Stormy course
for high-tech
funds has paid off
Stormy course
for high-tech
funds has paid off
by Andrew Leckey
What
turned out to be the high-tech mutual fund pleasure cruise of 1998 felt
a lot more like a tumultuous whitewater rafting expedition while it was
happening.
More
than once, investors feared they had booked passage on the investment equivalent
of the Titanic.
General
equity funds finished with a satisfying 14.52 percent annual gain, a bit
better than average by historical standards. This was propelled by a 20.22
percent increase in the fourth quarter, the best quarterly result since
the last quarter of 1982.
Yet
the stormy course traveled during a year dominated by waves of technology
and Internet activity gave shareholders the most seasickness they'd experienced
since the crash year of 1987.
"If
you looked only at the final results for both 1998 and 1987, you'd see a
fairly flat market, but in reality everything was all shook up,' observed
A. Michael Lipper, president of Lipper Analytical Services, which tracks
the nation's funds.
Good
times in 1998 were the best conceivable for some high-risk, high-return
portfolios, while natural resources, real estate, emerging market and gold
funds, fell into the drink.
Stock
in Amazon.com Inc. zoomed 970 percent, CMG Information Services 604 percent
and Yahoo! Inc. 580 percent, to help make The Internet fund the top-performer
of 1998 with a 196.14 percent gain and third-best performer in the quarter
with an 83.49 percent increase.
"The
Internet is one of the fastest-growing sectors in the economy and most of
the companies we own won't be profitable for at least another year or two,
which makes it more difficult to establish what fair value is," explained
Ryan Jacob, portfolio manager of The Internet Fund. "We focus on the
companies we believe have the most operating leverage to use the Internet
as a medium or as a distribution channel."
The
Internet Fund, the bulk of which is in Internet service providers and technology
companies, is concentrated in 25 to 30 different names. Most recently, it
has been adding shares of service provider RCN Corp. and Allou Health &
Beauty, which sells fragrances and cosmetics over the Internet. its favorite
holdings include major portals Geocities and DoubleClick Inc. and technology
firms Verisign inc. and Exodus Communications.
"The
speed with which the Internet sector developed in 1998 surprised a lot of
people, including not just investors, but CEOs of more traditional businesses,"
said Paul Cook, lead portfolio manager of the Munder NetNet Fund, fifth-ranked
fund for 1998 with a return of 97.96 percent. "At this point, the likes
of Amazon.Com and Yahoo! have gotten ahead of themselves and we've de-emphasized
them in our portfolio."
Munder's
performance was boosted by on-line brokerage industry leaders Charles Schwab
Corp., up 102 percent for the year; E Trade, up 104 percent; and Intuit,
up 75 percent. Other Internet-related winners were search engine Lycos Inc.,
up 169 percent; America Online, up 617 percent; Microsoft, up 115 percent;
Intel, up 69 percent; and Cisco Systems, up 152 percent.
The
fund recently bought stock in Office Depot, which is positioned for effective
on-line marketing of office supplies.
For
the year, large-cap funds, led by S&P 500 index funds, outperformed
small-caps. yet, in the fourth quarter, the advantage S&P 500 index
funds held over managed funds slipped, while mid- and small-cap funds made
significant gains.
Will
1999 be the year of small- and mid-cap dominance?
"For
the 10 years ending in 1983, there was a secular advantage for small-cap
stocks and the question is now whether that will happen again," mused
Lipper. "Possibly, but at this point, Web stocks and selected technology
stocks are leading the way and gains are primarily in mid-caps, so you'd
first need evidence of large companies buying small companies at strategic
prices rather than earnings-related prices."
The
leading fund in the quarter, with a 101.98 percent return, was Matthews
International Korea Fund, boosted by performance of economic survivors like
Hana Bank, Samsung Fire & Marine Insurance, Samsung Electronics and
Korea Electric Power. Yet, the year had its ups and downs for this single-country
fund.
"Ours
was one of the best-performing funds in the first quarter of the year, up
over 50 percent at its peak, and then we gave it up in the middle of the
year. before really taking off in October," pointed out G. Paul Matthews,
portfolio manager of the Matthews International Korea Fund. "I think
there is hope that the recovery seen in Korea may spread to the rest of
the region, which means more people will also consider some of the more
diversified regional funds."
The
top performing funds in the fourth quarter, according to Lipper, included:
The
best fund returns for all of 1998 were provided by:
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