FUNDS | Some SECTOR FUNDS deliver sensational results. But there's a price you pay.

KNOW WHAT it's like to own a sector fund that's riding a burgeoning industry? Try turning off your headlights one night in a rainstorm. Or imagine leaving the chute atop a bull at a rodeo. Want to bungee jump? You get the idea. Technology funds as a group are nearly three times as volatile as the overall stock market. Last April, the typical technology fund shed 13% of its value--then another 12% in May.

In short, tech sector funds are too volatile (and, by definition, too narrowly focused) to be the center of anyone's portfolio. But out there on the edge, at the margins of your investments, they can do you worlds of good. In fact, over the past ten years, the eight top performers were all technology sector funds.

No one can say whether the next ten years will be anything like the past ten. But if you invest as if they will, the odds probably favor you. For truly long-term investors who are underrepresented in technology (about a third of Standard & Poor's 500-stock index is now tech), putting 5% to 10% of your stock money into a tech fund seems like a savvy bet. Just remember that at times you'll feel like you do on the downhill side of a roller coaster. For one thing is certain: If you ride one of these wild beasts and jump off the first time it plummets 25%, or 35% or 45%--as most of them did last spring--you're almost certain to be poorer for the experience.

In choosing these six funds to highlight, we stuck with the tech and biotech industries--sectors that have proved for more than a decade that they can generate big rewards for investors. We paid no attention to volatility, because if short-term plunges spook you, you've no business holding such funds in the first place. Instead, we sought out funds with spectacular records in recent years, managed by experienced stock pickers.

MDs on the case

THE CO-MANAGERS of three-year-old Dresdner RCM Biotechnology N (800-726-7240) are both doctors, which lead manager Faraz Naqvi says gives them an advantage over their competitors. "When we talk to scientists about their work," he says, "it's like talking shop. It's not like they have to dumb it down for us."

Naqvi, 35, and colleague Michael Dauchot, 36, spend most of their time talking with physicians and other scientists, as well as studying clinical data from drug trials. Only if the science looks promising do they examine a company's financial statement and the pricing of its stock.

Among their favorites are Human Genome Sciences and Millennium Pharmaceuticals, both of which they believe will benefit greatly from the mapping of the human genome (see "The Payoff for Genebusters"). Human Genome, says Naqvi, is patenting gene sequences that will later be used in developing drugs. "It's like buying all the land in Manhattan before it gets to be a hot place to live."

In addition to their medical backgrounds, Naqvi and Dauchot have each spent four years as money managers and stock analysts. Perhaps that explains their rapid trading. The fund turned over its portfolio more than four times last year. The managers try to anticipate which sectors of biotech other investors will pour money into, and to beat them to the punch.

Dresdner RCM is three and a half times as volatile as the S&P 500, but it returned 234% over the 12 months to July 17, making it the number-two sector fund.

A mild dose of biotech

FIDELITY'S way of training and selecting young managers must count for something. Four different managers, most of them relatively inexperienced, have run Fidelity Select Biotechnology (800-544-8888) in the past four years, and the current manager (on board since February) was most recently Fidelity's banking and construction analyst. For all that, this is the top biotech fund of the past three, five and ten years, with annualized returns of 53%, 38% and 25%, respectively, while being only two-thirds as volatile as Dresdner RCM Biotechnology.

Newly installed Yolanda McGettigan, 30, makes no apologies for her short track record. Eight to ten doctors are on retainer to assist her in analyzing drugs. (Dresdner has a similar group.) "That I haven't been covering biotech for ten years and didn't go to medical school makes no difference so long as I have people like that helping me," she says. In any event, this fund sticks to the blue chips in its field, such as Amgen, Immunex and Med-Immune. Its top ten holdings, all similarly well-known names, make up more than half of the fund's assets.

McGettigan thinks the Human Genome Project will lead to enormous progress relatively quickly. "Biotech and pharmaceuticals are hitting a sweet spot right now," she says. "Over the next five years, the biotech industry is going to evolve like it has never evolved before." Still, she plays the field cautiously. "If you have a company with one drug in early clinical trials," she explains, "you take a huge risk. But if you have an Amgen with five or six drugs on the market and five or six more in trials, if one fails, the stock is not going to zero."

The hot hand at Firsthand

KEVIN LANDIS, who runs Firsthand Technology Value (888-883-3863), was playing volleyball in 1995 with some friends who told him about PMC Sierra and its new communications chips. This was Silicon Valley's Old Geek Network in action, and Landis quickly sensed the importance of PMC's breakthrough. He bought shares at a split-adjusted $3. The stock is now above $210, and Landis still owns a big slug. By such means has his fund become the top performer of the past five years in any category.

An electrical engineer, Landis, 39, started Firsthand Technology Value in 1994 after working in the semiconductor business. It's more than two and a half times as volatile as the S&P but has returned an annualized 58% over the past five years.

Landis has been steadfast during market sell-offs. When tech stocks sank last spring, he sold some of his strongest stocks to buy others that had fallen further. Declares Landis: "If there's a dumb way to invest, it's to not go with the Internet."

Yet Landis is picky about what subsectors he'll invest in. He has never bought a personal-computer company's stock, nor that of an Internet retailer. "We need to focus, and we are not retailing analysts," he explains. The fund is always searching for the Internet's next bottleneck--the area that will most need new equipment and services to speed the flow of traffic. Right now, that's communications, which is why Landis is bullish on fiber-optics stocks, such as Corning and Veeco Instruments.

New life for an old fund

WILLIAM KEITHLER returned to Invesco at the start of 1999 after a five-year stint running Berger Small Company Growth and New Generation funds. Shareholders of Invesco Technology (800-525-8085) should be glad he's back. The fund, begun in 1984, had so-so returns in its sector. In 1999, Keithler's first year, it brought home 145%, plus another 24% in a difficult 2000 to mid July.

Keithler, 48, has been a technology analyst and manager since 1982. "Things change in a heartbeat in this area, which is why I like it so much," he says. He has three analysts dedicated to the fund. "We focus on leadership companies," says Keithler--that and diversification. Few stocks represent more than 2% of assets. Still, there's no place to hide during a sell-off like last spring's, when the Nasdaq fell 37%. The fund was up 47% for the year on March 10, and very soon thereafter was down 10%.

Keithler is bullish on wireless companies, as well as on companies that are involved in building the Internet's infrastructure, including the fiber-optics firms that Landis likes so well. But he is not enthusiastic about most e-tailers and other consumer Internet companies.

Keithler has almost doubled the volatility of this fund since his arrival. "This is not a widows-and-orphans fund--we create a few, but we don't cater to them," he quips.

The wireless man

BRIAN HAYWARD thinks that many investors underestimate the potential of cellular telephones and wireless applications. An estimated 430 million handsets will be sold worldwide this year, compared with 275 million last year. Penetration in the U.S. recently topped 30% of the population, says Hayward. In Europe, once the 30% point was breached, growth accelerated. And throughout the U.S. rates have dropped to the point that "the price of using a cell phone is no longer an issue," Hayward says.