The Cisco Conundrum: Nearly 80% of Big-Cap Growth Funds Are Still Holding the Bag

Like the ashen-faced parents who watch their apple-cheeked munchkin's grades slip from A's to B's to C's, nervous fund managers hope their beloved Cisco(CSCO - Cramer's Take - Stockpickr) can snap out of it. After all, they've made a titanic bet on the former highflier with your money.

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On Monday the leading networking titan warned of a sharp third-quarter earnings shortfall, announcing that it will take $3 billion in charges to get its act together and write off networking components it can't sell due to a severe slowdown in tech and telecom-equipment spending. It was just the latest dose of bad news from the company that had earned a cult of committed investors by topping analysts' earnings estimates more than 30 quarters in a row. Cisco's shares, formerly a profit machine for fund managers, only fell 3% on Tuesday. But they're already down some 75% over the past 12 months.

If you own shares of a big-cap growth fund -- the largest stock fund category and a core holding in most portfolios -- Cisco's problems are your problems, too. In 1998 and 1999 growth and tech fund managers made big bets on the sizzling tech sector, riding it to eye-popping returns and record cash flows. Cisco, the titan whose gear was building out the Internet, was in the sweet spot. Today, nearly eight in 10 big-cap growth funds own its sagging shares, which still aren't cheap despite their breathtaking plummet. Cisco still sports a forward price-to-earnings multiple of 32, compared with 21 for the S&P 500, according to Baseline/Thomson Financial.

The idea of owning a mutual fund is to rely less on one particular stock, but today the Big Screen is looking at the fund world's outsize bet on the Cisco kid. The bottom line for fund investors is that portfolio managers' can't miss favorites eventually do miss and the upshot for Cisco shareholders is that scorched fund managers could lend an unhealthy dose of selling pressure if things don't look up.

"Cisco certainly seemed like a must-own," says Pat Dorsey, head of stock analysis at Morningstar. "The company was run like clockwork, with a great balance sheet and great market share. They outsourced a lot of manufacturing and it played into the growth of the Internet theme, so there were both good company factors and macro trends. You couldn't find a crack in their armor. It seemed like they were only susceptible to a spending slowdown, but that's exactly what happened."

Indeed, among the five tech stocks with the biggest representation in the S&P 500, a yardstick for many growth funds, Cisco is the most widely held even though its shares have taken a vicious beating. More funds own Cisco than own General Electric(GE - Cramer's Take - Stockpickr), the top holding in the S&P 500.

Big Tech, Big Holdings
	Percentage of Big-Cap Growth Funds	1-Year Return
Cisco Systems(CSCO - Cramer's Take - Stockpickr)	77%	-74.1%
Intel(INTC - Cramer's Take - Stockpickr)	56	-57.2
Microsoft(MSFT - Cramer's Take - Stockpickr)	59	-19.9
IBM(IBM - Cramer's Take - Stockpickr)	31	-13.1
AOL Time Warner(AOL - Cramer's Take - Stockpickr)	32	-26.3
Source: Morningstar. Returns through April 16.

It's easy to see why fund managers loved the stock. Their paychecks are tied to their performance relative to their peers and benchmarks like the S&P 500. When a stock represents a big chunk of your competitors' portfolios and the index, you need a good reason not to own it and might actually own shares even if you didn't like it. The reason: If it takes off, you'll get dusted. Cisco's shares rose 150% and 131% in 1998 and 1999, respectively.

"People were asking [fund managers], 'Why don't you own Cisco?' if you didn't own it," says Dorsey.

The Cisco Skid Cisco' slide in the past year or so has been far more pronounced than the broader market's.

Source: Morningstar. Annualized returns through April 16.

A look at the 10 funds with the biggest bet on Cisco's shares uncovers a bunch of tech- and tech-heavy growth funds that rang up heady gains in 1999 and big losses over the last year. The no-load (JAVLX - Cramer's Take - Stockpickr)Janus Twenty fund, currently closed to new investors, gained 65% in 1999, but has fallen nearly 38% over the past 12 months, according to Morningstar.

