The Hit List: These Tech Stocks May Be in the Line of Redemption Fire

Today, we told you redemptions from sagging tech funds could send tech stocks further down. Now, it's time to name names.

Cashing Out Redemption-fueled selling may hammer tech funds and many tech stocks in 2001

The Short List: Cramer Says Hedgies Are Shorting the Stocks in Big Tech Funds

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

No Redemption: How Growth/Tech Funds Could Crush the Market

Stock Funds Feel New Pain: Net Cash Outflows

Here's the situation: The average tech fund has lost more than half its value over the past 12 months, according to Chicago-based fund-tracker Morningstar. This came as the category took in a record $44.5 billion last year, or more than 30 cents of every net dollar invested in stock funds. One of the fund world's rules is that steep inflows and inordinately bad performance are a recipe for high redemptions. If that happens to tech funds and tech-heavy growth funds, fund managers will be forced to sell stock to cash out investors, putting more pressure on their already ragged holdings.

As this column noted last week, a similar scenario played out with value funds in 1998 and 1999. Weak relative performance led to steep outflows, forcing fund managers to sell their picks to raise cash. This selling led to worse performance, and a vicious cycle began.

If a similarly destructive pattern plays out among tech funds, these stocks might be in the firing line if tech investors vote with their feet. Here is a list of the cumulative top 10 holdings among the 10 largest tech funds, which have $50 billion under management.

Down, But Still Expensive The 10 biggest tech funds' 10 favorite stocks: Down 32.7% on average this year, but most are still far from cheap.
Stock	Percentage of Assets in 10 Biggest Tech Funds	YTD Return	Forward P/E Multiple	% of Company Owned by Funds
Cisco Systems(CSCO Quote)	2.8%	-39.7%	37	18%
Intel(INTC Quote)	1.7	0.4	30	22
Oracle(ORCL Quote)	1.6	-41.5	38	10
Micron Technology(MU Quote)	1.5	9.9	36	32
Nokia(NOK Quote)	1.5	-40.2	30	11
Applied Micro Circuits(AMCC Quote)	1.5	-61.1	62	54
Corning(GLW Quote)	1.5	-44	22	24
Texas Instruments(TXN Quote)	1.5	-26.8	42	20
JDS Uniphase(JDSU Quote)	1.5	-32.1	39	19
PMC-Sierra(PMCS Quote)	1.4	-51.7	47	32
S&P 500	N/A	-5	21	N/A
Source: Morningstar. Data as of most recent portfolio reports. Returns through March 5.

Yes, stocks of bellwether shops such as Cisco Systems(CSCO Quote) and Sun Microsystems(SUNW Quote) are down more than 50% over the past year, but given slackening demand of tech products and companies' inability to discern a turnaround, there's no reason they couldn't get cheaper.

And if sullen investors understandably start dumping their shares of tech and tech-heavy funds, that selling pressure could prolong the sector's malaise. For instance, the (PRSCX Quote)T. Rowe Price Science & Technology fund alone owned 2% and 1.8%, respectively, of chip shops Analog Devices(ADI Quote) and Applied Micro Circuits(AMCC Quote) at the end of last year, according to Morningstar.

The situation could even be tough for giants like Cisco, Intel(INTC Quote) and Corning(GLW Quote) because they're held in most big-cap growth funds, too. They're the biggest fund category out there with more than $250 billion, they're down more than 27% over the past year, and they still had 39% of their money in tech stocks at the end of January, according to Morningstar.

The specter of higher outflows at Denver growth-shop Janus should send shivers down any tech investor's spine. The house alone owned more than 5% of giants like Nokia(NOK Quote) and AOL Time Warner(AOL Quote), among others, at the end of last year, according to bigdough.com, a Web site that tracks institutional stock ownership. Janus funds own some 7% of Analog Devices, too.

The other side of this argument is that these are stocks of giant companies, so if funds start selling shares en masse there will be buyers. That might be true, but it's hard to say what record outflows could do to the sector or what prices buyers would be willing to pay in this environment. Also, it's not as if technology companies are seeing nothing but blue skies in terms of earnings growth for 2001, meaning there aren't screaming incentives to jump back into tech.

If this seems like an obscure, academic point, it's not quickly dismissed by pros. Recently, a growth fund manager who wished to remain anonymous said that he and his colleagues track Janus' top holdings very closely indeed. Their fear: owning those stocks when Janus managers have to sell them in giant hunks to meet redemptions.

And today James Cramer explains a favorite pastime among hedge fund managers: betting against the top holdings of sagging mutual funds, knowing they'll have to sell when their shareholders give up on them.