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Retrenching never comes easy.

The embattled

Firsthand Funds

has just sacrificed its highly specialized communications offering in its effort to pacify investors and euthanize a product that has been a spectacular failure since inception.

The $45 million


Firsthand Communications fund will be folded into the $950 million


Firsthand Technology Value, pending shareholder approval. (Firsthand will send a combined proxy statement and prospectus to shareholders in October.)

Firsthand's Communications fund, which had the unfortunate launch date of September 1999, declined 41.7% in 2000. The dismal performance continued as the fund showed a loss of 60.7% in 2001 and is down 57% year-to-date, according to Morningstar, landing the fund at the bottom of its category.

Tech Value hasn't exactly had a banner year (or years), either. The fund, which gained fame and investor dollars after its 190% return in 1999, is down 59% for the year. In other words, by merging the Communications fund into the Tech Value fund, Firsthand is "effectively sweeping its woeful record under another ugly rug," according to Morningstar analyst Shannon Zimmerman.

e-Commerce Stays

Given that Firsthand also offers the narrowly focused

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e-Commerce fund, investors might expect that fund to be the next to go.

Not so, says Kevin Landis, manager of Firsthand's funds.

"We've tried to gauge why investors stayed in the Communications and e-Commerce funds," Landis says. "And the perception is that investors in the communications fund were in it to get back the money they had lost. We thought they'd do that faster in Tech Value."

The e-Commerce fund, Landis says, has more stalwart investors in it. "They believe in the sector," he says. "And I do, too."

Landis says that he remains convinced in the long-term prospects of the communications sector, but acknowledges that it may take some time to suss out the winners. "You have to identify the vultures that will swoop in and make a killing in the sector," he says. "Like the railroad barons who let others go broke building the tracks, then bought them in bankruptcy."

Indeed, in the troubled communications sector, it has become difficult for even concentrated products like Firsthand's Communications fund to find enough quality investments. "It's harder to put together a portfolio of 40 to 50 stocks that we really feel good about," Landis says. "Plus, these companies are now value plays."

The top holdings of the Communications fund are now


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Sprint PCS



AT&T Wireless





. Utstarcom is down 48%, making it the best performer among the top five. The worst, Sprint, is down 88%.

Bring In the Generalists

The Communications fund closing comes just two months after Firsthand's second round of layoffs. That round cut its research department to three senior and two junior analysts. That winnowing of its research staff was part of a greater shift towards employing more technology generalists, Landis says.

"When coming out of a trough like this, there are going to be many

positive company surprises," he says. "We're moving more toward generalists who can spot good news in a variety of places."

Firsthand's assets exploded in the late 1990s, as it developed a reputation for discovering small or niche companies. While its strategy hasn't changed, Landis is looking for ideas in some very different places -- most notably in consumer goods, home entertainment, security and defense companies.

"Most people heard about us in 1998 to 1999, and put their money in in late 1999 to 2000," Landis says. "Most came to us based on our past performance, so I think we know what they expect."

Unfortunately for investors, though, those expectations are not realistic.