The Cruelest Month: February Was an Ugly One for Tech Funds

If it's any consolation, the beating you're taking with that sagging tech fund is no ordinary thrashing: Your losses have reached historic proportions.

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The average tech fund lost a whopping 27.9% in February, the fund category's worst month since October 1987, when it fell just one more percentage point, according to fund-trackers Lipper and Morningstar.

This is just the latest in a series of bleak metrics for these mercurial funds, which got record inflows last year. On average, they have lost more than half their value, like the tech-laden Nasdaq Composite, over the past 12 months.

While a look at your year-end account statement probably told you how much money tech stocks cost you, the losses have gotten worse since then. They're even starker if we put them in historical perspective. Yes, February was tech funds' worst month in 20 years, but then consider that five of the fund category's worst 10 months have come in the past year.

There's a bigger danger lurking behind these already-ugly numbers: The declines came as tech funds witnessed hefty inflows. We've noted that tech funds are starting to see early signs of outflows. If redemptions from tech funds worsen if investors get fed up with tech or just have to sell something to pay Uncle Sam this tax season, things may get uglier.

Y2K Crash, After All Five of the 10 worst months for tech funds in the past 20 years have come in the past year
Month	Avg. Tech Fund's Loss
Oct. 1987	-28.9%
Feb. 2001	-27.9
Nov. 2000	-27
Aug. 1998	-20.1
April 2000	-12.6
Aug. 1990	-12.5
May 2000	-12.1
Oct. 2000	-11.9
Nov. 1987	-10.4
July 1986	-10.3
Sources: Lipper and Morningstar.

As you might imagine, those nasty months have added up to one lulu of a lousy year. After posting a positive gain annually since 1984, the average tech fund lost more than 33% in 2000 and is down a whopping 58% over the past 12 months, according to Morningstar. In real-life terms, $10,000 invested in the average tech fund 12 months ago would be worth about $4,200 today.

Half the Funds They Used to Be After ringing up a stunning 136.8% gain in 1999, tech funds have lost more than half their value

Source: Morningstar. Annualized returns through March 6.

The even more depressing news is that, as usual, the money came fast and furious after these funds' averaged a 136% gain in 1999. A record $44.5 billion gushed into tech funds last year. That's more than 30 cents of every buck, after redemptions, invested in stock funds and more than a third of tech funds' total assets. Translation: Spurred by eye-popping gains, many investors showed up just in time for breathtaking losses.

In fact, the sector's pain has been so broad that it smacked virtually every tech fund. Only seven of the 128 tech funds in Morningstar's database are in the black since Jan. 1. And the survivors' club is home to several small, oddball funds that bet against or own few tech stocks.

The top tech fund this year is the no-load Potomac Internet/Short fund, which shorts or essentially bets against Net stocks. With TheStreet.com Internet Index down 77% over the past year, rooting against this slice of the tech sector has been a sweet spot. The Potomac fund is up almost 139% over the past year.

There's also the no-load (MATFX Quote)Matthews Asian Technology and (WWWEX Quote)Kinetics Internet Emerging Growth funds, which have just 42.9% and 53.5% of their money actually in tech stocks, respectively, according to their most recent portfolio reports to Morningstar. For comparison, the average tech fund has more than 80% of its money invested in the sector.

And most of these surviving funds aren't owned by many investors. If we exclude the broker-sold (SLMCX Quote)Seligman Communications & Information fund, where guru Paul Wick has managed to stow the fund's $1.4 billion in buoyant picks like Novellus Systems(NVLS Quote) and Microsoft(MSFT Quote), these top funds have a cumulative $26 million in assets. The average tech fund has nearly $600 million in its coffers.

Black Pack Of 128 tech funds out there, just seven are in the black this year
Top-Five Tech Funds YTD
Tech Fund	YTD Return	1-Year Return
Potomac Internet/Short	18%	138.9%
(WWWEX Quote)Kinetics Internet Emerging Growth	8.9	-68.6
Internet Index	-19.8	-74.6
(MATFX Quote)Matthews Asian Technology	7	-19.8
(SLMCX Quote)Seligman Communications & Information	3.1	-61.9
Avg. Tech Fund	-22	-58.6
Bottom-Five Tech Funds YTD
Tech Fund	YTD Return	1-Year Return
(BTECX Quote)Berkshire Technology	-46.6%	-72%
(VWTKX Quote)Van Wagoner Technology	-43.1	-70.1
(TEFQX Quote)Firsthand e-Commerce	-42.8	-79
(VTFAX Quote)Van Kampen Technology	-42.4	-71.8
(DTYAX Quote)Delaware Technology & Innovation	-42.1	-72.2
Avg. Tech Fund	-22	-58.6
Source: Morningstar. Returns through March 5.

The five losers, like the no-load (BTECX Quote)Berkshire Technology and (VWTKX Quote)Van Wagoner Technology funds, are more traditional, in that they aren't tiny and they actually put the majority of their money in tech stocks. While they are down quite a bit already this year, more than 43% on average, nary a tech manager is thrilled to come to work these days. Just a smidge less than 98% of tech funds have lost more than a third of their value over the past 12 months, according to Morningstar.

Given the breadth and depth of tech funds' losses, it might be logical to expect investors to start selling shares to pay steep tax bills, to bring their tech exposure back to marketlike 20%, or just because they're fed up. This may already be happening. In January investors redemptions from the nation's largest tech fund, the $9.7 billion (PRSCX Quote)T. Rowe Price Science & Technology fund, outnumbered investments by more than $800 million. Surging cash flows to bond funds and less aggressive stock funds underline the point.

To the tech bull or optimist, money flowing out of tech funds points to bonny days because many assume fund flows are a solid contrarian indicator. But to the tech bear or pessimist, redemptions from tech funds equal block sales of tech stocks. That scenario augurs for more dubious records down the road.