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Year's No. 1 Fund Will Probably Remain Off-Limits to Most

Ian McDonald

There are many white-hot tech funds to choose from these days. But a couple of minor corporate reshufflings this year will keep most of you from investing in the hottest one.

With just a month left in the year, the small, $83.9 million (NGTIX Quote)Nicholas-Applegate Global Technology fund is returning 351.3% through Thursday. No other fund's return is within 100 percentage points, according to Lipper. (See our rundown of the year's top-10 contenders.)

Like a marathoner in the home stretch with a five-mile lead, the fund will almost certainly finish the year in the No. 1 spot. But it doesn't appear that retail investors will be able to buy a single share anytime soon -- if ever.

That's because the fund is for institutions and wealthy individuals -- it requires a $250,000 minimum investment, compared with $250 to $2,500 for most retail funds. The fund could be brought to the masses by slapping a retail share class on it -- essentially selling the same fund with a pricing structure suited to Main Street investors.

Such a move would be a marketer's dream. Investors have stuffed more than $18 billion into tech funds so far this year, according to Boston-based Financial Research Corp., and this fund is riding as high as any in recent memory.

Still, there's no plan to add a retail share class. Disgruntled investors shouldn't send letters to executives at Nicholas-Applegate, though. It's their fund, but it's not necessarily their decision.

Focusing on its core institutional business, the San-Diego-based firm sold its 12 broker-sold retail funds to Phoenix-based Pilgrim Capital (no relation to Wayne, Pa.-based Pilgrim Baxter) in a deal that closed in May.

On Oct. 29, Pilgrim was acquired by Minneapolis insurer Reliastar (RLR Quote) to manage and market Reliastar's Northstar funds.

The upshot of the two deals is that Pilgrim, which started the year with eight funds and $7 billion, today has 32 funds with $13.5 billion.

Nicholas-Applegate, which manages $30 billion in institutional assets, according to Pensions and Investments, still subadvises some of the retail funds it sold to Pilgrim (none of them tech sector funds). But it is out of the retail-fund business and isn't quick to return calls about it. Before its deal with Pilgrim, retail shares accounted for less than 10% of Nicholas-Applegate's assets.

Presumably, Pilgrim could launch a retail version of the Global Technology fund -- with Nicholas-Applegate's consent. But while many fund marketers would be scrambling to do exactly that, Pilgrim is still digesting its new products and sales efforts.

"We've given that some thought, but not enough right now. It's just not something we're thinking about," says Jim Hennessy, a Pilgrim spokesman.

Nicholas-Applegate and Reliastar aren't in any rush, either. Officials at both companies defer comment to Pilgrim's Hennessy.

"I'm a little surprised. Usually fund companies don't miss an opportunity to sell a hot fund and bring money in the door," says Scott Cooley, the analyst who covers the fund for Chicago-based fund-tracker Morningstar.

He says the move wouldn't be too costly or groundbreaking. Just last summer, $32.4 billion John Hancock Funds added retail shares to two funds, (JHIGX Quote)Core Growth and (JHIVX Quote)Core Value, managed by its institutional affiliate, Boston-based Independence Investment Associates.

But Pilgrim and Nicholas-Applegate might both have good reasons to keep the fund on a high shelf.

"There's a natural inclination to roll out [a hot fund], but it's a niche fund and they [Pilgrim] have major product rationalization issues to deal with," says Andrew Guillette, a consultant at Boston fund-researcher Cerulli Associates. He adds that Nicholas-Applegate's core institutional customers might not be thrilled at the prospect of retail dollars bloating their fund, potentially putting a drag on performance.

All things considered, investors might be better off steering clear of the fund anyway.

"People have a habit of piling into volatile funds at their peak, and this is a volatile fund. If it can go up this much, it can go down pretty far, too," Morningstar's Cooley says.

Nicholas-Applegate wouldn't comment in detail on the team-managed fund's strategy, but Cooley says its record is the product of remarkably prescient timing: riding Internet stocks up to a 50% weighting the end of 1998 before shifting its focus to chipmakers and Japanese small-caps just in time for each group to shine this year. He says the fund may also have benefited from a hot string of tech initial public offerings.

"This kind of return is impressive and I don't want to diminish the achievement, but it may not be repeatable," Cooley says.

Of course, all this is moot for most investors as long as the fund is limited to institutions and the wealthy. Pilgrim's Hennessy doesn't rule out the idea that the fund could someday be open to more modest individuals. Until then, savvy investor Mick Jagger is right: You can't always get what you want.