Tuesday, the market offered investors a riches-to-rags story, and it had a bittersweet ending for tech-fund investors.
selloff hit tech stocks particularly hard, but most of last year's leading tech funds managed to lose less than the 5.7% the index gave up.
Fears of inflation and rising interest-rate hikes, as well as profit-taking, drove much of the selling, says David Eisenberg, chief equity officer at $31.7 billion
John Hancock Funds
. Tech stocks felt the majority of pain because they had furthest to fall, he says. Last year, the Nasdaq returned more than 80%, and the average technology fund was up more than 130%, according to
What do tech stocks have to do with interest rates? Many tech stocks' stratospheric valuations indicate that investors are betting on rising earnings well into the future -- even for those young companies that haven't earned a dime yet. Since rising interest rates can pinch earnings down the road, investors' confidence in many tech stocks was undercut, leading to heavy selling. Selling hit more speculative Internet stocks hardest as indicated by the
TheStreet.com Internet Sector
index, which gave up nearly 7% in Tuesday's trading.
"Clearly, at the end of last year, tech stocks got ahead of themselves," says Eisenberg, who expects two or three rate hikes this year.
Among last year's top-10 tech funds, Tuesday's losses ranged from a low of 2.5% for
Van Wagoner Technology to a high of 6.1% for the
Internet Fund. Most of last year's winners lost 4 or 5 percentage points in the blood bath.
Van Wagoner Technology, which gained more than 220% last year, lost less than its contemporaries Tuesday thanks to a more obscure portfolio and a large cash position, says managing director Peter Kris.
Although high-profile manager Garrett Van Wagoner's top holding, medical Web site
, dropped more than 11% Tuesday, other top-10 holdings fared better. Communications software maker
, the fund's fourth-largest holding, even managed a 4% gain.
"We think today's volatility is very healthy," says Kris, who says Van Wagoner created a 10% cash position because of fears that valuations had gotten too high.
Cash positions may have softened the blow for other tech funds as well. For many funds in the hot sector, cash has been flowing in faster than it could be invested.
The Internet Fund was hit hardest among 1999's top tech funds. Top holdings like
Telephone & Data
(off 7%) and
(down 10%) fell sharply. Fellow Net fund
Munder NetNet lost 6.5%.
Neither Kris nor Eisenberg believes today's selloff portends a sustained drop. But Eisenberg does think the selling eventually might bring particularly speculative tech stocks back down to earth.
In the meantime, it looks like these managers can hold their heads high. Until Wednesday, anyway.