Garrett Van Wagoner Scores in '98

Sometime in February, Garrett Van Wagoner will cozy up to your computer for an interactive "fireside chat." Unlike his other frequent online communications, this chat will come via broadcast.com with video and sound.

He's got a lot to talk about.

After a devastating 1997 in which all of his funds ended the year deep in the red, the former star fund manager has climbed back up the charts.

In the last quarter of 1998, Van Wagoner outstripped both his U.S. stock-fund peers and the S&P 500. He finished the year with two of his five funds ahead of the benchmark and in the top 10 of their respective categories.

Van Wagoner Funds vs. S&P in 1998 Fund Q4 Return Return Technology 45.5% 85.1% (VWPBX Quote)Post-Venture 37.6% 37.6% (VWEGX Quote)Emerging Growth 35.5% 8% (VWMDX Quote)Mid-Cap 33.4% 16.5% (VWMCX Quote)Micro-Cap 30.6% 13.1% S&P 500 21.4% 28.7%

Source: Lipper Inc.

It was a very different picture last year.

Van Wagoner Funds vs. S&P 1997 Fund Q4 Return Return Technology N/A N/A (VWPBX Quote)Post-Venture -24.8% -12.2% (VWEGX Quote)Emerging Growth -25.8% -20% (VWMDX Quote)Mid -Cap -23.2% -13.9% (VWMCX Quote)Micro-Cap -25.5% -19.8% S&P 500 2.9% 33.4%

Source: Lipper Inc.

But shareholders shouldn't exhale yet. Returns on most of these funds since inception are still downright dismal when compared with the broader market. Signs of a comeback have surfaced before. These proved to be false starts. What's different now? "Our diversification strategy, which we believe really helped in the second half of the year," says Peter Kris, managing director at the Van Wagoner funds.

Indeed, the once highly aggressive portfolios no longer hold concentrated positions like the 10.4% bet on engineering software maker Avant (AVNT Quote) that Van Wagoner's (VWEGX Quote)Emerging Growth fund was riding last June. "In the second half of the year, we didn't have any holdings larger than 4% or so," says Kris.

Also, Van Wagoner is betting that the low interest rates that helped to boost small growth stocks last fall will continue to support a rally in the sector. "The Fed's going to continue to be concerned that the global economy has liquidity," he says. "So, I expect short-term interest rates to be cut further in the first half of the year."

It's a bet that certainly paid off last quarter. "In October, I was pretty convinced we would have a good cycle with the Fed cutting interest rates," he says. "It seemed like global liquidity was going to get better, and one of the ways we decided to play that was through the semiconductor business."

One of the fund's most profitable holdings in the fourth quarter turned out to be RF Micro Devices (RFMD Quote), a component supplier to Finnish telecom giant Nokia (NOKa Quote).

Like most other chart-topping tech managers last year, Van Wagoner also dabbled in Internet stocks. "We kind of did it the chicken way," he says. "We didn't own a lot of the second-tier and tertiary companies," he says. "We owned Amazon.com (AMZN Quote) and Yahoo! (YHOO Quote)."

And a leap into medical software maker Medical Manager (MMGR Quote) last fall also paid off. When the firm's stock fell to as low as 12 5/8 last fall after a class-action lawsuit was filed over a Y2K problem, Van Wagoner says he "bought the ever-loving bejeezus" out of it. A settlement is now pending, and the stock is trading above 30 -- near its 12-month high.

It's been a solid year for Van Wagoner: He's bested peers in every one of his fund's categories, according to Lipper. "It feels good," says Van Wagoner of the turnaround. "After the past year and a half, it feels really good."

Stardom at Govett

But there was a time when merely being better than average would have seemed anything but good for the manager.

In 1995, Van Wagoner was arguably one of the most famous fund managers in the business. He'd just completed his second year of managing the top-performing U.S. stock fund, Govett's (GSCQX Quote)Smaller Companies fund, up 58.5% in 1993 and 28.7% in 1994. What's more, he was on pace for another top-10 finish when he left to start his own fund firm in late 1995.

By the spring of 1996, Van Wagoner was juggling more than $1 billion in three new mutual funds, Emerging Growth, (VWMDX Quote)Mid-Cap and (VWMCX Quote)Micro-Cap, and still tearing up the charts. But by June, fears that the rapidly expanding economy would force the Fed to raise interest rates brought the house down on small growth stocks -- many of which had become overvalued by momentum investors who, like Van Wagoner, chased earnings acceleration seemingly at any price. Higher interest rates would make it impossible for small companies to sustain the kind of growth momentum that investors were banking on. And hot hands like Van Wagoner's and fellow mo-mo investor Gary Pilgrim's went cold.

Van Wagoner's funds began rapidly losing ground -- not only to the big-cap benchmark, but also against small-cap peers. While all three funds managed to end the year ahead of the S&P 500, they had given back much of their early gains.

In preparation for 1997, the manager beefed up his staff and launched a fourth fund, the small-cap (VWPVX Quote)Post-Venture. By spring, fears of a Fed tightening had eased considerably and investors began to creep back into small growth stocks. The funds rallied, but not for long. Asia's implosion in the fourth quarter crushed the sector. Investors had lost their taste for risk, and Van Wagoner's aggressive style of investing was buried in the ensuing small-cap bear market.

Fourth-Quarter Comeback

Deep in the red on the eve of 1998 Van Wagoner started yet another fund -- a larger-cap Technology fund. This fund proved to be a well-timed coup. Launched on the heels of a tough quarter for tech stocks, the tiny fund flew up the charts in 1998, finishing the year near the top of all equity funds -- up 85.1%.

Even more satisfying for Van Wagoner, the Fed ease in the fall finally brought relief to his favorite fast-growing small-cap stocks. Van Wagoner's funds climbed even faster than their small-cap peers. The gains put the ailing funds back in the black for the year, pushing Post-Venture almost to the top of its small-cap category.

His expectation that the Fed will again lower the short-term interest rate has Van Wagoner optimistic about the months to come. "Most people think the market is going to poop in a handbasket, but I think the market's going to have a good year," he says.

He's betting that favorable interest rates, together with continued growth in small-stock earnings and attractive valuations, will keep his funds rolling.

While not staking too much on high-priced Net stocks right now, the manager says he believes the Internet is going to change the world. "I think it's going to be absolutely revolutionary," he says. And he's keeping an eye on the Web smarts of the companies he buys. "If you don't have a Net strategy, you're going to get left in the dust," he says.

Throughout the toughest times, Van Wagoner has kept in touch with shareholders via online chats. And he says he's looking forward to next month's higher-tech "fireside chat."

A date for the event has not yet been set, but Kris expects it will take place in the middle of February. It's a terrific opportunity to ask, listen and learn from a now-seasoned money manager, but if you plan to invest, be sure to bring your iron stomach along for the ride.