Tanking Tech Stocks Push Firsthand Into a New Experience

Even the most fervent tech lovers know by now they can't sup on tech alone.

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So Firsthand Funds, the Silicon Valley fund family comprising six tech- and telecom-sector mutual funds, has filed with regulators to offer five new portfolios. Though the firm and its jefe, CNBC darling Kevin Landis, are known for tech investing, two of these funds focus on health care and three are diversified growth funds. With the average tech fund down 58% over the past year, the sudden urge to diversify is hardly shocking.

"Obviously, we're known for tech, and as we sit here the last year couldn't have been uglier for tech," says Steven Witt, Firsthand's managing director. "We're also building out our staff in health care, and it's just a natural evolution for the firm."

Even if these funds aren't launched this fall, their filings show that one of the tech sector's biggest and most public fans has learned a sobering lesson: Tethering yourself to the tech sector insures a rough ride on a sharp-toothed tiger.

Another intriguing twist is that the Firsthand Capital Appreciation fund, filed on Monday, is designed as a broker-sold fund with upfront or deferred sales charges to pay a broker's commission. This would be Firsthand's first broker-sold fund; the foray implies that Firsthand, like many other tech- and growth-focused fund shops, is interested in moderating fund cash flows, as well as returns.

Here's why: Broker-sold funds tend to suffer fewer knee-jerk redemptions during blue periods in the market. Burned investors this year have yanked more money from Firsthand's funds than they've invested, according to Boston fund consultancy Financial Research Corp.

The Pipeline Firsthand has filed for five new funds in the past month
Filing Date	Firsthand Fund
June 21	Multi-Cap Growth
June 21	Aggressive Growth
June 21	Biotechnology
June 21	Healthcare
July 16	Capital Appreciation
Source: FreeEdgar.com

The managers of the Multi-Cap Growth, Aggressive Growth and Capital Appreciation funds aren't named in preliminary papers, but whoever holds the reins will have a lot of leeway. The funds can hold shares of U.S. or foreign companies of any size, focusing on those promising outsize earnings growth.

The proposed Healthcare and Biotechnology funds share the firm's traditional nondiversified approach, if not in its traditional sector. Like all sector funds, though, these funds will suffer the slings and arrows of their sliver of the market.

For Firsthand, the diversified funds are a logical step. After all, these growth funds can load up on tech stocks, as most did in recent years, when the sector is in favor. But they can also seek shelter elsewhere when demand for tech stuff dries up, sinking share prices.

"Last year when tech was hot, many growth funds were driven by tech. We have no doubt that when things come back tech will be the driver of growth," says Firsthand's Witt. "We were the spicy mustard on the Thanksgiving table and now we want to be the other dishes, too."

It's easy to see why the folks at Firsthand might be interested in broadening their menu. After all, their racy tech funds had nowhere to hide over the past 12 months, falling more than 68% on average. The firm's flagship (TVFQX Quote)Firsthand Technology Value fund gained 190% in 1999, but it's off 60% over the past 12 months. By comparison, the average large-cap growth fund is down 34% over the same period, according to Chicago fund-tracker Morningstar.

Despite its recent drubbing, the Technology Value fund's 21.4% average annual return over five years more than doubles its average peer.

Decked Tech These Firsthand tech funds are feeling the Nasdaq's pain
Firsthand Fund	1-Year Return	3-Year Return
(TLFQX Quote)Technology Leaders	-59.2%	19.4%
(TVFQX Quote)Technology Value	-59.7	21.4
(TIFQX Quote)Technology Innovators	-69	23.5
(TCFQX Quote)Communications	-77.3	N/A
(TEFQX Quote)E-Commerce	-77.9	N/A
Avg. Tech Fund	-58.5	9.4
S&P 500	-17.8	2.7
Source: Morningstar. Returns through July 13. Firsthand Global Technology fund is not included because it has no one-year record.

It's also understandable that Firsthand is mulling a move into the broker-sold channel -- a shift made by fellow tech-fund boutique Kinetics Asset Management earlier this year. Cash flows for the firm's funds have mimicked tech stocks' performance over the past year.

In 1999 and 2000, more than $4.6 billion in net sales flowed into the Technology Value fund. But now due to investment losses and shareholder redemptions, the fund's assets slid to $1.7 billion by the end of May, according to Financial Research. Through the first five months of this year, redemptions from the fund outpaced investments by $296 million.

Redemptions from broker-sold funds tend to be less reactive because brokers and advisers, responsible for the majority of fund sales, can quell rattled investors and also help avoid massive sector bets in the first place. Investors' cash tends to chase performance throughout the fund world, but the pattern is more pronounced in the direct-sold or no-load market.

Going With the Flow Plunging cash flows ($millions, right scale) into the Technology Value fund show investors' fickle streak

Sources: Financial Research Corp. and Morningstar.

In the wake of the Nasdaq's implosion, we've seen Net funds morphing into tech funds and now tech shops molting into growth shops. Both make good business sense for these companies, since betting the house on one sector or style is no better for them than it is for you.

The bottom line for investors is that it's probably best to remember these folks' DNA before you buy shares of their funds. Translation: A tech manager is always going to love tech, so it might be best to treat a tech lover's growth fund as a tech fund, no matter what its label. And given the ocean of funds out there, there's no reason to pounce on young funds with no track record. If you're looking for a solid growth, tech or health care fund, check out our Big Screens that sifted each category.