Success Breeds New Funds, Some Concerns for Firsthand

Standout Firsthand Funds manager Kevin Landis is shooting the lights out, and money is flooding in the door. Can Landis' small Silicon Valley mutual fund shop handle all this good news?

One of Landis' funds will close to new investors soon, but the company launched two new funds on Oct. 1, so he has five on his plate -- six if you count a tech hedge fund he quietly runs on the side.

Even though his (TVFQX)Technology Value fund is the top-returning mutual fund over the past five years and returns of two other funds are also in triple digits this year, investors might wonder if the manager's eyes are bigger than his stomach.

In addition to Technology Value (undervalued electronic and medical tech stocks), Landis manages (TLFQX)Technology Leaders (big-name, leading tech stocks) (TIFQX)Technology Innovators (small-cap or emerging tech companies) and Silicon Capital Partners, (a tech-focused hedge fund). He also leads the team that manages the two new Firsthand funds: E-Commerce and Communications.

This year, investors poured more than $350 million into his three biggest funds through Sept. 30, according to Boston fund researcher Financial Research. Firsthand's total assets were $1.1 billion as of Oct. 31.

Thursday, Firsthand said it would close the $398 million Technology Innovators fund when it hits $450 million in assets. With $5 million to $10 million flowing in each day, the fund could hit that target within two weeks, says Steven Witt, a Firsthand managing director.

The inflows appear to be driven by the Firsthand funds' eye-popping performance. "Once we got that top five-year number [for Technology Value], inflows got very strong," says Witt.

Triple-Digit Fever
Fund	YTD return	Rank	1-year return	Rank
(TVFQX)Firsthand Technology Value	124.7%	6/97	165.2%	11/91
(TLFQX)Firsthand Technology Leaders	104.4	15/97	146.1	15/91
(TIFQX)Firsthand Technology Innovators	139.7	4/97	207.5	5/91
S&P 500	13.6	n.a.	25.2	n.a.
Lipper Science Technology Fund Avg.	76.4	n.a.	117	n.a.
Figures as of Nov. 11. Source: Lipper.

In a familiar cycle in the mutual fund business, rising returns have led to gushing inflows, which have, in turn, led to more funds -- and oftentimes diminishing performance. Closing Technology Innovators might lighten Landis' load a bit, but the two new funds will keep him busy.

They are team-managed, but Landis is managing the short-staffed team while Firsthand shops for more talent. Landis says there could be more Firsthand funds rolling out in 2000, but he didn't comment on whether he'd be managing them.

Landis has been even busier since the Oct. 1 departure of Firsthand co-founder Ken Kam, who ran the firm's only nontech fund, Medical Specialists, and took it with him when he left to found Ingenuity Capital Management.

Interestingly, despite his workload, Landis' funds have taken fairly divergent paths, even though they've moved up and down -- mostly up -- in close correlation.

Funds of a Feather Technology Value, Technology Leaders, Technology Innovators

No stock is in all three funds' top 10 holdings, and only three stocks appear in two funds' top holdings, according to Sept. 30 data.

Technology Value "isn't just a me-too fund," says Bruce White, a private money manager at Clifford Associates in Pasadena, Calif. "When you said tech fund, I expected to just see Microsoft (MSFT), Cisco (CSCO) and Sun Microsystems (SUNW). But they're not there."

In fact, only Technology Leaders owned Mister Softee and the other two Nasdaq drivers, as of Sept. 30. Morningstar figures indicate only 20% of tech funds currently ignore Microsoft shares.

How has he done it? Landis thinks hiring tech-industry veterans as stock-pickers helps cut through an industry rife with hype. He also stays away from predictable picks, preferring companies that profit behind the scenes. For example, the new E-Commerce fund probably will focus on firms that make online transactions safer and faster, rather than high-profile retailers like Amazon.com (AMZN).

But can Landis, who co-founded Firsthand in 1993, keep his funds on a roll? He says once he finishes building his research team, there shouldn't be any workload concerns. Today the firm has three analysts and hopes to double that number in the next year. But skeptics say the growing pains could just be starting.

It appears Landis hasn't been able to keep up with the investments in his Technology Value and Technology Innovators funds. Both had cash positions of just over 17% on Sept. 30, which strays from what Witt says is the firm's intent to stay fully invested in stocks.

Even the funds' originality could become bittersweet for investors. This style could eventually stretch Landis' acumen too thinly across too many mutual funds in the future.

And then there's the hedge fund, which most investors and financial advisers don't know about. Unlike mutual funds, hedge funds are only open to a limited number of qualified investors with $1 million in investable assets.

Securities and Exchange Commission rules prohibit hedge fund managers from advertising their track records or commenting on their holdings. Landis is not allowed to discuss the fund with the press, and fund managers who moonlight as hedge fund managers are not required to note in the mutual fund's prospectus that they run a substantially similar hedge fund.

Simultaneously running similar mutual and hedge funds can raise serious compliance issues. A portfolio manager could use a mutual fund to boost his or her hedge fund's return and, in turn, his or her paycheck.

But investors shouldn't be overly concerned since the SEC regulates these situations closely, says Joel Davis, a senior financial planner with American Express Financial Advisors in Portland, Maine.

And there's no reason to believe there are any compliance concerns with Landis' portfolios. In fact, his three established mutual funds were all doing better than the hedge fund's 92.7% year-to-date return as of Sept. 30.

Despite the number of funds Landis is steering, Davis doesn't think investors should be too concerned with the manager's workload since he is only following one sector of the economy.

"He clearly has a unique ability to invest in this sector and understand these trends, so I don't see a problem," he says.

He does highlight one concern, though. "Compensation to mangers in a hedge fund is so tremendous compared to the compensation to a mutual fund manager, they might be concerned about him choosing that direction if he's successful there."

Yet another reason for Firsthand investors to root for their funds' continued outperformance.

>To order reprints of this article, click here: Reprints