however, have emerged both saner and stronger. "They stared at death in many cases, and didn't like what they saw," says Walter Price, co-portfolio manager of Allianz RCM Technology fund. "They changed their business models."

One change: Many companies now rely as much on revenue from maintaining their existing products as they do from selling new products. Oracle is the poster child for maintenance revenue, Price says. New software licenses are down, but it is still getting plenty of income from maintenance fees.

Companies that make security software, such as McAfee MFE, have also held up well. The company's stock has fallen just 9.7% the past 12 months, and has actually eked out a 2% gain the past three months.

Another change: Many are flush with cash and hold relatively little debt. Although their stock prices may languish, they have stored up enough nuts to last for a fairly long technological winter. Cisco, for example, has $29 billion in cash and short-term investments on its books.

And many technology companies have experience with deflation — a period of falling prices. Even though deflation is a relatively rare economic problem, tech prices are almost always falling. The most successful companies have learned how to make money even when cutting prices.

Nevertheless, technology does face one big, nasty obstacle: the economy.

Companies don't go out and splurge on new computer systems when they're watching business dry up. "Everything in electronic capital equipment is pretty deadly," says Paul Wick, manager of Seligman Technology and Communications fund. "Because of the global economic shock, we're seeing reduced consumption in everything in electronics."

And, Price says, technology companies, like most other companies, rely on a smoothly functioning financial system — which, at this point, we don't have. So there's no rush to jump into tech now.

But don't let your sensors down. Tech stocks are cheap, and those that have survived are far stronger than they were during the 1990s. When the economy and the market turn around, technology stocks might not soar all the way to Neptune, but they could well lead the rebound.

John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays. new book,Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments, is available through John Wiley & Sons. Click here for an index of Investing columns. His e-mail is jwaggoner@usatoday.com.