Tech Fund Losses Go From Bad to Worse
Among mutual funds, there’s bad in this market decline and then there’s worse--in some cases, much worse.
With Monday’s plunge, technology-focused stock funds saw their already-severe losses deepen, of course. For some, that meant that their 12-month declines pushed past the 50% mark.
For others, the losses are far beyond the halfway mark and are nearing 90%.
Not surprisingly, so-called pure-play Internet stock funds or those with heavy Internet exposure have been decimated. Jacob Internet, Potomac Internet Plus, Firsthand E-Commerce and Amerindo Technology, for example, all were down more than 82% through Friday, measured from a year ago. Those funds fell further Monday.
But even among more diversified tech funds, 12-month losses have been massive, according to fund tracker Morningstar Inc. As the accompanying chart shows, the majority of funds were already down more than 50% from a year ago as of Friday. And nearly half had already fallen more than 60%--a threshold the Nasdaq composite index crossed Monday.
The only specialty tech and communications funds that have managed to gain ground during Nasdaq’s downward spiral are fringe offerings with relatively low assets: The $1.6-million Potomac Internet/Short fund, for instance, has rocketed 183% in the last 12 months and 29.5% year to date by betting against Net stocks (that is, using short sales).
The $13-million Icon Telecommunications & Utilities fund gained 7.4% in 12 months by emphasizing utilities rather than telecom stocks. The $4.7-million Kinetics Internet New Paradigm has eked out a small gain through Friday by steering clear of pure Net stocks, for the most part, in favor of indirect Internet plays.
The tech carnage hasn’t just hit tech-specific funds, of course. Almost any fund that has kept a heavy weighting of tech in its portfolio has been hit hard.
Several of Garrett Van Wagoner’s growth-stock funds, for example, including Van Wagoner Post-Venture, Van Wagoner Emerging Growth and Van Wagoner Mid-Cap Growth, have been chopped by more than 50% this year alone. Each fund recently held about 90% of assets in technology and telecom, according to Morningstar.
His longtime shareholders may be used to the wild ride, however: The flagship Emerging Growth, for instance, lost 20% in 1997 before gaining 8% in 1998 and 291% in 1999, then sinking 21% last year.
Conversely, many of the strongest general growth stock funds recently, such as the $16.5-million Hussman Strategic Growth, the $162-million Strong Discovery and the $190-million IDEX Salomon All Cap, have fared well by keeping tech exposure below 20% of their assets.
A few general growth funds, such as the $124-million Needham Growth and $20.5-million Oberweis Micro-Cap, however, have notched gains year to date despite significant tech exposure.
So what does a fund manager do in a market like this?
Many have stayed close to fully invested, especially since new money from investors has slowed to a relative trickle, giving managers little ammo. In February, stock fund industry redemptions outpaced new investments for the first time since August 1998, according to unofficial estimates.
And despite talk on Wall Street about the near-record $2 trillion in money market mutual funds--a stash some analysts believe could be used to help fuel an eventual stock rally--cash levels at equity funds have declined in recent months.
Cash holdings of stock funds averaged 5.6% of assets at the end of January, down from 5.8% on Dec. 31 and the recent peak of 6.5% on Nov. 30, according to the funds’ trade group, the Investment Company Institute. In past bear markets, such as 1990, cash levels have often averaged more than 10% before the market bottomed.
“Our mandate is exposure to tech stocks, so we stay as close to fully invested as we can,” said Kevin Landis, manager of Firsthand Technology Value and several other tech-sector funds, including Firsthand E-Commerce.
But Jon Burnham, manager of the large-cap Burnham Fund, said he has been “sitting on a lot of cash for two reasons: I’m not sure what to do with it, and I want to be ready for [net] redemptions if they come.”
Burnham, who said Monday that his cash level has risen to an unusually high mark of about 16% of assets, said he would rather pay more for stocks on the way up than try to call the market’s bottom.
“Why should I buy IBM at $97 if it’s going to be $87 next week?” he said. “We won’t know when the market bottom is until long after we hit it--that’s the way bear markets work. So for now, I don’t want to be a buyer. When I feel better I’ll be a buyer.”
