Escaping the Tech Wreck
By Rick Micchelli
Technology funds continued to decline in the first quarter of 2001 after losing 33% on average last year. The hardest hit tech funds plunged an additional 50%-60%, as a stream of profit warnings brought new-economy issues down. A series of rate cuts by the Federal Reserve couldn't stem the losses in the sector, as bellwethers such as Cisco Systems (CSCO ) and Nortel Networks (NT ) plunged.
Funds investing in stocks of such blue chip tech companies, as well as those investing in more speculative Internet issues, fell alike. Several tech portfolios, however, were spared by virtue of investment strategy. Potomac Internet/Short (PDISX ), which shorts the Dow Jones Composite Internet Index, soared 40.9% in the quarter, as it continued to benefit from the dot-com implosion of 2000.
Avoiding U.S. tech companies altogether was an effective strategy for Matthews Asian Technology Fund (MATFX ). It lost just 1.9%. "I think the two standout markets have been Korea and Taiwan," said co-manager Mark Headley. "We have seen a very strong move in Taiwan, and a pretty decent move in selected stocks in Korea -- markets that I think were way oversold in the fourth quarter." The fund, which has 20% of its assets in Korea and 16% in Taiwan, also invests in Japan, Singapore, Hong Kong, and China.
"Asian technology companies were badly bloodied last year, and I think their outlook is pretty positive relative to their valuation," said Headley on future prospects. "I think most of them never achieved the kind of absurd valuations you saw in the Nasdaq, so when they pulled back they became extremely attractive, and investors have been noticing that." Headley has been adding to the fund's semiconductor exposure on weakness in the sector.
Kinetics Internet Emerging Growth Fund (WWWEX ) and Kinetics Internet New Paradigm Fund (WWNPX ) were also good relative performers in the quarter. The funds avoid "co-depenence" in the tech sector by seeking out companies that will behave differently from the majority of tech firms that are driven by the same "macrovariables," explained co-manager and Kinetics chief investment strategist Peter Doyle.
Doyle instead looks for stocks driven by company- or event-specific factors "likely to cause them to have performance that is different from what is going on in the overall technology sector." As a result of the diversification, the Kinetics funds managed to avoid much of the carnage their peers suffered from investing in household name techs such as Oracle Corp. (ORCL ), Dell Computer (DELL ), and EMC Corp. (EMC ).
But though Kinetics Internet Emerging Growth Fund has risen 1.4% so far this year, it fell a whopping 63.1% in 2000, its first full year of operation, versus a gain of 3.9% for its sibling, Kinetics Internet New Paradigm. The relative difference in performance owes to the funds' approaches: Kinetics Internet Emerging Growth invests in smaller and newer tech issues, while Kinetics Internet New Paradigm focuses on established companies across a range of sectors using the Internet to enhance existing business models.
Best-Performing Technology Funds (Total Return) -- First Quarter 2001 Potomac Internet/Short Fund (PDISX) +40.9 Kinetics Internet Emerging Growth Fund (WWWEX) +1.4 Kinetics Internet New Paradigm Fund (WWNPX) -1.8 Matthews Asian Technology Fund (MATFX) -1.9 Kinetics Internet Fund (WWWFX) -7.2 Worst-Performing Technology Funds (Total Return) -- First Quarter 2001 Berkshire Technology Fund (BTECX) -61.3 Van Wagoner Technology Fund (VWTKX) -60.4 Delaware Group:Technology & Innovation/B (DTYBX) -56.1 Firsthand Funds:E Commerce Fund (TEFQX) -54.5 Van Kampen Technology Fund/B (VTFBX) -53.8
Best-Performing Technology Funds (Total Return) -- First Quarter 2001
Potomac Internet/Short Fund (PDISX) +40.9
Kinetics Internet Emerging Growth Fund (WWWEX) +1.4
Kinetics Internet New Paradigm Fund (WWNPX) -1.8
Matthews Asian Technology Fund (MATFX) -1.9
Kinetics Internet Fund (WWWFX) -7.2
Worst-Performing Technology Funds (Total Return) -- First Quarter 2001
Berkshire Technology Fund (BTECX) -61.3
Van Wagoner Technology Fund (VWTKX) -60.4
Delaware Group:Technology & Innovation/B (DTYBX) -56.1
Firsthand Funds:E Commerce Fund (TEFQX) -54.5
Van Kampen Technology Fund/B (VTFBX) -53.8
Source: Standard & Poor's. Total returns are in U.S. dollars and include reinvested dividends. Data as of 4/2/01.
Megan Graham-Hackett, director of technology research at Standard & Poor's, said that while tech subsectors -- like some areas of software technology and semiconductors -- may perform a little better going forward for the year, S&P still has an underweight recommendation on technology.
"There are some semiconductors that should do okay, but once we are over the inventory correction there is still a question of end-user demand," said Graham-Hackett. "Definitely those names were hit quite severely, and have performed better so far this year from a very depressed base, but we are still getting very negative earnings announcements for these companies, and therefore it is difficult to make a broad call on semiconductors," she explained.
But the picture for technology looks much brighter under a time horizon that exceeds 12 months, Graham-Hackett said. "I think that anyone you talk to will confirm that there may be a reprieve, and there may be some excess inventories to work off and some weakness tied to some demand issues currently, but over the longer term it is definitely an area that will grow well, and show earnings growth that exceeds the S&P 500 overall in a three- to five-year time frame."
Micchelli covers mutual funds for Standard & Poor's FundAdvisor