The Big Screen: Funds' Own Not-So-Private Tech Mania

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Fund investors were wrong to schlep out onto the tech sector's shakiest limbs over the past few years, but fund companies held the ladder.

Today, the Big Screen sifts a few ultrafocused types from the tech-fund ocean to highlight how both fund companies and investors made ill-advised bets on snazzy slivers of the sector du jour.

At the end of 1998, there were 50 tech funds, nearly all of them scattering their assets across the whole sector. But steep gains the following year led to a record $42 billion in inflows, and fund companies rolled out more than 100 new tech funds to capture some of that money -- just as tech stocks finally lost their steam.

To stand out from the crowd, many of these funds focused on the hottest and most volatile parts of the mercurial sector. Consequently, these narrow portfolios looked and performed more like stocks than funds, making you wonder why anyone thought they were a good idea. If investors bought a mutual fund to get cheap access to a broad portfolio of stocks, these funds did just the opposite.

"[Fund] marketing people were driven to differentiate themselves, so they started focusing on hot areas," says Burt Greenwald, a Philadelphia-based fund consultant. "All of a sudden, it wasn't just tech or telecom, but wireless, etc. These funds were the foam on top of the [Nasdaq] bubble."

Nothing but Net

Let's start with Net funds. At the end of 1998, there were four, but some 20 more have launched since then. The five biggest of those 20 funds, including (GITAX Quote)Goldman Sachs Internet Tollkeeper and (FNINX Quote)Fidelity Select Networking and Infrastructure, have lost more than half their value over the past 12 months, according to Chicago fund-tracker Morningstar.

Caught in the Net Some 20 Net funds have launched since Jan. 1, 1999 -- there were four before then
Net Fund	One-Year Return	Inception
(FNINX Quote)Fidelity Select Networking and Infrastructure	-57%	2000
(TEFQX Quote)Firsthand e-Commerce	-55.1	1999
(MNIBX Quote)Munder International NetNet*	-52.1	2000
(EIFAX Quote)Enterprise Internet	-48.3	1999
(GITAX Quote)Goldman Sachs Internet Tollkeeper	-40.8	1999
Average Tech Fund	-46.8	N/A
Source: Morningstar. Returns through Nov. 26. Slated to merge with Munder NetNet fund.

As some Net funds focus mostly on dot-coms and others stretch the definition to include any company with a Web site, there's a range of returns in this pack. At one end, you have the dot-com-focused (JAMFX Quote)Jacob Internet fund, down more than 90% since its inception at the start of last year, and at the other you have the tech-light (WWWEX Quote)Kinetics Internet Emerging Growth fund, which is down just 4% over the past year.

No matter how you slice it, you're probably better off with a broader tech fund where your manager can invest as much or as little of your money in Net stocks as he or she sees fit.

Even if you think a strictly Net-focused fund makes sense, it's tough to figure out a fund that centers on shares of business-to-business, or B2B, shops such as Ariba (ARBA Quote) and Commerce One (CMRC Quote), both down more than 88% over the past 12 months.

How rough can it be when you focus on a white-hot corner of the tech sector just as it's about to go cold? The B2B Internet HOLDRs fund, an exchange-traded basket of B2B stocks, is down 81% over the past year. And the (BTBAX Quote)Amerindo Internet B2B fund is down more than 68% over the same stretch.

B2Who? Hard 2 like these young and crumbling B2B funds
B2B Fund	One-Year Return	Inception
B2B Internet HOLDRs(BHH Quote)	-80.6%	2000
(BTBAX Quote)Amerindo Internet B2B	-68.2	2000
(TBTBX Quote)Turner B2B E-Commerce*	-42.7	2000
Average Tech Fund	-46.8	N/A
Source: Morningstar. Returns through Nov. 26.*Renamed Turner New Enterprise and given a broader mandate

The folks at Turner Investment Partners figured out that hitching their wagon to a slice of the tech sector wasn't a great idea. After launching their B2B E-Commerce and Wireless funds last year, they merged them into the (TBTBX Quote)Turner New Enterprise fund in July. The new fund can basically invest wherever its managers see the ripest growth opportunities, not just in B2B or wireless stocks.

Some did jump on the wireless bandwagon after Qualcomm's (QCOM Quote) 2,620% gain in 1999, and stayed there. It hasn't worked out too well. In a miserable year for the telecom sector, wireless has been a lonely spot. Of the four wireless funds launched last year, all are way under water, and just one, the (FWRLX Quote)Fidelity Select Wireless fund, is down less than the average telecom fund's 42% tumble. The (WIREX Quote)Wireless and (WCPIX Quote)ProFunds Ultra Wireless funds have both lost more than half their value over the past 12 months, similar to the narrow sector's bellwethers such as Nokia (NOK Quote) and Ericsson (ERICY Quote).

Wireless and Winless These funds zeroed in on wireless just as the Nasdaq peaked
Wireless Fund	One-Year Return	Inception
(WIREX Quote)Wireless	-57.5%	2000
(WCPIX Quote)ProFunds Ultra Wireless	-55.3	2000
(IWWDX Quote)Investec Wireless World	-43	2000
(FWRLX Quote)Fidelity Select Wireless	-36.4	2000
Average Communications Fund	-41.6	N/A
Source: Morningstar. Returns through Nov. 26.

Geographically Speaking

Another questionable approach to tech investing is to focus on a country or region, such as the India Technology fund, the (MATFX Quote)Matthews Asian Technology fund and the (MNIAX Quote)Munder International NetNet fund. Usually funds either focus on a sector or a foreign market, not a sector within a foreign market. Because many sector funds are designed to let a portfolio manager invest in both foreign and domestic stocks, you'd probably be better off with a broader tech fund that could shift money overseas when it seemed sensible, rather than as a rule.

In fact, these funds have leeway, too. The India Technology fund, for instance, can invest in companies run by Indian executives, but that bizarre flexibility only underscores the gimmicky nature of these funds.

Tech Investing With a Passport How many people need a tech fund that zeroes in on Asia, India or Israel?
Foreign Tech Fund	One-Year Return	Inception
India Technology*	-49%	2000
(MATFX Quote)Matthews Asian Technology	-22	1999
(AMITX Quote)AMIDEX Israel Technology	N/A	2001
Average Tech Fund	-46.8	N/A
Source: Morningstar. Returns through Nov. 26. *Return from Nov. 30, 2000.

Beyond these niche offerings, fund marketers also dreamed up a convertible bond fund that focused on tech shops' debt ((CVTAX Quote)Calamos Convertible Technology) and even a socially responsible tech fund ((CTHAX Quote)Calvert Social Investment Technology).

Given the tech sector's fall and the abundance of small, struggling tech funds out there, many of these oddities are doomed to be merged away or simply cashed out. But let's remember them the next time fund companies hawk subsector fare that zeroes in on alternative energy plays or biotech companies. Funds like these are more fun to watch than to own.