If You Can Take the Heat, Tech Rockets May Still Have Fuel
Remember that huge group of stock mutual funds that returned 100% or more last year?
The Triple-Digit Club has come back to Earth in 2000, perhaps to no one’s great surprise.
Still, more than half of the 20 biggest winners among domestic stock funds in 1999 have continued to gain ground this year, beating both the Standard & Poor’s 500 index and the Nasdaq composite.
And for investors who can stomach sharp swings, analysts say some of last year’s hottest funds could still be worth buying--even though the conventional wisdom is that investors should be wary of funds that top any annual performance list.
Last year saw 171 stock funds rise 100% or more, a feat that had previously been achieved by just 23 funds in all other calendar years combined, according to Morningstar Inc. The top 15 domestic funds in 1999 boasted returns of more than 200%.
The driving force, of course, was the technology-stock sector, which began to rocket in the second half of last year. And with the peak in tech stocks earlier this year came the peaks for many of last year’s fund leaders as well.
By the end of July, with tech stocks in another downtrend, many of the stock funds that were up 100%-plus in 1999 were down between 20% and 30% year to date.
The Monument Internet fund, for example, is off nearly 26% so far this year, after soaring 273% in 1999.
Yet the No. 1 fund of 1999, Nicholas-Applegate Global Technology, has eked out a 4.5% gain so far this year. That might be tiny compared with last year’s 495% surge, but it’s still better than the Nasdaq composite, which through Friday was down 6.9%.
The Van Wagoner group of funds also has continued to shine this year after zooming in 1999.
The performance differences this year among last year’s leaders might have as much to do with the inevitability of sector rotation as with skillful stock-picking, fund analysts say.
Within tech, biotech has remained a hot area, for example. But anything Internet has been trashed after a spectacular two-year run-up.
Why look at last year’s fund leaders at all? If you want to bet on technology in the years ahead, analysts note, these funds are among the most aggressive tech bets. What’s more, many are run by seasoned portfolio managers with sharp eyes for tech trends.
Some analysts say the best place to start researching among last year’s triple-digit gainers is among those that have tumbled this year.
“If you’re going to shop from this group, good funds that have gotten whacked are often a better place to start than funds that are still rallying,” argues Russel Kinnel, Morningstar’s director of fund analysis.
He pointed to Amerindo Technology, an Internet-stock-heavy fund managed by Alberto Vilar and Gary Tanaka, a team more experienced than most Net fund managers.
After a 248.9% romp last year, Amerindo is down 29.4% in 2000.
“It may only have a huge year like that once every seven years, but the way to make money with such a volatile fund is to be patient and wait for that run,” Kinnel said.
To avoid getting whipsawed, however, Kinnel recommends dollar-cost-averaging into funds such as Amerindo. He also suggests limiting such wild funds to 5% of one’s total portfolio.
Kinnel also admires fund manager Garrett Van Wagoner, known for his rapid trading style and for his insights into tech trends.
All five of Van Wagoner’s funds are in this year’s double-digit club, with gains of 10% or more.
“Van Wagoner on a roll is just about one of the most impressive sights,” Kinnel said. “I remember he wanted to open a biotech fund last fall--he was right on top of that whole move.”
All of Van Wagoner’s funds made the ’99 triple-digit club. Three are still open to new investors: Van Wagoner Technology, Van Wagoner Mid-Cap Growth and Van Wagoner Post-Venture, which focuses on small stocks.
Philip Edwards, director of fund research at Standard & Poor’s Corp., said he screens funds for performance consistency to avoid one-year wonders.
Members of the triple-digit club that pass S&P;’s muster include RS Diversified Growth, a $708-million small growth fund managed by John Wallace and John Seabern; Turner Midcap Growth, an $882-million fund managed by Chris McHugh; TCW Galileo Aggressive Growth, a $26-million mid-cap growth fund managed by Doug Foreman and Christopher Ainley; Firstar MicroCap, a $44-million small growth fund managed by Joe Frohna; and Standish Small Cap Tax-Sensitive, a $303-million small growth fund managed by Nicholas Battelle, which barely made the list with its measly return of--yawn--101% in 1999.
“Last year may have been an aberration for these funds,” Edwards said, “but only in terms of the absolute amounts of their gains, thanks to the incredible market. They all have good managers with longer-term records.”
Some managers, including Van Wagoner and the Amerindo team, established their early records at other funds or investment firms. Analysts recommend a close look at a fund’s prospectus, where that information can often be found.
Don Cassidy, senior research analyst at fund tracker Lipper Inc., said that though he does not make recommendations, he thinks “squeamish” investors who nonetheless want to be in the tech sector might be drawn to Invesco Technology, a $4.9-billion fund managed by William Keithler.
“It may not be as spectacular as some others when it’s going well, but it never seems to have a down year,” Cassidy said of the fund, which is up 12.5% this year after returning 144.9% last year.
Anyone looking at highly aggressive stock funds needs to remember the risks, of course. Those risks start with the gambling nature that can thrust managers into the limelight and produce extreme swings in both directions.
