Like most technology funds, U.S. Bancorp's


First American Technology Fund has been hit hard by the



After producing steady returns between 1995 and 1998 and soaring a remarkable 192% in 1999, the fund was decimated over the subsequent two years, prompting a switch in senior management and a change in strategy.

Barry Randall was named lead manager in February, and he has since taken some important steps to limit his clients' potential losses amid extremely hostile market conditions. Among other measures, he has largely stayed away from stocks in the telecommunications, Internet and biotech sectors. And while the fund has fallen 20% since March 1, it has outperformed its benchmark index -- the Merrill Lynch Tech 100 -- by 3 percentage points over that same period.

Amid a wave of accounting scandals, bankruptcies,


investigations and a complete loss of confidence in the integrity of the financial markets, Randall is celebrating any small victory.

1. First of all, let's talk about what strategies you have put in place to turn the fund around.

I've lowered the risk level of the fund fairly dramatically. That is to say, since I took over the fund, we don't own any telecommunications companies. The only dotcoms we own are the ones we know work like


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, and 10% of the fund is in health care stocks, not biotech health care but hospitals and medical devices.

So that's the primary method by which I've reduced risk and raised the relative performance of the fund.

There is a presumption that an investor in our fund is willing to accept a certain level of risk, but I've succeeded in lowering the volatility that goes along with that. That's not the same as preventing it from declining in a declining market, but it does mean that I'm not there on the bleeding edge of technology.

I'm addressing technology by way of defense technology or by virtue of investing in companies related to data storage. We are addressing segments of the tech market that will have demand regardless of what the economy or stock market is doing.

Falling Back to Earth
The First American tech fund had a huge year in 1999 but has since underperformed its fellow tech funds.

Source: Morningstar, Data as of June 27, 2002

2. Is it possible to reduce the risk level of the fund when valuations are still so high?

There is a school of thought that says valuations are still high. I am essentially valuation-agnostic. I don't invest based on whether or not a company is over or undervalued. I only buy stocks based on whether or not their prospects are underappreciated.

If you hadn't bought


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in 1988 because you thought it was overvalued, you wouldn't have bought it anytime thereafter for the next 10 years because it was overvalued, and yet it was the greatest wealth creator in the history of the stock market.

Conversely, the argument on


all the way into the grave was that it was undervalued. So arguments about whether companies are under- or overvalued, whether today or today vs. the past, are essentially lost on me.

3. Aren't Microsoft and Enron the exception rather than the rule, though?

No one has ever made a convincing argument to me that paying attention to valuation is a must at all phases in the stock market. There are times when buying inexpensive stocks works, and there are times when it doesn't. But in all phases there are companies that are overvalued, and they continue to be overvalued because they keep going up.

Talking With:
Barry Randall
Manager, First American Technology fund (FATAX)

Expense ratio: 1.15%

1-year return: -48%

3-year return: -29%

Top holdings: Dell, Hewlett-Packard and Veritas

Managed since: Feb. 2002

Assets: $33 million

Source: Morningstar, as of June 27, 2002

4. Has the implosion of WorldCom (WCOME) shaken your confidence in tech and telecom now? Can we really trust any of these companies anymore?

Yes, you can. WorldCom was part of a fraud but it was already trading below a dollar before the fraud was discovered, and it was going to go out of business anyway, based on the fact it had a terrible business model. What has happened hasn't shaken my confidence that most companies are law-abiding companies.

5. Are there any other companies in the tech world that you fear might have an accounting blowup?

Not specifically, I don't have a particular suspicion about any company I own. What this means is that the regulators are going to go back and look under every rock that Arthur Andersen never touched.

Additionally, I think companies in the cable business and other industries that have utilized EBITDA as a standard metric of health will come under greater scrutiny, but that's not to say I have any particular suspicion about them.

6. The durable goods report last week showed improvements in orders for things like computers and electronic products. Is tech spending really showing signs of improvement?

Yes, the numbers don't lie. It is coming back but there are not the same drivers in the next three years that existed in the prior three years. There was a perfect storm of demand related to the Internet, Y2K spending and to the economy being very strong in general, so this triple cocktail of demand drove technology spending.

We have none of those things right now, and I don't foresee any of those things returning anytime soon. Yes, tech spending is improving, but it's not going to accelerate to rates seen recently.

7. What are your favorite stocks and sectors right now?

My favorite sector is data storage, and the two positions we have are





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. These two stocks have differing recent histories, but both are large companies that will survive economic hardship and provide value to their customers for a long time. Will their businesses reaccelerate to rates previously seen? No, but data happens and will continue to happen whether the economy is good or bad.

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Another area we like is the video game space. You get the confidence that these businesses are driven by factors that are outside of economic issues. Whether or not I believe tech spending will return, it doesn't matter -- Christmas will definitely return.

8. What areas are you avoiding?

We remain clear of all telecom equipment stocks and we think the worst is yet to come. We foresee bankruptcies driven by either malfeasance as in the case of WorldCom or just driven by bad business models -- those would include companies like






, whose balance sheets are overburdened by debt. So because of the difficulty in the services side of telecommunications, we remain far away from the equipment side of the space.

9. What kinds of returns can investors expect from technology stocks in the coming years? Presumably, we're not going back to the lofty gains seen in the late 1990s, are we?

I don't anticipate a return broadly to 20% growth, but keep in mind that companies address individual markets and have individual characteristics. The video game space happens to be in an extremely growth-oriented phase of its cycle, so it is realistic to expect growth of 30% to 40% in that particular space.

Conversely, it's more realistic to expect the PC business, which in recent years has been a no-growth business, to accelerate to, say, 10% at best. In either instance, going from zero to 10% or 20% to 40% can lead to stock outperformance. We're not as interested in absolute growth than in the rate of change in growth.

10. What lessons have you learned from the carnage in the tech sector? Has it changed your buy and sell discipline at all?

The lesson learned is that there is no magic recipe in technology. Tech stocks worked when they worked because they were growth engines, they grew faster than people's wildest expectations, and then they sagged faster than people thought they could sink. Companies didn't go up based on a magic formula. eBay is a great company that's gone up and gone down, but at the end of the day it has a great business model, and that's what will last.