Born at the Wrong Time: The Fate of the Tech Fund Class of December '99

Everybody knows fund investors had tech-fund fever at the end of 1999, but it doesn't take a medical degree to see that fund companies were stricken, too.

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That year the average tech fund finished with a jaw-dropping 136% gain and nearly $33 billion gushed into the category, smashing the previous in-flow record of $4.4 billion set in 1995, according to fund-trackers Morningstar and Financial Research Corp. In a familiar pattern, fund investors chased hot returns and fund companies chased investor dollars. Less than a third of the 147 tech funds out there have a three-year track record and fund shops launched a record 58 last year alone. As usual, the glut of new funds focused on a hot sector presaged its cooling.

"Even if you go back several years, generally the categories where there are a lot of new [fund] launches are much worse bets for investors than others. We've looked at this in past years and found it's the case more than 70% of the time," says Scott Cooley, a senior fund analyst at Morningstar. "I don't think we've ever seen a mania like this in any other area, though. This shows individual investors aren't the only ones who chase returns."

To understand the deeply destructive effects of performance chasing, today the Big Screen checks out the record 17 tech funds launched in December 1999 -- before that, the most ever launched in a month was five, set two months earlier.

Born three months before the Nasdaq Composite peaked, these funds' numbers are stark and their lessons are valuable: Don't chase performance, and don't assume a sector fund will invest your money in its sector.

The December Rookies
Fund	YTD Return	2000 Return
(PDISX Quote)Potomac Internet/Short	17.0%	59.4%
(WWWEX Quote)Kinetics Internet Emerging Growth	8.4	-63.1
(MATFX Quote)Mathews Asian Technology	-7.7	-57.0
(WWWIX Quote)Kinetics Internet Infrastructure	-7.9	-45.7
(ETCAX Quote)Evergreen Technology	-10.2	-24.0
(RIAFX Quote)RS Internet Age	-16.5	-46.4
(WWWGX Quote)Kinetics Internet Global Growth	-22.0	-32.8
(NETAX Quote)Westcott Technology	-26.2	-64.9
(STEKX Quote)Strong Technology 100	-37.4	-19.6
(PAIVX Quote)PIMCO Global Innovation	-41.0	41.0
(NIFAX Quote)Nuveen Innovation	-41.3	-9.3
(PNETX Quote)Potomac Internet Plus	-46.2	-77.3
(SNETX Quote)Strong Internet	-48.5	-44.5
Alpha Analytics Digital Future	-50.0	-13.8
(JAMFX Quote)Jacob Internet	-52.6	-79.1
(DTYAX Quote)Delaware Technology & Innovation	-54.6	-29.7
(BTECX Quote)Berkshire Technology	-65.3	-19.5
Avg. Peer	-34.8	-32.6
S&P 500	-8.0	-9.1
Source: Morningstar. Returns through July 18.

Like an engineer who takes over a train that's about to thunder off a cliff, these funds' managers had the dubious honor of managing a tech-focused fund just as the long-sizzling sector finally took a breather. Excluding the (PDISX Quote)Potomac Internet/Short and (PNETX Quote)Internet Plus funds, which are souped-up portfolios that essentially make outsize bets on or against Net stocks, these funds lost about a third of their value in their first calendar year, according to Morningstar.

As you can see, many of these funds, like the three Kinetics funds, focus on the Net sector. That makes sense given that the (WWWFX Quote)Kinetics Internet and (MFITX Quote)Monument Internet funds each gained more than 200% that year.

Of course, the definition of a Net stock is typically more fluid than that of a tech stock, so in the face of the past year's tech storm many of these funds reached beyond the tech sector. At the end of the first quarter, for instance, the (WWWEX Quote)Kinetics Internet Emerging Growth, (WWWIX Quote)Kinetics Internet Infrastructure and (WWWGX Quote)Kinetics Internet Global Growth funds had just 35.4%, 12.4% and 1.1%, respectively, of their money in tech stocks. Although these tech funds' reluctance to own tech stood them in good stead, that might not jibe with investors' expectations.

"'Let's launch a tech fund and not own much tech.' It almost seems more cynical, like let's slap a tech label on this and do something else," says Cooley. "Then again, it's hard to argue because they didn't lose as much."

The (JAMFX Quote)Jacob Internet fund, run by Ryan Jacob, who rang up fat gains with Kinetics' flagship Internet fund, had about 80% of the fund's money in tech. He's also lost more than 80 cents of a buck invested in his fund a year ago, according to Morningstar.

If we rank these funds by their year-to-date returns and sift the top- and bottom-five funds' cumulative favorite U.S. stocks, we see a pretty divergent take on tech. The top five funds' faves aren't a techy list. There's Cablevision(CVC Quote), telecom shop SBC Communications(SBC Quote) and GM's Direct TV unit, which trades as Class H of the company's shares. The bottom-five funds are smitten with names that you'd expect in a tech fund, like AOL Time Warner(AOL Quote), Check Point(CHKP Quote) and Juniper(JNPR Quote).

A Broad Menu The favorite stocks of the top-five and bottom-five December rookies shows a range of tastes
Top-Five Faves
Stock	Percentage of Top-Five Portfolio	One-Year Return
Cablevision(CVC Quote)	3.4%	-1.9%
Commonwealth Telephone Enterprises(CTCO Quote)	2.4	-7.9
SBC Communications(SBC Quote)	1.7	3.3
Affiliated Computer Services(ACS Quote)	1.5	79.6
Direct TV (General Motors Class H)(GMH Quote)	1.5	-37.5
Bottom-Five Faves
Stock	Percentage of Top-Five Portfolio	One-Year Return
AOL Time Warner(AOL Quote)	3.4%	-25.0%
Check Point(CHKP Quote)	3.0	-46.5
Qualcomm(QCOM Quote)	2.8	-0.7
BEA Systems(BEAS Quote)	2.7	-58.8
Juniper(JNPR Quote)	2.7	-84.6
Source: Morningstar. Holdings as of most recent portfolio reports. Returns through July 18.

Tech funds' reluctance to own tech demonstrates how tough things have been for the sector, but so does the fact that many of these young funds are changing their stripes and folding up. Like the Monument Internet fund that's now called the (MFITX Quote)Monument Digital Technology fund to reflect a broader strategy, the Westcott Nothing But Net fund is now the (NETAX Quote)Westcott Technology fund.

And the (SNETX Quote)Strong Internet fund is merging into the (STEKX Quote)Strong Technology 100 fund, another December rookie. It's just one of many Net funds that are folding into broader tech fare or just folding.

The bottom line for investors is that there are probably far too many tech funds out there thanks to the tech bubble. It will take time to winnow the crowd and we probably won't know for several years if any of the category's youngsters are going to mature into stars. If anything, given tech's precipitous fall, now is a far more intriguing time to launch or buy shares of a tech fund.

Naturally, tech's torpor and the glut of new, battered funds have made fund shops shy. Just three tech funds have launched in 2001, according to Morningstar. If you're shopping for one, we've run several screens of the bloated category. Last month we looked at tech funds that have beaten their peers over the past one- and three-year periods, and more recently we checked out which tech funds have fared the best since the Nasdaq peaked on March 10 last year.

Mutual fund shops are rushing to roll out new tech fare -- and now you know that might be precisely the time to give the battered pack a long look.