Once upon a time, long ago, technology stocks accounted for over one-third of the S&P 500′s market capitalization. In just a few short years, the bursting of the Internet Bubble halved that amount. Even so, technology is still one of the largest sectors of the market–and also one of the most popular among fund managers.

According to Merrill Lynch, over 40% of domestic equity managers were overweighting tech at the beginning of the year. While there are numerous reasons for the popularity of this view, most center on growing earnings and vastly improved balance sheets.

The red-hot IPO market has been another draw. Huge one-day pops from companies such as VMWare and Constant Contact have thrust technology companies into the limelight. Recent interest rate cuts are also playing right into the hands of technology investors, since such companies usually borrow money at variable interest rates.

The contrarian nature of tech (the sector is the worst-performing over the last five years) is only one reason this call is unusual for fund managers. The extreme popularity of the play is another. Technology stocks may have simply gotten too cheap to ignore, and so many market pros took notice that the rally could have been a self-fulfilling prophecy.

What really makes the sudden attraction to technology among mutual funds unusual is that it’s working.The Nasdaq is far outpacing the broader S&P 500 index, which is propelling many active funds ahead of their benchmarks. A rare occurrence, but the fundamentals suggest the trend may well continue.

The Monthly Index Report for October 2007

Index

Oct-07

QTD

YTD

Description
S&P 500 Index* 1.48%

1.48%

9.24%

Large-cap stocks
DJIA*

0.25%

0.25%

11.77%

Large-cap stocks
Nasdaq Comp.*

5.83%

5.83%

18.38%

Large-cap tech stocks
Russell 1000 Growth

3.40%

3.40%

16.51%

Large-cap growth stocks
Russell 1000 Value

0.01%

0.01%

5.98%

Large-cap value stocks
Russell 2000 Growth

4.50%

4.50%

14.27%

Small-cap growth stocks
Russell 2000 Value

1.09%

1.09%

-1.64%

Small-cap value stocks
EAFE

3.94%

3.94%

18.05%

Europe, Australasia & Far East Index
Lehman Aggregate 0.90%

2.85%

3.85%

U.S. Government Bonds
Lehman High Yield

2.62%

0.33%

3.21%

High Yield Corporate Bonds
Calyon Financial Barclay Index**

2.82%

2.82% 7.62% Managed Futures
3-mo. Treasury Bill*** 0.34% 0.34%

4.40%

All returns are estimates as of October 31, 2007. *Return numbers do not include dividends.

** Returns are estimates as of October 30, 2007.

Ben Warwick is CIO of Memphis-based Sovereign Wealth Management. He can be reached at ben@searchingforalpha.com.