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Wall Street, California | PORTFOLIO STRATEGIES

If You Can Take the Heat, Tech Rockets May Still Have Fuel

August 08, 2000|Josh Friedman

Remember that huge group of stock mutual funds that returned 100% or more last year?

The Triple-Digit Club has come back to Earth in 2000, perhaps to no one's great surprise.

Still, more than half of the 20 biggest winners among domestic stock funds in 1999 have continued to gain ground this year, beating both the Standard & Poor's 500 index and the Nasdaq composite.

And for investors who can stomach sharp swings, analysts say some of last year's hottest funds could still be worth buying--even though the conventional wisdom is that investors should be wary of funds that top any annual performance list.

Last year saw 171 stock funds rise 100% or more, a feat that had previously been achieved by just 23 funds in all other calendar years combined, according to Morningstar Inc. The top 15 domestic funds in 1999 boasted returns of more than 200%.

The driving force, of course, was the technology-stock sector, which began to rocket in the second half of last year. And with the peak in tech stocks earlier this year came the peaks for many of last year's fund leaders as well.

By the end of July, with tech stocks in another downtrend, many of the stock funds that were up 100%-plus in 1999 were down between 20% and 30% year to date.

The Monument Internet fund, for example, is off nearly 26% so far this year, after soaring 273% in 1999.

Yet the No. 1 fund of 1999, Nicholas-Applegate Global Technology, has eked out a 4.5% gain so far this year. That might be tiny compared with last year's 495% surge, but it's still better than the Nasdaq composite, which through Friday was down 6.9%.

The Van Wagoner group of funds also has continued to shine this year after zooming in 1999.

The performance differences this year among last year's leaders might have as much to do with the inevitability of sector rotation as with skillful stock-picking, fund analysts say.

Within tech, biotech has remained a hot area, for example. But anything Internet has been trashed after a spectacular two-year run-up.

Why look at last year's fund leaders at all? If you want to bet on technology in the years ahead, analysts note, these funds are among the most aggressive tech bets. What's more, many are run by seasoned portfolio managers with sharp eyes for tech trends.

Some analysts say the best place to start researching among last year's triple-digit gainers is among those that have tumbled this year.

"If you're going to shop from this group, good funds that have gotten whacked are often a better place to start than funds that are still rallying," argues Russel Kinnel, Morningstar's director of fund analysis.

He pointed to Amerindo Technology, an Internet-stock-heavy fund managed by Alberto Vilar and Gary Tanaka, a team more experienced than most Net fund managers.

After a 248.9% romp last year, Amerindo is down 29.4% in 2000.

"It may only have a huge year like that once every seven years, but the way to make money with such a volatile fund is to be patient and wait for that run," Kinnel said.

To avoid getting whipsawed, however, Kinnel recommends dollar-cost-averaging into funds such as Amerindo. He also suggests limiting such wild funds to 5% of one's total portfolio.

Kinnel also admires fund manager Garrett Van Wagoner, known for his rapid trading style and for his insights into tech trends.

All five of Van Wagoner's funds are in this year's double-digit club, with gains of 10% or more.

"Van Wagoner on a roll is just about one of the most impressive sights," Kinnel said. "I remember he wanted to open a biotech fund last fall--he was right on top of that whole move."

All of Van Wagoner's funds made the '99 triple-digit club. Three are still open to new investors: Van Wagoner Technology, Van Wagoner Mid-Cap Growth and Van Wagoner Post-Venture, which focuses on small stocks.

Philip Edwards, director of fund research at Standard & Poor's Corp., said he screens funds for performance consistency to avoid one-year wonders.

Members of the triple-digit club that pass S&P's muster include RS Diversified Growth, a $708-million small growth fund managed by John Wallace and John Seabern; Turner Midcap Growth, an $882-million fund managed by Chris McHugh; TCW Galileo Aggressive Growth, a $26-million mid-cap growth fund managed by Doug Foreman and Christopher Ainley; Firstar MicroCap, a $44-million small growth fund managed by Joe Frohna; and Standish Small Cap Tax-Sensitive, a $303-million small growth fund managed by Nicholas Battelle, which barely made the list with its measly return of--yawn--101% in 1999.

"Last year may have been an aberration for these funds," Edwards said, "but only in terms of the absolute amounts of their gains, thanks to the incredible market. They all have good managers with longer-term records."

Some managers, including Van Wagoner and the Amerindo team, established their early records at other funds or investment firms. Analysts recommend a close look at a fund's prospectus, where that information can often be found.

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