The Fund Shakeout Is Good for You
10 Questions With Invesco Telecom Manager Brian Hayward
You might not have that mangy tech fund to kick around much longer.
Faced with steep losses, fund investors are lightening up on ravaged tech funds. Fund companies, which never like declining asset bases, are moving to either cash out the laggards or merge them into others. Some 20 tech funds have been merged away or cashed out this year.
This week the Big Screen zeroes in on some more funds that might not be long for this earth. The list includes funds run by sputtering Net specialists such as Ryan Jacob, as well as those run by value shops such as Neuberger Berman that thought they'd try their hand in Silicon Valley.
"Fund companies that rolled out a bunch of trendy Net funds are getting what they deserve," says Russ Kinnel, director of fund research at Chicago-based fund tracker Morningstar. "The fund world will be getting smaller," adds Burt Greenwald, a Philadelphia-based fund consultant.
In 1995 there were 21 tech funds; today, there are more than 150. Here's why: Fund companies hoping to get some of the whopping $75 billion the category pulled in during 1999 and 2000 slapped together loads of me-too funds. Alas, most of these funds hit the street just as tech stocks peaked.
The rule of thumb is that most stock funds break even when they have $80 million to $100 million in their coffers. But more than two-thirds of the tech funds out there have less than $50 million. With the average tech fund down more than 50% over the past 12 months, these minnows are a tough sell.
To illustrate our point, let's look at some small, ugly and mostly young tech funds. We sifted the category for funds that lost more than half their value in the 12 months ended Sept. 30 and have less than $100 million in assets. A whopping 76 made that cut; most are less than three years old. Here's a look at some that are down more than 60% over the past 12 months that have less than one-tenth the average tech fund's assets, $261 million.
It wouldn't be a surprise or a shame to see some of these funds evaporate. Rest assured, many will.
A Calvert spokeswoman says it's "sticking with the fund," but how many people are looking for a tech fund that invests according to a set of social criteria, like the $3.4 million socially conscious Calvert Social Investment Technology fund? It's down 62%. And should a value shop like Neuberger Berman keep trying its hand at tech investing with its puny $9 million
Technology fund, which is down 61% over 12 months? The firm didn't immediately return a call.
But it's not a foregone conclusion that these funds will disappear. Of the shops with funds on this list, some are tech specialists that ride the mercurial sector for a living. Cases in point:
Jacob Asset Management
Amerindo Investment Advisors
Ryan Jacob made his name ringing up big returns with the
Kinetics Internet fund, but he launched his own fund at the end of 1999, just as the dot-com siren song was ending and another kind of siren was just starting to be heard. The
Jacob Internet fund raised some $150 million for its launch; it's down to less than $20 million. Because this is Jacob's only fund, it might not go away until the firm does -- though that might not take long, either. Jacob didn't return a call for comment on the matter.
Amerindo, a more established firm, isn't in that kind of pickle. Yes, the
Amerindo Internet B2B fund, launched at the end of May last year, is down 75% over the past year and has only about $9 million in assets. But between the $71 million
Amerindo Technology fund, down 70% over the past year, and other managed accounts, the firm had more than $1.2 billion under management on June 30. The firm has no plan to fold up its struggling B2B fund, according to a spokesman.
The tech sector's pain has hobbled older tech funds, too, by whittling already small asset bases. If we screen the 49 tech funds that are at least three years old, we find seven that have $25 million or less in assets. Of these unlucky seven, only the
Berger Information Technology fund has beaten its average peer over the past three years, according to Morningstar.
The field of tech funds is already dwindling. Beyond the more than 20 that have already disappeared this year, shops like
, which made a habit of hopping on hot sectors with two Net funds and an alternative energy fund, are
laying off staff. And some former growth gods who lost their shareholders' shirts, such Merrill's Jim McCall, have
While this might be bad news for the managers running tech funds, it's probably good news for you. A decrease in the number of tech funds will probably boost the quality of tech funds and managers, in a kind of Darwinian turn of events. Another positive is that just as a spate of new funds focusing on a hot sector usually signals a top, it's usually a good sign when many of those funds go away.
So tech fans should whistle as they walk past the expanding tech-fund graveyard.
Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
email@example.com, but he cannot give specific financial advice.