Though about 30% of the Burnham fund’s stock assets were recently in technology, what little buying he has done lately has been in other sectors, such as real estate investment trusts, whose income component adds portfolio stability, and gas companies, whose outlook has remained relatively strong.
While Burnham wouldn’t try to pick a bottom, he noted that “the year is still young,” saying the prospects of further interest rate reductions and a federal income tax cut offer hope for the U.S. economy.
Landis also sounded a hopeful note, saying that the economic slowdown may not be as dramatic as it appears. “Corporate customers are being a little bit cagey with their suppliers, looking for the best deals,” he said. “The dynamic has shifted.”
When the market recovers, he still expects Internet infrastructure stocks to outperform most of the old tech leaders.
“You’ll probably be able to make some money in PC-related stocks like Intel [ticker symbol: INTC], Microsoft [MSFT], Dell [DELL] and Compaq Computer [CPQ], but more so in the likes of Ciena [CIEN], Vitesse Semiconductor [VTSS], PMC-Sierra [PMCS] and Broadcom [BRCM]--the companies right in the heart of the Internet infrastructure,” he said.
Landis and Burnham both said their shareholders have hung tight, and that redemptions have not been an issue thus far.
But a lack of new money has left some managers a bit hamstrung.
“Our cash flows have stayed positive every month. It’s just that the new money has basically dried up,” said manager Michael Cohen of the $3-million Alpha Analytics Digital Future fund.
Still, he has been able to put some money to work.
Cohen said he has bought shares of Optical Communication Products Inc. (OCPI), a Chatsworth-based maker of active optical components; Network Appliance Inc. (NTAP), a leader in network-attached data storage; and Brocade Communications Systems Inc. (BRCD), which makes fiber-channel switches for storage area networks.
Cohen said he has looked at stock valuations in making those decisions as well as changing trends in technology.
“Brocade, in particular, is a stock I’ve liked for long time, but finally the price fell to the point where the valuation was compelling,” he said.
The stock sells for an estimated 48 times this year’s projected earnings per share, but profits are expected to rise an annualized 51% over the next three to five years, according to analysts’ estimates.
That gives the stock a relatively low price-to-earnings-growth ratio of 0.9--if those estimates are to be believed. In general, analysts’ earnings estimates for tech companies have been falling sharply.
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The Tech Wreckage
Most technology and communications sector funds have been whacked by at least 50% in the last year, according to Morningstar. Only a few have escaped with minimal damage.
Year-to -date 1-year Net assets Fund name return* return* (in millions) Potomac Internet/Short 29.45% 183.44% $1.6 Icon Telecommunications & Utilities -11.57 7.37 12.9 Kinetics Internet New Paradigm 0.67 1.36 4.7 Fidelity Select Multimedia 5.90 -14.28 260.5 Icon Information Technology -9.41 -19.03 36.0 Smith Barney Telecomm Income -9.38 -20.52 63.6 Gabelli Global Telecommunications -3.40 -31.54 322.0 T. Rowe Price Media & Telecom -4.67 -38.13 797.9 Light Revolution -5.25 -38.20 7.8 North Track PSE Tech 100 Index -9.56 -40.95 482.1 Flag Investors Communications -7.51 -41.95 1,675.5 STI Classic E-Commerce Opportunity Tr -14.97 -44.63 111.5 Waddell & Reed Adv Science & Tech -13.67 -45.16 2,914.1 Evergreen Technology -7.01 -46.05 14.2 USAA Science & Technology -22.73 -48.63 521.1 Fidelity Select Software & Comp -23.14 -48.94 1,240.4 MFS Technology -28.97 -48.97 165.5 Franklin Global Communications -10.27 -49.72 202.3 Seligman Communications&Information; 0.12 -49.76 6,615.3 Alliance Technology -15.58 -50.57 7,736.0 Seligman Global Technology -10.33 -51.37 1,271.2 