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Tech funds soar in 2001
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January 29, 2001: 6:36 a.m. ET
Despite continued volatility, managers are finding success on Wall Street
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - Investors might think tech funds have been caught in a bad soap opera over the past year. One minute the funds are the darlings of Wall Street, and the next they're on their death beds with their worst losses in 16 years.
And now, like a character on a respirator who snaps out of a coma, tech funds are delivering some of the best returns of 2001.
"Last year was a year of unprecedented volatility," said Paul Wick, manager of the $8 billion Seligman Communications & Information Fund. "The euphoria is gone and we're back to reality."
 Tech funds in 2000 lost money for the first time since 1984, breaking one of the longest winning streaks of the bull market. The category lost an average of about 27 percent, according to Chicago fund researcher Morningstar.
But this year, despite a few volatile trading days for the Nasdaq composite index, tech funds have bolted out of the gate. Tech funds account for 13 of the top 25 domestic stock funds tracked by Morningstar.
The average tech fund is up 8.86 percent year to date as of Jan. 25, compared with 1.86 percent for U.S. domestic stock funds, Morningstar said.
The biggest winners include Rydex Internet Fund, up 30.43 percent as of Jan. 25, and Matthews Asian Technology Fund, up 23.02 percent. (The Matthews fund is listed with tech funds even though it invests in Asian stocks). The Seligman fund is up 18.63 percent in the same time.
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"It is a huge run right in the beginning of the year," said Christine Benz, a tech fund analyst at Morningstar. "Some of the best performers are on the 'Who's Who list' of the worst of 2000."
 Part of the reason for the bounce this year is that many tech stocks were so battered last year there was nowhere to go but up, managers said. The Fed's surprise rate cut on Jan. 3 -- with a promise of more cuts to come this year -- also boosted investor optimism.
President Bush's push for a tax cut will help boost the outlook on Wall Street by putting more money in the pockets of consumers, managers said.
And, the strengthening euro is helping big-name tech stocks that derive a lot of their revenue overseas.
Nowhere to go but up
Many stocks were so battered last year that a lot of good companies are selling at bargain-basement prices, said Geri Hom, manager of another winner, Schwab Technology Focus Fund.
"These have been so beaten up they can't help but go back up," Hom said. "It's a broad rally...I think there are bargains to be had, and over the long run the sector should perform well."
 The Schwab fund, with about $40 million in assets, is up about 16.67 percent this year, Morningstar said. Its top holdings are Microsoft (MSFT: Research, Estimates), Cisco Systems (CSCO: Research, Estimates), Intel (INTC: Research, Estimates), IBM (IBM: Research, Estimates) and EMC (EMC: Research, Estimates).
Wick, of the Seligman fund, said one reason for his fund's good returns this year is the rebound in semiconductor stocks -- in particular, semiconductor capital equipment stocks. He mentioned names such as Novellus Systems (NVLS: Research, Estimates), Lam Research (LRCX: Research, Estimates), ATMI (ATMI: Research, Estimates), and Cognex (CGNX: Research, Estimates).
Another reason the Seligman fund is prospering is it invests in mid-cap stocks, rather than the largest names in technology, Wick said. He stays away from giants such as Nokia (NOK: Research, Estimates) and Ericsson (ERICY: Research, Estimates).
"Big-cap technology stocks went to unprecedented valuations in the last couple of years," Seligman said.
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 SOME OF WICK'S FAVORITE STOCKS:
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Integrated Device Technology
Symantec
Novellus
Autodesk
Amkor
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Wick believes the correction in high-flying Internet stocks will help reduce volatility this year.
"I'm quite optimistic that the year is going to be a good one and a strong rebound year on the heels of a number of Fed rate cuts," Wick said. "With the Internet bubble bursting, you're not going to have the daily crazy moves we had."
Internet funds get some relief
Still, despite the string of dot.com failures in the past year that left Internet funds with some of the worst losses on Wall Street, some managers in the sector have reason to smile in 2001.
"It's pretty clear the fourth quarter of last year was pretty horrific, and we didn't need much of a bounce to post these kind of returns," said Ryan Jacob, manager of Jacob Internet Fund.
 Jacob Internet Fund took the hardest hit of all among technology funds by losing 79.11 percent, Morningstar said. This year, the fund is up 14.22 percent as of Jan. 25.
Jacob, the star manager of the Internet Fund who delivered triple-digit returns before launching his own fund in 1999, attributed last year's performance to his focus on pure Internet plays.
Jacob has admitted he could have moved faster out of some stocks last year when it became clear the sector was in a crash, and not a correction. He eventually repositioned the portfolio away from content and media companies in favor of infrastructure and communications businesses.
This year, Jacob likes stocks that derive most of their revenue from the Internet or Internet-related products, including MatrixOne (MONE: Research, Estimates) and Agile Software (AGIL: Research, Estimates). The two companies are leaders in the business-to-business software area. He also likes Exodus Communications.
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"It's important to differentiate between dot.coms with questionable business models and Internet-related companies that are still in leadership positions," Jacob said.
The Fed's move towards easing interest rates should have a positive impact on the market by the second half of 2001, Jacob said.
Asian techs wake up
Another area of the market that has rebounded is Asian techs, which got hit hard last year by a "herd panic," said Mark Headley, manager of the Matthews Asian Technology Fund.
"Everybody just fled Asia in the second half of last year," Headley said. "People ran from Asia in great droves...A lot of high-quality companies were absurdly oversold."
 Part of the reason for the flight was domestic problems within countries such as Japan. But there was also a feeling that whatever was happening in the U.S. markets would affect Asia, Headley said.
A lot of Asian dot.coms have bounced back, such as Sina.com and China.com, he said.
Lower U.S. interest rates have helped take the heat off the region as well, Headley said. "Higher interest rates in the U.S. were really strangling growth in Asia."
Headley likes businesses that are providing services across Asia, such as Singapore's information technology service company Datacraft. Taiwan Semiconductor is also benefiting from a move towards outsourcing more services.
Venture Manufacturing in Singapore, another favorite, is a new outsoucing partner for Cisco, he said.
What should you do?
Alan Lowenstein, co-manager of another top tech fund, Hancock Technology Fund, said investors should try not to get emotional about the issue. The fund, with $712 million in assets, is up about 19.19 percent this year.
"What happens especially in tech investing is you go through periods of good times and bad times," Lowenstein said. "People get overly enthusiastic about technology and they take tech stocks higher. Then the reverse happens."
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SOME STOCKS LOWENSTEIN LIKES:
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Micron Technology
EMC
I2 Technologies
Mercury Interactive
BEA Systems
Palm
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Lowenstein pointed out that a lot of strong companies are selling for a fraction of what they used to command. Palm (PALM: Research, Estimates), for example, is trading for around $26, a far cry from its old levels of around $150.
 Benz, of Morningstar, advises investors not to look for tech funds based on short-term winners. She likes funds with veterans at the helm, such as Invesco Technology Fund managed by Bill Keithler.
Another good bet is Dresdner RCM Global Technology, Benz said. The team of managers, headed by veteran Walter Price, have a lot of experience in institutional investing.
Wick, of the Seligman fund, said investors should go back to the basics and pay attention to factors such as cash flow, earnings power, balance sheets and valuations.
"My advice is to keep a long-term perspective, Wick said. "Try to understand as much as you can about the companies you're investing in." 
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