Where Tech Funds Went Right--or Wrong
Some of the most profitable terrain for the leading technology stock mutual funds in the third quarter was more than 5,000 miles from Silicon Valley--in Japan.
Geography of a sort was also behind the dismal numbers posted by the fund that came in last: It was hemmed in by cyberspace.
Though the average tech fund rose 8% in the quarter--extending the sector’s gains this year--it was a volatile period, and a frustrating one for many popular funds.
Beyond uncovering interesting opportunities overseas, the winning funds displayed a knack for timing market swings and companies’ boom phases. Those talents don’t come together very often.
Nicholas-Applegate Global Technology paced fund tracker Morningstar Inc.’s roundup of 51 tech funds (excluding those with less than $20 million in assets), returning 24.3% for the quarter.
That might not sound spectacular in a sector that routinely pushes the limits of momentum. But those results shined during an anxious three months that saw the Standard & Poor’s 500 index lose 6.2%.
The quarter’s runner-up among tech funds was Dresdner RCM Global Technology, a low-profile portfolio that advanced 17.7%.
On the losing side of the coin, the celebrated Internet Fund reversed its winning ways. The Net stock pure play led the entire fund industry in 1998, mushrooming 196%, but it gave back 11.6% in the third quarter.
The quarter was a difficult one for fund managers to navigate as interest rates climbed, the dollar sagged and the familiar summer slump hit many tech stocks, particularly the Nets.
And what about now? Among the quarter’s winners, the Nicholas and Dresdner funds both plan to stay the course. And with the notable exception of Nicholas’ high minimum investment requirement of $250,000, the two funds have much in common: worldwide scope, stock price-to-earnings ratios averaging 54 (based on most recent 12 months’ earnings), and hefty overseas weightings--32% and 28%, respectively. Both also have their sights trained on Japan.
“Foreign tech stocks have been a positive driver for these funds,” said Christine Benz, an editor and analyst at Morningstar. “In the past, you were better off with a domestically focused tech portfolio, but as Japan and some other Asian markets came on strong, it really made a difference.”
U.S.-based funds that own Japanese stocks also have gotten a boost this year as the yen has gained against the dollar, automatically raising the value of Japanese shares.
Walter Price, who co-manages Dresdner RCM with Huachen Chen, has been increasing the fund’s exposure to Japan as that economy’s rebound gains steam.
“One of the things we have seen in the U.S. and Europe is that as a country goes through a restructuring, it uses a lot more technology,” Price said.
One of his favorite ideas is Yahoo Japan, which the partners recognized as a giant in the making. Unlike its American parent, the stock didn’t have great expectations priced in when they started buying.
They also own Hirose and Murata, which supply electronics that enable Nokia customers to link up to the Web via their cell phones (Japan and Europe have been quicker to embrace this trend than the U.S.).
Less-developed markets are fair game too: Price and Chen expect to add to their holdings in two new tech tigers, Israel and India. Price is hoping for a pullback in Indian software maker Infosys (Nasdaq ticker symbol: INFY; Mon. close: $171), whose clients include Amazon.com.
Nicholas-Applegate Global, led by Emmy Sobieski and Aaron Harris with help from a coterie of far-flung colleagues, has tapped the turnarounds at Sony (SNE, $157.13) and Fujitsu--the latter gained 52% in the quarter in Japan.
If those were obvious choices, identifying 7-Eleven Japan as an e-commerce play took a little digging. Aided by its ties to tech conglomerate Softbank, the chain is installing Internet kiosks and becoming a preferred product-delivery point for Net shopping.
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As for U.S. Net stocks, both the Nicholas and Dresdner funds managed to avoid the sector’s swoon in the spring and summer.
The sector accounted for 55% of Nicholas’ holdings at the close of 1998, when cyberstocks were hot. But it represented just 10% by June 30 as the market fretted about slowing usage and pricing pressure faced by Web merchants.
The pullback in Net shares presented both funds with a buying opportunity just as consumers were about to go back indoors and log on. “We are seeing increased traffic, more business-to-business activity and higher ad rates,” Sobieski said.
With the Internet’s commercial conditions improving, the funds grew more bullish on Yahoo (YHOO, $181.38). Indeed, the Net portal outdid even the “whisper number” when it posted third-quarter earnings of 14 cents a share last week.
