How Long Can Tech Funds Keep This Up?

They were off the charts in '99--but don't expect a rerun this year

Offshore investing seemed so simple at the end of the millennium. Even someone putting money into international markets for the first time could hardly go wrong. Buy technology funds, what else? It barely mattered where, either--Japan, Europe, or the U.S. Economic growth may still have been a little shaky in Japan and parts of the Continent. No problem. New Economy stocks operated in a world of their own.

The best three performers in our quarterly survey of offshore mutual funds were all invested in tech, and they all posted triple-digit returns. Twelve of the top 25 funds invested primarily in tech or telecom, and every one gained more than 50%. "Tech stocks have exploded," says Jim Campbell, portfolio manager of the No. 2-ranked, $148 million Fleming Frontier European Discovery Fund.

DISAPPOINTMENTS. And tough luck for those who could not take advantage of that. Funds stuck in Old Economy companies suffered at the end of the year. Even those with respectable gains in the previous 12 months disappointed in the last quarter. The 25 worst performers had returns ranging from -13.3% to 3.79%.

BUSINESS WEEK's Offshore Fund Scoreboard reflects a new world where money managers look at the sector before the country, where a Japan fund that invests in tech can return 118.3% in a quarter while one that doesn't returns just 3.5%. 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

It sure would be nice to get returns of 50% this year--but don't count on it. Investors got a little ahead of themselves in the dying days of 1999. It was partly relief: The millennium bug seemed to have no bite. And partly bravado: They had faced down U.S. Federal Reserve Chairman Alan Greenspan's interest rate hikes. Emerging markets were surging--they gained an average of 60% for the year--and the financial panic of the previous two years seemed to have finally ebbed.

The tech revolution took hold in the closing months of 1999. In Europe, tech stocks comprised just about 3% of market capitalization early in the year. By yearend, they were 8%, says Tim Harris, equities strategist at J.P. Morgan & Co. in London. What began in Japan as a broadbased market recovery in January had turned all-tech by December. And in Latin America, telecom and media companies helped push markets up 40% late in the year.

So it's time for a reality check. "Everybody is trying to answer the same question: How long will the tech boom last?" says Leila Heckman, managing director of Global Asset Allocation at Salomon Smith Barney in New York. "And every day there's a slightly different answer."

No one says the tech boom is over, or even about to falter anytime soon. But many expect some fallout. First, tech and telecom stocks are expensive and volatile. In the U.S., they trade at an average 43 times 2000 earnings, vs. about 25 for other stocks in the Standard & Poor's 500 index. It's much the same in Japan and Europe. "These are highly valued business models," says Otto Waser, chief investment officer at Bank Julius Baer & Co., a private bank in Zurich. "Even a minor disappointment [in earnings] can cause very large corrections in price."

Meanwhile, investors are realizing that some tech companies aren't going to make it. The talk is all about consolidation, shakeout, losers. "Last year you could invest in tech stocks indiscriminately," says Nicholas Sargen, managing director at J.P. Morgan in New York. "Not this year."

And once again, the threat of rate hikes hangs over the U.S. Greenspan is widely expected to raise rates in early February. If investors react badly and begin selling off stocks, that could spell trouble abroad. If too many people dump Inc., who knows how far a stock such as Softbank in Tokyo could fall? "Before, if you were nervous about the U.S., you would diversify by investing in Japan," says Sargen. That doesn't hold true anymore--in the short term, anyway.

But don't let the analysts scare you away. In Japan, Net companies are really just coming into their own. Thanks to several new exchanges that cater to startups, "there will be a new stream of Internet companies that offer enormous investment opportunity," says Toby Rodes, Net analyst at Nikko Salomon Smith Barney in Tokyo.

WRONG NUMBERS. In Latin America, professional investors see promise in the huge telecom and media companies moving onto the Internet. Mostly, for now, because the stocks are so cheap. "Telmex [Telefonos de Mexico] will be a major Internet asset, but it is trading at ridiculous multiples--and it's making money," says Ed Cabrera, Latin America strategist for Merrill Lynch in New York. Mexico's Televisa media group and Brazil's long-distance telephone company Embratel are other favorites.

European managers such as Fleming's Campbell are putting money into Internet infrastructure and security companies, e-commerce software outfits, and technology consultants. In particular, he likes consulting firms such as Sweden's Framtidsfabriken and Germany's Pixelpark, as well as software company Stonesoft in Finland. Anything, that is, but dot.coms. "The barriers to entry are too low there," he says. Telecom stocks, which account for 14% of Europe's market capitalization, are also promising--for the next six or so months, according to James Downie, telecom analyst at ABN Amro in London. As these companies develop their Internet strategies, their stock price should go up. But Downie believes they may have underestimated the cost of putting in broadband infrastructure.

When it comes to playing global markets this year, Tim Woolley, portfolio manager of the Henderson Horizon Global Technology Fund, the No. 6-ranked offshore fund, probably sums up the current state of New Economy investing best: "Tech has been a great growth area to make money. Now, though, people's expectations have to be reset."

Woolley says you should get used to returns closer to 15% or 20%. He calls those kind of figures historic. You might prefer to think of them as early 21st century.

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