Warburg Pincus Global Telecommun -4.25 -52.03 304.1 Fidelity Select Electronics -13.33 -52.71 7,650.5 RS Information Age -13.68 -53.45 171.6 Rydex Technology Inv -14.69 -54.05 53.9 Kinetics Internet Global Growth -0.17 -54.15 9.9 Fidelity Select Telecommunications -11.11 -54.38 992.6 Kemper Technology -21.05 -54.81 3,158.2 Pimco Global Innovation -29.11 -54.86 271.4 Rydex Electronics Inv -17.18 -55.14 225.7 Prudential Technology -17.92 -55.38 448.2 Goldman Sachs Internet Tollkeeper -18.32 -55.59 1,502.1 W&R; Science & Technology C -14.39 -56.33 165.1 Invesco Telecommunications Inv -19.35 -56.58 1,930.7 Janus Aspen Global Technology Instl -21.73 -56.82 381.4 Dresdner RCM Global Technology I -26.37 -56.83 574.7 Investec Wireless World -21.60 -57.05 27.7 Firsthand Technology Leaders -25.86 -57.79 830.9 Rydex Telecommunications Adv -24.49 -57.82 12.3 North American Science & Tech -25.87 -57.83 16.7 Sit Science & Technology Growth -30.90 -57.95 30.5 Kinetics Internet Infrastructure -2.95 -58.17 9.4 E-Trade Technology Index -19.24 -58.40 47.4 Heritage Technology -21.24 -58.46 71.8 Strong Technology 100 -26.00 -58.91 192.1 T. Rowe Price Science & Tech -26.71 -59.77 9,721.0 Fidelity Advisor Technology -19.51 -59.86 2746.9 Lexington Global Technology -8.92 -59.96 6.9 MSDW Information B -25.86 -60.08 2,805.4 Scudder Technology S -25.21 -60.63 462.8 Kinetics Internet 0.29 -60.69 407.1 Montgomery Global Communications R -16.14 -60.72 223.7 Nuveen Innovation -36.68 -60.80 73.4 Monument Telecommunications -12.17 -60.85 6.9 Fidelity Select Computers -23.41 -60.99 2,188.1 Dreyfus Premier Technology Growth -24.60 -61.05 2,255.5 Fidelity Select Developing Comm -21.73 -61.15 1,811.5 ING Global Information Technology -26.48 -61.60 112.0 Firsthand Technology Value -32.85 -61.63 4,600.0 Matthews Asian Technology 3.36 -62.32 16.9 Invesco Technology Inv -28.53 -62.62 4,705.7 Janus Global Technology -22.75 -62.76 4,074.7 Firstar Science & Technology Instl -35.17 -62.77 71.1 Red Oak Technology Select -35.49 -63.03 1,648.6 E-Trade E-Commerce Index -24.18 -63.63 30.1 Merrill Lynch Global Technology -27.81 -64.59 2,260.8 Duncan-Hurst Technology R -22.09 -65.36 4.9 Fidelity Select Technology -26.06 -65.56 4,693.0 John Hancock Technology -25.58 -65.57 1,312.6 Pimco Innovation -26.18 -65.60 2,935.2 Berger Information Technology Inv -32.44 -66.09 69.7 MSDW Instl Technology -32.92 -66.62 117.2 Northern Technology -21.70 -68.19 1,333.4 Orbitex Info-Tech & Communications -26.29 -68.27 219.8 Munder Future Technology -31.40 -70.07 912.6 Kinetics Internet Emerging Growth 7.59 -70.66 5.8 Monterey Murphy New World Technology -24.83 -71.87 3.5 RS Internet Age -20.67 -72.17 78.7 Idex Pilgrim Baxter Technology -32.78 -72.44 49.9 Enterprise Internet -19.91 -72.59 198.4 Emerald Technology -30.14 -72.60 11.9 Turner Technology Instl -35.40 -72.65 91.2 AIM Global Telecom and Technology -41.95 -72.65 2,852.1 Federated Communications Technology -23.46 -72.85 417.2 Monument Digital Technology -18.85 -73.02 59.4 Nicholas-Applegate Global Techno I -35.26 -73.25 98.5 Van Kampen Technology -45.08 -74.23 990.9 Ivy Global Science & Technology -33.31 -74.28 50.7 Strong Internet -38.56 -74.36 33.8 Firsthand Technology Innovators -30.22 -74.94 704.9 Van Wagoner Technology -50.70 -75.13 393.1 Berkshire Technology -50.56 -75.29 25.3 Firsthand Communications -31.84 -75.35 497.8 Delaware Technology and Innovation -47.25 -75.47 94.6 WWW Internet -28.72 -77.07 48.1 Munder NetNet A -29.92 -77.31 2,693.9 PBHG Technology & Communications PBHG -32.18 -77.63 1,189.1 First American Technology -36.51 -77.70 264.8 Investec internet.com Index -32.46 -78.03 11.0 Westcott Technology -24.14 -79.31 1.0 Firsthand E-Commerce -50.08 -82.62 456.9 Amerindo Technology D -41.61 -82.93 164.5 ING Internet -37.20 -85.32 64.7 Jacob Internet -32.70 -88.58 42.4 Potomac Internet Plus Inv -38.28 -88.86 3.7 *
* Through Friday
Source: Morningstar Inc.