And last month Nicholas raised its stake in America Online (AOL, $121.06) when Microsoft opted not to start a price war in Internet access.
In Internet services, both funds are sticking with Web hosting firm Exodus Communications (EXDS, $70.88), despite competition from Intel, because the pie is growing quickly and Exodus is expanding into providing software.
Both also like consultant USWeb (USWB, $31.69), which just launched an e-commerce development venture with Microsoft. And both profited from the popularity of Net infrastructure stocks such as JDS Uniphase (JDSU, $131.56) and Redback Networks (RBAK, $150).
Still, tech giants Intel, Cisco Systems and Microsoft are among Nicholas’ 10 top positions. The presence of those mature, richly valued firms underscores the challenge of racking up future gains that even compare to those of the last year.
Sobieski feels that these household names add balance and stability to the portfolio--as well as growth. “There may be some companies that won’t have these enormous pops, but their progress is more sustainable. And they are reinventing themselves to get in front of some huge growth drivers.”
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Meanwhile, funds that specialize in Internet stocks found themselves in an unfamiliar spot--the loser’s circle--in the third quarter. As would be true of any other sector portfolio, they had nowhere to go when investors fled the group.
The quarter’s biggest loser, the Internet Fund, suffered worst because it sold heavily during a restructuring of the portfolio and wasn’t fully invested when the Net stocks started to come back, said strategist Peter Doyle.
Still, Doyle says of the fund’s decline, “If you’re trailing by 10%, that could be made up in two days’ time” in the Net sector--and he’s right. Nevertheless, as chairman of the fund’s advisor who took over after marquee name Ryan Jacob left in June, Doyle faces the onus of first proving himself to investors, and second, piloting the fund through a new environment.
The midyear Net stock slump reinforced Doyle’s conviction that cash matters as much as concept. He’s emphasizing well-capitalized companies that can execute their business plans without tapping iffy equity markets to raise financing.
“Some Internet stocks have lost 60% or 70% [of their value], and for many, I think this is permanent erosion of capital,” he said. “Look at their cash burn rate. Greater financial strength will make the difference.”
So it’s goodbye Theglobe.com (TGLO, $14.88), an epic IPO that was once the fund’s top holding, hello RCN Corp. (RCNC, $49.13), a Net service provider that already had a cash hoard before investor Paul Allen recently took a big stake.
A sleeper that Doyle pitches as a potential content king is Getty Images (GETY, $24.25), which is creating an online photo distribution business that competes with Bill Gates’ Corbis.
Doyle has been trying to re-educate Internet Fund investors who fear that the glory months will fade to measly annual returns in the 35% range. “They don’t realize that if you can get ahead 35% a year,” he said, “you’d be the best-performing fund of all time.”
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Edward Silver can be reached at edward.silver@latimes.com.
Quarter’s Tech Fund Stars, Flops
Here are the five best- and worst-performing technology stock mutual funds* for the quarter ended Sept. 30. One quarter’s performance, of course, doesn’t necessarily tell you how the funds will perform in the future, but many of the winners have been hot all year.
TOP PERFORMERS
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Total Total Assets, return return Phone Fund in millions 3Q YTD** number Nicholas-Applegate Gbl Tech $56.2 +24.3% +200.5% (800) 551-8643 Dresdner RCM Global Tech 48.2 +17.7 +54.8 (800) 726-7240 Red Oak Technology Select 89.8 +15.4 +44.3 (888) 462-5386 Firsthand Techn. Innov. 95.1 +15.2 +101.8 (888) 883-3863 First American Techn. 21.5 +14.1 +61.6 (800) 637-2548 Avg. tech stock fund +8.0 +46.1
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WORST PERFORMERS
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Total Total Assets, return return Phone Fund in millions 3Q YTD** number Internet $603.1 -11.6% +88.4% (888) 386-3999 Munder NetNet 1,106.7 -3.5 +53.4 (800) 438-5789 USAA Science & Techn. 272.7 -3.2 +14.6 (800) 382-8722 Monument Internet 47.4 +1.2 +101.6 (301) 215-7550 Orbitex Info-Tech & Comm. 34.1 +2.0 +64.7 (888) 672-4839
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*Limited to funds with a minimum $20 million in assets.
** Year to date through Sept. 30
Source: Morningstar Inc.