On average these funds are down more than 23% so far this year, more than doubling the S&P 500's tumble.

Cisco Lovers These funds have big percentages of their assets in Cisco.
Fund	Percentage of Assets in CSCO	YTD Return
(RYIIX - Cramer's Take - Stockpickr)Rydex Internet	17.7%	-34.3%
(FOCPX - Cramer's Take - Stockpickr)Fidelity OTC	12.6	-24.8
(FADTX - Cramer's Take - Stockpickr)Fidelity Advisor Technology	9.2	-21.7
(FSDCX - Cramer's Take - Stockpickr)Fidelity Select Developing Communications	8.5	-24.9
(JAVLX - Cramer's Take - Stockpickr)Janus Twenty	8.4	-21.4
(FSPTX - Cramer's Take - Stockpickr)Fidelity Select Technology	8.4	-28.6
(SETAX - Cramer's Take - Stockpickr)Security Technology	8.4	-18.2
(OGTAX - Cramer's Take - Stockpickr)One Group Technology	8.4	-18.7
(PTSGX - Cramer's Take - Stockpickr)Pitcairn Select Growth	8.1	-17.3
(SWTFX - Cramer's Take - Stockpickr)Schwab Technology Focus	8	-21.5
S&P 500	2.2	-10.4
Source: Morningstar

Given Cisco's fold this year, it wouldn't be a surprise for even true believers like these funds to lighten their load. The $13.5 billion (MFEGX - Cramer's Take - Stockpickr)MFS Emerging Growth fund, run by John Ballan and Dale Dutile, had more than 12% of its money in Cisco last year, but through selling and sagging performance the stock was half that at the end of last month, according to the MFS Web site.

The (SNETX - Cramer's Take - Stockpickr)Strong Internet fund, run by James Houlton, had nearly 9% of its money in Cisco at the end of last year, but that was down to 5% at the end of last month, according to Strong's Web site.

Fidelity was the top institutional owner of Cisco at the end of last year with nearly $5 billion invested in the company, despite selling more than 12 million shares in last year's fourth quarter. If Fidelity managers and those at other big stakeholders like Janus and MFS decide to sell shares, it could add some more selling pressure. It's important not to make too much of the effects fund selling can have on a company like Cisco, which has a $125 billion market cap. But it shouldn't be ignored either. The stock fell from the $80.2 billion (FMAGX - Cramer's Take - Stockpickr)Fidelity Magellan's top-ten holdings in the first quarter, and even selling a modest position in such a big fund represents a lot of shares on the block.

"When Magellan sells, it hurts, and when other managers sell tech too, that's a lot of downward pressure," said Jim Lowell, editor of the independent newsletter Fidelityinvestor.com when discussing some Fidelity managers' shrinking appetite for tech.

A look at ownership data shows that the percentage of big-cap value funds owning Cisco hasn't budged from 18% over the past 12 months. Growth managers may have good reason to hang on to their shares, figuring the company will emerge from the downturn in good shape. Then again, many may find themselves in the awkward position of having to justify why they do own Cisco. If you're holding shares of Cisco or a growth fund that's trailing its Cisco-stuffed peers, you might have the same query.

If you're looking for the funds that have decided to own less Cisco, we sifted the fund world for those funds that sold the most shares last last year, according to their year-end shareholder reports. None were out of the stock completely, but they weren't waiting for Cisco's sagging stock price alone to lighten their load.

This Has Been Fun, but... Here are the five stock funds that dumped the most Cisco shares, according to their year-end shareholder reports.
Fund	Millions of Cisco shares sold
(FCNTX - Cramer's Take - Stockpickr)Fidelity Contrafund	13.6
(MEGBX - Cramer's Take - Stockpickr)MFS Emerging Growth	4.6
(VWUSX - Cramer's Take - Stockpickr)Vanguard U.S. Growth	4.1
(TWCGX - Cramer's Take - Stockpickr)American Century Growth	3.1
(ANWPX - Cramer's Take - Stockpickr)American Funds New Perspective	1.4
Source: Morningstar