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Growth Fund Leaders, Laggards
Growth stock mutual funds’ fortunes over the last year have largely depended on how much they’ve held in tech stocks. Here are the five best-performing and five worst-performing growth stock funds this year in the large-cap, mid-cap and small-cap sectors. Performance data are through Friday.
Top Performers - Large Cap
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Year-to-date 1-year Net assets Fund name return return (in millions) Rydex Dynamic Venture 100 26.73% NA $26.0 Potomac OTC/Short 19.44 77.1% 16.7 Rydex Dynamic Tempest 500 12.98 NA 17.2 Hussman Strategic Growth 6.36 NA 16.5 Impact Management Investment Retail 5.70 58.91 2.9
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Bottom Performers- Large Cap
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Year-to-date 1-year Net assets Fund name return return (in millions) Berkshire Focus -50.79% -73.69% $279.4 ProFunds UltraOTC Inv -46.71 -90.28 516.4 Rydex Dynamic Velocity 100 -46.70 NA 123.4 Merrill Lynch Focus Twenty A -43.21 -63.46 1,250.9 Ameritor Investment -40.71 -62.61 2.1
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Top Performers- Mid Cap
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Year-to-date 1-year Net assets Fund name return return (in millions) Needham Growth 7.83% -15.80% $123.6 Fountainhead Special Value 6.56 -14.88 22.1 Idex Salomon All Cap A 4.53 18.66 190.1 Janus Special Situations 2.04 -23.68 1,478.9 Strong Discovery 1.83 -10.42 161.6
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Bottom Performers-Mid Cap
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Year-to-date 1-year Net assets Fund name return return (in millions) Van Wagoner Post-Venture -50.30% -76.07% $489.5 Van Wagoner Emerging Growth -50.18 -73.64 837.7 Van Wagoner Mid-Cap Growth -50.05 -73.60 225.1 IPS New Frontier -38.94 -80.38 11.4 Putnam OTC Emerging Growth A -33.76 -78.10 4,541.7
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Top Performers-Small Cap
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Year-to-date 1-year Net assets Fund name return return (in millions) Perkins Opportunity 18.67% -37.38% $30.4 Apex Mid Cap Growth 17.04 -79.22 0.5 Kinetics Small Cap Opportunities 12.05 NA 1.2 Oberweis Micro-Cap 9.38 -25.75 20.5 John Hancock Small Cap Value A 4.79 -14.93 687.3
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Bottom Performers-Small Cap
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Year-to-date 1-year Fund name return return Roulston Emerging Growth -41.92% -72.63% Van Wagoner Micro-Cap Growth -38.86 -66.74 Loomis Sayles Small Cap Growth Instl -30.10 -59.36 IPO Plus Aftermarket -30.08 -71.82 PBHG Emerging Growth -27.13 -62.48
Net assets Fund name (in millions) Roulston Emerging Growth $16.5 Van Wagoner Micro-Cap Growth 159.0 Loomis Sayles Small Cap Growth Instl 247.0 IPO Plus Aftermarket 45.0 PBHG Emerging Growth 609.4
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Source: Morningstar Inc.
