A Firsthand Look at Being a First-Place Fund - TheStreet

A Firsthand Look at Being a First-Place Fund

Firsthand's Kevin Landis has guided his Technology Value fund to a No. 1 ranking for the most recent five-year period.
Author:
Publish date:

SAN JOSE, Calif. -- The blue-jeaned and sneakered 38-year-old interrupts my tour of his office to swing by an empty suite of the Silicon Valley building. "I'm worried about having us on several different floors, but we don't have much choice," says Kevin Landis, surveying the vacant row of cramped offices.

That's for sure. Ever since Firsthand's

(TVFQX)

Technology Value fund snagged the honor of being ranked No. 1 among all mutual funds for the past five years, the independent fund firm is literally bursting at its seams. Phone lines ring nonstop as interested investors clamor to get into the chart-topper. An army of temp workers stuffs prospectuses into packets, struggling to keep up with the thousands of daily requests for applications. Two newly minted funds are barely a week old, and as most fund firms watch cash slow to a trickle, Firsthand can barely keep up with the millions of dollars rushing in every day.

Sure, you expect that from a family of high-powered high-techies that consistently blows past the competition. The numbers, both short-term and long-term, are certainly worthy of attention. Up 181% for the past 12 months, the firm's flagship Technology Value fund has delivered better than 40% on average every year for the last five, according to

Morningstar

.

With numbers like that, you might expect a long list of super-expensive Internet stocks to pack the portfolios of Firsthand's trio of tech funds. Think again. From the start, Landis bucked the trend, never buying a dot-com. And guess what name the Silicon Valley native offers when asked what excites him among his stocks? No, not some small-cap startup selling the latest and greatest Net gadget.

Instead, you hear an old familiar name:

IBM

(IBM) - Get Report

. Yep, Big Blue. A big position. Landis says management understands better than anyone what it takes to be successful not just today, but more importantly, tomorrow.

"IBM is now whipping up what they need to do, and they're doing it," Landis says. "You gotta hand it to (chief executive) Lou Gerstner -- he has gone in and said, 'I think this company has got to get focused on the right things.' They're gracefully bowing out of what is an increasingly ugly slugfest -- the PCs -- and getting into the e-commerce business. Very, very smart. They get it."

But you won't just find long-established leaders in Landis' funds. Just because he steers clear of the dot-coms doesn't mean Landis isn't betting -- big -- on the Internet. He refers to his play in this modern Gold Rush as a picks-and-shovels investment. "I get all these prospectuses for e-this and e-that and whatever-dot-com. And whether it's flowers or books or hammers, I'm not so much interested in which brand is going to win out as I am in figuring out which tech companies will supply them."

High on Networking Software Stocks

Some favorites? Landis is high on

Concord Communications

(CCRD)

, which makes software that helps to view a company's computer network the way a traffic cop would look at a city's streets. "It spots the traffic jams that are coming, and spots where they are right now. So when somebody comes to them and says, 'We need to upgrade our T-1 line because we can't get on the Internet,' they can say, 'You only think the problem is the T-1 lines; actually, it's the idiot downstairs who's backing up the entire system.' Networks have become more complicated and so traffic management becomes more important."

Another big holding is nearby network software maker

Packeteer

(PKTR)

. This company's software says, " 'OK, you're a customer trying to do business on our site, you get the highest priority. You, you're just an Internet hit on

espn.com

, you can wait.' That's pretty cool. You have to ask, how do we anticipate what people need now that they've got all this networking gear?"

Both small companies are favorites in the

Tech Innovators

fund, which offers shareholders a different type of tech investing (and a different risk profile) than

Tech Leaders

, which is full of names such as

Cisco

(CSCO) - Get Report

, IBM and

Lucent

(LU)

.

"If you wish you'd been in early, that's tech innovators," Landis explains. "The name says it. Young companies where my first reaction is 'Wow, that could really be something.' "

The third and most famous of the Firsthand funds takes price and valuation much more into consideration. Tech Value buys the "under-appreciated" of Silicon Valley, stocks in giants such as

AT&T

(T) - Get Report

and

Motorola

(MOT)

. But despite that "value" label, price discipline is still the last thing that this

UC Berkeley

engineering grad considers.

Looking for Themes

First, Firsthand Funds relies on broad themes, then tries to capitalize on them by identifying the top players who will exploit them. "You start out asking yourself, 'How is the world going to be different in a few years time?,' and you come away with a few themes: How's it going to happen? Who's going to make it happen? Then you figure out what the best companies are. Don't get to valuations until fairly late in the process -- put that price discipline in last."

One of the biggest trends Landis is betting on: wireless. "I'm sold. Over 50% of the world's population has never made a phone call. That's a staggering argument. Short of deep worldwide depression in developing nations, there's nothing to stop the growing demand for wireless." Other themes: flat-planel displays and digital photography. "They would be really sexy themes to talk about were it not for the fact that the Internet has captured everyone's attention."

Right now, Landis' attention is fixed on process as well as stock-picking. Since firm co-founder Ken Kam, who is also the chief portfolio manager of Firsthand's

Medical Specialists

fund, left to start his own firm, Landis has been singlehandedly running the rapidly growing fund firm. One of the biggest (if perhaps the most enviable) challenges he faces is managing the rapid asset growth.

Since the beginning of 1999, Tech Value more than doubled, to $500 million in assets from $230 million. But Tech Innovators, with its emphasis on tiny caps, is more problematic. Since it was created more than a year ago, it ballooned to $150 million from $10 million. Still nimble enough to shop among the little companies? Yes, Landis says, but he admits he will need to close the fund at some point. There may still be several hundred millions of dollars in growth until then, though, and those temps are working on sending out applications to prospective shareholders.

Now back to figuring out that office-space issue.

Brenda Buttner's column, Under the Hood, appears Thursdays. At time of publication, Buttner held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While she cannot provide investment advice or recommendations, Buttner appreciates your feedback at

TSCBrenda@aol.com.