Few mutual funds have disappointed so many careful investors for so long as T.Rowe Price Science & Technology. Once the nation's largest tech fund, ending 1999 with assets of $12.3 billion, it seemed to have just what a smart fund picker could want: a solid long-term record, low fees, and a big research crew led since 1991 by one of techdom's most experienced hands, Chip Morris. Yet it failed to perform. Each year since 1996, even when it earned double-digit returns, it still trailed tech fund peers. Its assets have since dwindled to $5 billion.
Now, Morris is leaving TRP to join his predecessor, noted tech investor Roger McNamee, at Integral Capital Partners, which runs venture capital and hedge funds. What can the T. Rowe Price fund's 363,000 holders expect from new manager Michael Sola? More diversification, with a higher number of stocks in the portfolio and smaller concentrations in any given industry. Also, less sudden swapping of stocks. "I tend to be more of an incrementalist when I trade," Sola told me the other day. "We just have to be better at identifying the trend and then sticking to it."
Sola comes to the job after serving under Morris since 1995. Already he has gotten a taste of running his own show managing the $26 million T.Rowe Price Developing Technologies Fund since its August, 2000, inception. The fund focuses on smaller-cap stocks than Science & Technology. Last year, it lost 31% while rivals fell 39% on average, according to Morningstar.
That solo performance is too short to draw any meaningful conclusions. But to get a sense of changes to come, it may help to look at Science & Technology's performance, which Sola witnessed up close. The fund, Morningstar analyst Scott Cooley said, had a stellar long-term record until the wild tech-stock years of 1998 and '99. It posted handsome returns of 42% and 101% in those years, respectively. Yet the average rival fund returned even more, 56% and 143%, as Morris hewed to TRP's custom of keeping a sharp eye on risk. In Cooley's view, "Morris had been so burned in the past by not being exposed to more speculative stuff that he thought it was a buying opportunity" in 2000 when tech stocks first sold off. The fund dumped such steadier companies as Microsoft and plunged into a bunch of racier techs, including Ariba and DoubleClick.
Wrong. As the market in tech stocks grew worse, the fund kept trailing its peer group, losing 34% in 2000 and 41% last year. Morris declined to comment, but Sola said: "We did not do nearly as good a job at recognizing the bubble after looking at it so long. You get caught up in it with relative performance....Hopefully, we've learned our lesson."
Sola doesn't expect ebullient markets ahead--at least not in 2002. "The days of seeing investment [returns] of 30% are behind us," he told me. While makers of semiconductors and software still face weak demand this year, Sola is bullish on both areas longer term. In chips, he favors companies with a diversified group of end users, such as Analog Devices, over big, familiar Intel. "It has long-term growth issues," Sola thinks, as the growth rate in PC shipments slows. Sola also sees makers of network-security software, such as VeriSign, winding up with a nice chunk of corporate computing budgets.
Morris spread his bets over 50 or so stocks. Sola says his portfolio will expand to perhaps 75 names. Morris told me a couple of years back that the fund's aversion to outsize risks meant it was unlikely ever to lead the pack of tech funds. He aimed instead to keep it solidly ahead of the average rival. That job now is up to Sola.