Lower your expectations. At the beginning of the year, that was the final word to international investors. Triple-digit returns on technology funds would be history. The future would be more sober, stock growth more sustainable. Investors would have to choose companies more carefully. There actually would be some losers.
Well, the professionals got it partly right. The days of indiscriminate tech investing are over. But they didn't end on schedule. The momentum slowed in Asia before anywhere else. In Europe and the U.S., investors kept up the pace for most of the first three months of 2000. Then all of the money managers' predictions came true in one April day.
The disparity between Asia and Europe, in particular, couldn't be more stark than it was in our quarterly survey of offshore mutual funds. Nearly all of the top performers invested in Europe--mostly in technology, media, and telecommunications--and many of the worst in Asia.
As the professionals warned, though, not a single fund even came close to a 100% return. The best performer, Fleming Frontier European Discovery, gained 53.67%, and the top 20 more than 20% each. "In Europe, stocks were relatively cheap, the economies were improving, and the market for technology was strong," says Nicholas Sargen, J.P. Morgan's global investment strategist for private clients.
The same could have been said for much of Asia--except, that is, Japan, where economic growth was negligible and political uncertainty considerable. But what seems to have been missing throughout the region is confidence that corporate reforms have really taken hold. Seven of the 20 worst-performing funds were invested in Japan; five were in South Korea and Thailand. Their losses ranged from 22.57% to 10.11%.
Business Week's Offshore Fund Scoreboard catches the marketplace at a turning point this quarter. The New Economy is in place, but investors are starting to ask which companies are really on terra firma. It's a time when a fund that invests in European technology can gain 53.67% a quarter, and one that invests in Japanese technology can lose 18.59%. Offshore funds don't file reports with the U.S. Securities & Exchange Commission and aren't marketed in America. But their performance reflects decisions by U.S. and international investment pros. We track the world's 500 biggest equity funds quarterly, using data from Standard & Poor's Micropal (like Business Week, a unit of The McGraw-Hill Companies). The latest performance data on these and other equity and fixed-income funds are available at www.micropal.com.
Tech stocks no longer seem to operate in a world of their own. That means investors will have to evaluate new businesses more carefully. And they should reconsider the virtues of companies with traditional names and conventional business models, not to mention good old-fashioned profits. In other words, Old Economy blue chips could reemerge this year--especially those that quickly adapt to the New Economy.
"NEEDED TO PAUSE." Many money managers in Europe and the U.S. were expecting tech stocks to fall a bit in the begining of the year. "I wouldn't have been uncomfortable if our performance was flat or even slightly down," says Jay Nakahara, who manages the $835 million global technology fund for Invesco, ranked 16th in our survey. "We needed to pause."
That's one way to describe what happened in mid-April. Nasdaq lost 25% of its value from its March peak; the Frankfurt's Neuer Markt sank 33%, and Tokyo's Jasdaq Top-50, 40%. Bubble burst, correction, reality check: No matter how the pros refer to it, they almost all say the drop was healthy, expected, even deserved. "High-tech valuations have been way above any rational basis for some time," says Bob McKee, chief economist at Independent Strategy, a global investment consultancy in London.
That, of course, is why some money managers prefer to invest in established companies that have come to terms with the Internet. Margaret Lindsay, senior vice-president at Fiduciary Trust Co. International and manager of its $30 million European Smaller Companies Fund, likes Italy's L'Espresso media group for just that reason. It's well managed, makes money, and has a strategy for the Net that includes advertising based on market segmentation. It's a common enough idea in the U.S., but innovative in Italy, she says. Companies that are developing business-to-business Internet strategies also could be in vogue: Auto makers such as Toyota in Japan or Ford in the U.S., for example.
For some money managers, there are companies worth investing in, Internet strategy or no. Chris Rice, manager of HSBC European Growth Fund, says some stocks are just too cheap or too reliable to dismiss. Synthes-Stratec, for instance, is a Swiss medical equipment company that is growing at 15% and is trading at 25 times this year's earnings. Swiss pharmaceutical Novartis and food giant Nestle also are among his picks. Rice believes that asset-management firms are a good buy as well for the simple reason that they are growing rapidly, thanks to increasing interest in Europe in the equity market. In particular, he likes BIBOP in Italy and MLP in Germany.
FAMILIAR NAMES. The shift back to familiar names already has begun in parts of Asia this year. "In 1999, nobody really touched anything but telecom and technology stocks," says Lee Jeong Ja, a strategist at HSBC Securities in Seoul. "But in the first quarter, Old Economy stocks looked relatively better because they had been neglected." Grain processor Shin Dong Bang, for example, climbed 85%; Aluminum of Korea, 59%.
In Hong Kong, Richard Li's Pacific Century Cyberworks famously lost nearly half its value in the two months since it won a $38 billion bid for local phone giant Cable & Wireless Communications. Such turbulence in technology and telecom stocks is one reason fund managers like Steve Luk at Jardine Fleming Investment Management are investing in safer businesses such as Hongkong & Shanghai Banking Corp. Singapore, where the Net economy was less established to begin with, is now looking more interesting. Roy Phua, senior portfolio manager at Rothschild Asset Management, likes such standbys as Singapore Airlines, Chartered Semiconductor, and Development Bank of Singapore.
In Japan, there are fewer reliable blue chips. Stay away from construction, steel, and real estate, say money managers. And don't even think about banks. ING Barings bank analyst James Fiorillo points out that from October, 1999, to April, 2000, the banking sector fell by 12.8%, while the overall market rose 11.8%. Although banks seem to be merging every couple of months, Fiorillo argues that the promised savings aren't likely to materialize.
That leaves companies that could actually benefit from corporate restructuring, such as Kirin Beverage and machine tool maker Fanuc, says HSBC equity strategist Garry Evans. Kirin is trading near a 52-week high of $24 per share. Its soft-drink operations could buy up some bargains in Japan's fragmented food industry. Fanuc, meanwhile, should do well because of the rebound in capital spending.
Latin America also offers investors "big blue-chip bellwether stocks that have an Internet strategy," says Geoffrey Dennis, Latin America equities strategist for Salomon Smith Barney in New York. He likes Telefonos de Mexico and Brazilian long-distance phone company Embratel. Jorge Mariscal, Latin America equities strategist for Goldman, Sachs & Co. in New York, would add to that list Mexico's Banacci and Brazil's Unibanco--two banks that are making aggressive Internet moves.
Of course, no one is suggesting that investors give up on new tech stocks altogether. If there's a message for how to trade in the New Economy these days, it's this: The markets are risky, valuations are important, diversification helps. In short, the old rules do matter.