Dear Dagen: Ken Kam's Medical Fund Begins Life With a Track Record

Ken Kam is to leave Firsthand Funds to start Ingenuity Capital sometime this year. What are the pros and cons of investing in a start-up fund such as this? Do you know when the fund will be open to investors?

-- Phil Byron

Phil,

When a fund manager starts a small, optimistically named firm, it often raises major concerns for potential investors: Will the manager reproduce past successes on his own? Will the new firm offer the same resources his old one did? Will he take exceptional risks to boost early returns?

Ken Kam's new venture eliminates some of these common worries.

Kam is taking the Firsthand Medical Specialists fund with him when he opens his new firm later this year in Los Altos, Calif. Kam, who co-founded Firsthand Funds, has been running the Medical Specialists fund since its late-1997 inception.

The fund will simply be renamed Ingenuity Medical Specialists. Nothing else should change.

Plus, Kam says he doesn't have any immediate plans to launch any other funds. So this one will get his undivided attention.

"What I want to do is build this fund up," Kam says. It could use some further development. Right now, it only has $10.5 million in assets. Kam says he has big plans for the use of the Web, but he won't go into any detail.

Kam is leaving a firm that has built an excellent reputation for managing technology stocks, although much of the credit goes to co-founder Kevin Landis. The flagship (TVFQX Quote)Firsthand Technology Value fund has a five-year average annual return of 49.5%, which ranks it first among its peers for that time period, according to Lipper. The small fund family has always favored technology. Historically, the majority of the $456 million Technology Value fund's assets have been invested in technology rather than medical stocks. The firm also runs two other tech funds, (TIFQX Quote)Technology Innovators and (TLFQX Quote)Technology Leaders, and is launching a communications-stock fund.

Since its late-1997 start, Kam's medical fund has experienced consistent undulations.

During the second quarter of 1998, it fell 19.7%, and it dropped another 14.3% during the third quarter. Then the fund roared back 32% during the most recent quarter to finish 1998 down 4.6%.

The first half of this year was looking good, but the third quarter has been unkind. Since the end of June through Sept. 23, the fund has returned a nice, round 0%. For the year to date, its 24.2% return still ranks seventh among the 53 health and biotechnology funds tracked by Lipper. The average fund in the group is down 1.3%.

"I am fairly comfortable that I know how to run that fund. I don't need to do anything unusual. I need there to be a little bit of a comeback in health care stocks," Kam says.

Kam focuses on companies in areas such as minimally invasive surgery and biotechnology. He looks for companies that have the potential to double their market capitalization in two years, and that naturally leads him to smaller stocks, which tend to more volatile than larger ones. The median market cap of the fund is $6.4 billion. (With so little in assets, the fund should be able to move in and out of small stocks with greater ease than a much larger fund.)

Kam also invests in a small number of names. At last count, the fund owned only 15 stocks, according to Morningstar. The result: a performance record that looks an annual sales chart for snow shovels.

Portfolio Details

The fund's largest holding at the end of July was Immunex (IMNX Quote), according to Morningstar. This biotech stock commanded 18% of his portfolio.

Lately, Kam has been looking at companies in the downtrodden area of health care information systems. He believes that companies in the group have been beaten up because of Y2K fears. Although hospitals have been allocating assets to Y2K fixes, other software and technology needs haven't disappeared, Kam says. Once hospitals get the Y2K problem behind them, they will begin investing in much-needed information-management systems. Moving into the next millennium, these technology providers should experience a resurgence, Kam says.

In particular, he likes QuadraMed (QMDC Quote), which sells software and other services for improved management of health care systems. QuadraMed's stock is down 70.1% for the year to date. Kam started buying it at around 10 a share earlier this year and it's currently trading around 6. "I am a little under water right now," he notes.

Potential investors in this fund should face that possibility as well.

Maybe there's a place for this volatile fund in your portfolio, a small place that is. A sector fund like this should not take up the majority of a portfolio, perhaps 5% to 10%.

Kam, himself, tells potential shareholders they should have an investment horizon of at least three years. Agreed. But even if you are suitably patient, you should take a long, hard look at this fund's V-shaped performance chart. Ask yourself if you can live with those kinds of dips.

Back at the Ranch

Once Kam officially leaves Firsthand Funds, Landis will take over as sole manager of the firm's Technology Value fund. Kam will work as consultant, providing advice on medical stocks, which have historically made up about one-third of the fund. It will be up to Landis whether he continues to keep health care names in the portfolio. If you like technology, you can stay with Firsthand, but you'll have to follow Kam for pure health care.

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