Van Wagoner Emerging Growth lost 50% in one month during this spring’s tech sell-off, and Turner Midcap Growth got rocked in March when enterprise software and services company MicroStrategy (ticker symbol: MSTR), a key holding at the time, revealed accounting irregularities and tumbled 62% in one day.
Kopp Emerging Growth’s management team, which has led the fund to gains of 148.2% in 1999 and 44% in 2000, is known for bold bets: fiber-optic component maker SDL (SDLI) recently mushroomed to more than 20% of assets, according to Morningstar, partly on news of its pending acquisition by industry leader JDS Uniphase (JDSU).
As Cassidy put it, “Always look beyond the numbers” when evaluating a hot fund.
Another danger with these funds: Not only can no sector stay in vogue forever, but the momentum perpetuated by managers themselves cuts both ways. “They buy more of their own stocks, driving up the prices, but the reverse phenomenon occurs when things are going badly and they’re selling the stocks,” said Morningstar’s Kinnel.
Asset size should always be weighed when evaluating performance, as tiny funds can ride just two or three initial public offerings to the top of the charts but bigger funds cannot. S&P;’s Edwards said he ignores funds with less than $25 million, while Kinnel said he looks sideways at any fund with less than $100 million.
And, of course, hot funds that get too much cash too fast can have a hard time putting it to good use.
All in all, Morningstar analyst Scott Cooley notes that, even with the continuing gains this year of many of last year’s hot funds, there’s good reason for investors to be wary of chasing performance.
People invariably pile into funds after they have made huge moves, Cooley notes. That strategy worked last year, as the tech sector dwarfed even its dramatic climb in 1998.
But generally, the average investor comes too late to the party to capture those glitzy gains touted in fund advertisements.
“It’s human nature, I guess,” Cooley said. “It happened with biotech in the early ‘90s, with emerging markets in ’93 and ‘94, and with financial specialty funds in ‘97, in the days when, believe it or not, nobody wanted to talk about technology.”
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Times staff writer Josh Friedman can be reached at josh.friedman@latimes.com.
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Welcome to the Club. Now What?
The stock market’s surge in 1999 helped land a record 171 mutual funds in the triple-digit club, with total returns for the year of 100% or more. That feat had previously been accomplished by only 23 funds in all other calendar years combined. Nearly all of last year’s big winners were heavily invested in technology stocks-and continue to be. Here’s a look at how 1999’s 20 top-performing domestic funds fared, and their returns so far this year.
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‘99 ’00 YTD Assets Fund return return* (in millions) Nicholas-Applegate Global Tech. +494.7% +4.5% $301 MAS Small Cap Growth +313.9 -3.6 454 Van Wagoner Emerging Growth +291.2 +27.1 1,311 Nevis Fund +286.5 +3.7 221 Monument Internet +273.2 -25.7 121 Amerindo Technology +248.9 -29.4 442 PBHG Technology & Commun. +243.9 +5.9 3,137 Van Wagoner Post-Venture +237.2 +12.1 703 ProFunds UltraOTC +233.3 -26.0 980 Van Wagoner Technology +223.8 +17.1 614 BlackRock Micro-Cap Equity +221.5 +8.9 97 Kinetics Internet +216.4 -29.2 913 Thurlow Growth +213.2 -29.9 2 Firsthand Technology Innovators +212.3 +6.4 864 Van Wagoner Micro-Cap Growth +207.9 +27.3 264 Loomis Sayles Aggressive Growth +198.8 +19.7 50 First American Technology +191.8 -1.6 159 Firsthand Technology Value +190.4 +17.3 4,051 Strong Enterprise +187.8 -9.0 857 Emerald Technology +186.2 -13.6 19 Nasdaq composite index +85.6 -6.9 S&P; 500 index +21.0 +0.3
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* Year to date through Friday
Source: Morningstar
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Analysts’ Picks Among Hot Funds
Here are nine triple-digit gainers of 1999 that still get high marks for their long-term potential from analysts at Morningstar Inc. and Standard & Poor’s. Note, though: Most of these funds, not surprisingly, are highly aggressive in their investing strategies, and may not be suitable for more conservative investors.
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Minimum ’99 ’00 YTD initial Fund return return* invest. Phone number Amerindo Technology +248.9% -29.4% $2,500 (888) 832-4386 Van Wagoner Post-Venture +237.2 +12.1 1,000 (800) 228-2121 Van Wagoner Technology +223.8 +17.1 1,000 (800) 228-2121 RS Diversified Growth +149.9 -9.4 5,000 (800) 766-3863 Firstar MicroCap +136.2 +16.8 1,000 (800) 228-1024 TCW Galileo Agg. Growth +127.6 +4.2 2,000 (800) 386-3829 Van Wag. Mid-Cap Growth +126.9 +17.0 1,000 (800) 228-2121 Turner Midcap Growth +125.5 +13.0 2,500 (800) 224-6312 Standish Small Cap Tax-Sen. +100.7 +2.3 100,000 (800) 729-0066 Nasdaq composite index +85.6 -6.9 S&P; 500 index +21.0 +0.3
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* Year to date through Friday
Source: Morningstar, Standard & Poor’s
