| BUSINESSWEEK ONLINE : JUNE 26, 2000 ISSUE | ||||||||
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| COVER STORY
Life after Tech Stocks "Value" and "Old Economy" sound sexy again Time for a reality check. Mutual fund excesses have come home to roost. For much of 1999 and the first few months of 2000, investors threw billions at managers of technology sector and tech-heavy growth funds. That came to an abrupt and painful end this spring when the Nasdaq index--home of high-tech stocks--lost more than a third of its value in three months. Sighs Bernie Picchi, U.S. equity research director at Federated Investors Inc., a Pittsburgh-based fund manager: ''We pushed these stocks into the realm of incredulity.'' The poor tech performance dragged down the average total return for all equity funds. For the year through June 8, they showed a 1.92% gain--less than what could have been earned in a money-market fund. (Total return includes appreciation plus reinvestment of dividends and capital gains.) U.S. diversified equity funds, on the other hand, were up 3.42%, a whole lot better than the Standard & Poor's 500-stock index, which came in flat for the year so far (table, page 242). Mutual-fund data are prepared for Business Week by Standard & Poor's Corp. The anemic returns on the S&P 500 look better than other major market averages. Much of this year's angst has centered on the Nasdaq composite, which was down as much as 33% at the beginning of June from its high on Mar. 10. By June 8, Nasdaq stocks rallied enough to cut the year-to-date loss to 7% and help put the average equity fund back in the black for the year. The flip side of the Nasdaq's troubles was a significant improvement for value funds investing in Old Economy industries like energy, finance, and real estate. Small-cap value funds, up 5.57%, beat small-cap growth, up 4.37%, and large-cap value, up 1.94%, edged out large-cap growth, up 1.79%. Only in the mid-cap area did growth top value, 8.63% to 4.91%. Sector funds specializing in value areas like natural resources, up 17.74%, and real estate, up 10.08%, are way ahead of their New Economy rivals like technology, up 1.14%, and communications, up 0.78%. ''A TRICKLE.'' Bond funds, while not blockbusters, are looking relatively appealing at midyear. The average tax-free bond fund has a total return of 2.45%, while taxable funds are up 1.65% (table, page 244). Convertible bond funds still managed a 5.10% gain even though they often invest in technology and telecommunications companies. And long-term bond funds, both taxable and tax-free, showed strong returns, too. Long bonds rallied despite the fear of higher inflation because the U.S. Treasury spent some of its surplus on buying back bonds. Better performance from bond funds counts little these days. Investors still prefer equities, but they're taking them in smaller helpings. In recent weeks, they were putting a net $3.2 billion a week into equity funds, down more than 70% from the $12 billion a week they spent in March, says Bob Adler of AMG Data Services, an Arcata (Calif.) firm that tracks fund flows. During the same period, weekly flows to specialized technology funds skidded nearly 90%, to just $346 million from $3 billion. Says Adler: ''The tap shut off to a trickle.'' It's clear from the fund flows that investors are playing it safe. Fund managers say they're a little more cautious now as well. Consider the best-performing fund among all equity funds so far this year, the $17.6 million Monterey Murphy New World Biotechnology Fund (MNW), up 78.85% (table, page 240). Portfolio manager Lissa Morgenthaler, based in Half Moon Bay, Calif., has recently converted 90% of the fund's assets to cash, betting that it's safer than living with the market's current volatility. Indeed, biotech stocks have taken their investors on a wild ride, too. Morgenthaler says she doesn't plan to sit on the sidelines for long. ''This is the biotech century,'' she says. ''If you don't own biotechnology companies, you have one huge blind spot.'' HEDGED BET. But you need nerves of steel to invest in biotech. Just ask Faraz Naqvi, portfolio manager of $355 million Dresdner RCM Biotechnology Fund and $41 million Dresdner RCM Global Health Care Fund, which are up 50.5% and 37.12%, respectively. While others were fleeing biotech, Naqvi was buying Praecis Pharmaceuticals Inc. (PRCS) at its Apr. 27 initial public offering. The stock has doubled from the $10 offering price. Even so, he's keeping 20% of the biotech fund's assets in cash. He's also cutting back the health-care fund's biotech stake by almost half, to 20%, trimming stocks such as Affymetrix Inc. (AFFX) and Medarex Inc. (MEDX) ''We want to be a little defensive,'' he says. While technology funds have been hard-hit as a group, there are some standouts. Kevin Landis, portfolio manager of $3.9 billion Firsthand Technology Value Fund, got a 26.76% return from lesser-known names such as Osicom Technologies Inc. (FIBR) and Globespan Semiconductors Inc. (GSPN) Still, the single biggest boost to the fund was Seagate Technology (SEG), now the fund's largest holding. It's up 38% this year. What has really come crashing down to earth this year are pure-play Internet funds. Among the worst equity funds of 2000 are two funds launched in the final months of last year: Potomac Internet Plus Fund, down a painful 39.12%, and Jacob Internet, down 37.92% (table, page 241). ''The excesses that have been built up are going to take years