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." ...