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
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."
To understand the deeply destructive effects of performance chasing, today the Big Screen checks out the record 17 tech funds launched in December 1999 -- before that, the most ever launched in a month was five, set two months earlier.
Born three months before the
peaked, these funds' numbers are stark and their lessons are valuable: Don't chase performance, and don't assume a sector fund will invest your money in its sector.
Like an engineer who takes over a train that's about to thunder off a cliff, these funds' managers had the dubious honor of managing a tech-focused fund just as the long-sizzling sector finally took a breather. Excluding the
Potomac Internet/Short and
Internet Plus funds, which are souped-up portfolios that essentially make outsize bets on or against Net stocks, these funds lost about a third of their value in their first calendar year, according to Morningstar.
As you can see, many of these funds, like the three
funds, focus on the Net sector. That makes sense given that the
Kinetics Internet and
Monument Internet funds each gained more than 200% that year.
Of course, the definition of a Net stock is typically more fluid than that of a tech stock, so in the face of the past year's tech storm many of these funds reached beyond the tech sector. At the end of the first quarter, for instance, the
Kinetics Internet Emerging Growth,
Kinetics Internet Infrastructure and
Kinetics Internet Global Growth funds had just 35.4%, 12.4% and 1.1%, respectively, of their money in tech stocks. Although these tech funds' reluctance to own tech stood them in good stead, that might not jibe with investors' expectations.
"'Let's launch a tech fund and not own much tech.' It almost seems more cynical, like let's slap a tech label on this and do something else," says Cooley. "Then again, it's hard to argue because they didn't lose as much."
Jacob Internet fund, run by Ryan Jacob, who rang up fat gains with Kinetics' flagship Internet fund, had about 80% of the fund's money in tech. He's also lost more than 80 cents of a buck invested in his fund a year ago, according to Morningstar.
If we rank these funds by their year-to-date returns and sift the top- and bottom-five funds' cumulative favorite U.S. stocks, we see a pretty divergent take on tech. The top five funds' faves aren't a techy list. There's
, telecom shop
and GM's Direct TV unit, which trades as Class H of the company's shares. The bottom-five funds are smitten with names that you'd expect in a tech fund, like
AOL Time Warner
Tech funds' reluctance to own tech demonstrates how tough things have been for the sector, but so does the fact that many of these young funds are changing their stripes and folding up. Like the
fund that's now called the
Monument Digital Technology fund to reflect a broader strategy, the
Westcott Nothing But Net
fund is now the
Westcott Technology fund.
Strong Internet fund is
merging into the
Strong Technology 100 fund, another December rookie. It's just one of many Net funds that are folding into broader tech fare or just folding.
The bottom line for investors is that there are probably far too many tech funds out there thanks to the tech bubble. It will take time to winnow the crowd and we probably won't know for several years if any of the category's youngsters are going to mature into stars. If anything, given tech's precipitous fall, now is a far more intriguing time to launch or buy shares of a tech fund.
Naturally, tech's torpor and the glut of new, battered funds have made fund shops shy. Just three tech funds have launched in 2001, according to Morningstar. If you're shopping for one, we've run several screens of the bloated category. Last month we
looked at tech funds that have beaten their peers over the past one- and three-year periods, and more recently we
checked out which tech funds have fared the best since the Nasdaq peaked on March 10 last year.
Mutual fund shops are rushing to roll out new tech fare -- and now you know that might be precisely the time to give the battered pack a long look.
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
firstname.lastname@example.org, but he cannot give specific financial advice.