to unwind,'' says Peter Doyle, a portfolio manager at Kinetics Asset Management Inc., which runs the $1 billion Internet Fund. Doyle's fund is down 25% so far this year after scoring a heady 216% gain in 1999. Earlier this year, Doyle shifted 25% of the fund's assets from thinly capitalized companies such as theglobe.com (TGLO) to RCN Corp. (RCN), which has $3.6 billion in cash though it hasn't made any money yet. RCN hit 72 in February and now trades at 28. Even so, Doyle has no regrets about the switch. ''With well-capitalized companies, ignore the stock prices,'' he reasons. While New Economy tech investors are licking their wounds, those who invest in Old Economy industries such as energy and natural resources are enjoying a good year. ''We're at the strongest oil and gas cycle I've seen in a decade,'' says Michael Hoover, fund manager for $75 million Excelsior Energy & Natural Resources Fund, up 26.09%. True, oil prices of $30 a barrel were a big help. But the funds aren't just buying big oil companies. Hoover's Excelsior fund made money on oil-service companies Smith International (SII) and BJ Services (BJS), which sell equipment and services to oil producers, as well as exploration-and-development companies such as Ocean Energy (OEI). International markets provided investors no haven from the stormy U.S. market. Foreign equity funds are down 3.73%, and world funds, which include U.S. stocks, are slightly in the red, down 0.24%. The explanation: ''When things don't look so good in the U.S., then maybe they don't look so good overseas, so every-body retreats,'' explains David Ishibashi, fund manager for the $30 million Salomon Smith Barney World Pacific Portfolio, down 30.17%. The stars among the global set are funds investing in Europe. They gained 2.85%, a good performance considering that the euro hit record lows before bouncing back slightly in the past few weeks. The Continental crowd handily beat Latin American funds, which are down 7.94%, and diversified Pacific/Asia funds, which lost 14.28%. Japan funds, which earned triple-digit returns in 1999 after a nine-year bear market, are racking up losses again this year, down 13.68%. In fact, the worst-performing equity fund the year so far is Warburg Pincus Japan Small Company Fund, down 41.25%. Still, Salomon Smith Barney's Ishibashi says he remains bullish on the Pacific Rim, mainly because he expects better economic growth, profits, and improving productivity gains in Japan. Among the largest mutual funds, those investing in value stocks have had a good run. For instance, $56.2 billion Investment Company of America and $47.3 billion Washington Mutual Investors, the third and fourth largest equity funds, gained 4.81% and 2.68% respectively (table, page 242). The $104.6 billion Fidelity Magellan, with a more growth orientation, was only slightly positive, up 0.42%. REVIVAL. A handful of large Vanguard value funds have also perked up. The $22.9 billion Vanguard Windsor II, in particular, has ''risen from the ashes,'' says Daniel Wiener, editor of Independent Adviser for Vanguard Investors in Potomac, Md. The $22.7 billion Vanguard Wellington Fund made a heavy play in long bonds that paid off, says Wiener. By comparison, American Century Ultra Investors shed 3.47%, while the Janus Twenty Fund lost 6.59%, the biggest drop among the megafunds. Still, considering the fund gained 73.4% in 1998 and 64.9% last year, its long-term shareholders have little to complain about. Bond-fund investors should be relatively pleased this year. All but two categories--multisector and high-yield--are in the plus column. Eleven bond funds have earned double-digit returns so far this year (table), and five of them invest in convertible securities. Converts are interest-bearing bonds which can rally when stocks are going up and behave more defensively on the way down. Ed Perks, manager of $180 million Franklin Convertible Securities, said what helped his fund earn a 12.89% gain this year was sticking to converts issued by Old Economy companies such as Tower Automotive (TWR) and United Rentals (URI). Both bonds paid more than 13% interest. Perks hasn't turned his back on tech, though: Recently, his fund upped the proportion of tech and telecom issues to 49% from 44%. High-yield bond funds continued to disappoint their investors, as they have for the last two years. The bonds are so beaten up that yields are in double-digits and working their way higher. Nelson Jantzen, a senior portfolio manager at New York's Alliance Capital who looks after a big chunk of its $8.5 billion in high-yield assets, says the higher rates will make them irresistible. With yields hitting 13%, ''a slew of new and sophisticated investors are coming into the market,'' Jantzen says. Indeed, AMG's Adler notes that inflow to high-yield funds are now at their highest levels in six months. The moral: Battered funds may become so cheap that they once again attract investors. That may be some comfort to those whose once high-flying funds are grounded right now. By MARA DER HOVANESIAN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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 RELATED ITEMS Life after Tech Stocks TABLE: The Best Returns TABLE: The Worst Returns TABLE: How the Big Funds Fared TABLE: A Wide Range in Equity Fund Returns TABLE: The Best Bond Funds TABLE: Positive Returns for Most Bond Funds INTERACT E-Mail to Business Week Online | |||
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