"We're talking to fund managers every day who say there is no visibility in earnings. Most of these managers are, in a lot of ways, flying blind through this," said Christine Benz, a senior technology-fund analyst with Morningstar, a Chicago-based mutual-fund research firm.
Out of 176 tech funds, the only two posting gains were the Potomac Internet/Short Fund, which "shorts" stocks and makes money when they go down, and the Kinetics Internet Emerging Growth Fund.
Last year 167 tech funds out of 181 posted first-quarter gains as the Nasdaq rocketed to record highs.
The Potomac Internet/Short fund, which has $20 million in assets, gained 40.9 percent for the quarter, according to preliminary figures from Morningstar. The Standard & Poor's 500 index fell 9.5 percent for the quarter, and the Nasdaq tumbled nearly 20 percent.
The short fund, created in December 1999, is one of nine Potomac funds. The fund's philosophy is to gain one percent for every one percent drop on the Dow Jones Internet index.
Despite posting a gain, Dale Schmidt is not ready to uncork the champagne.
"As much as I enjoy running a short fund, there are a lot of people losing money and companies losing lots of value. I'd like this industry to succeed," said Schmidt, who noted that his personal portfolio has been hurt in the downturn. "Potomac has both short and long funds and we try to be there for people in the thick and thin...but as an economic proposition, it's better if the markets are going up."
But investors are going short: Since November, money flowing into Potomac's short fund has grown each consecutive month, Schmidt said.
Only two of 176 tech mutual funds posted gains in the first quarter.
Top 5 funds
Kinetics Internet Emerging Growth
Kinetics Internet New Paradigm
Matthews Asian Technology
Bottom 5 funds
Van Wagoner Technology
Amerindo Internet B2B
Delaware Technology and Innovation
Source: Morningstar, as of March 30, 2001
"They probably don't make sense for most people because they can really backfire on you," she said.
Potomac's short fund has essentially all the same stocks in the Dow Jones Internet index, the difference lies in which stocks comprise the largest holdings based on market cap. BEA Systems, eBay, Checkpoint Systems, VeriSign and Yahoo represent the fund's top five holdings.
Some of the largest holdings in Kinetics' basket of stocks include Data Broadcasting, Nucentrix Broadband Networks, IDT, and Tredegar.
"Our objective is to search for companies that are off the radar screens of most investors," said Steven Tuen, Kinetics Internet Emerging Growth lead portfolio manager.
His fund, which posted a slight 1.4 percent gain for the quarter, focuses on small- to midcap companies.
Data Broadcasting (DBC) was one of its home-run hitters for the quarter, soaring more than 90 percent to end the period at $7.59.
DBC, an online financial and stock-quote technology company, sold its majority stake in CBS MarketWatch earlier this year and unlocked the value of the company, Tuen said.
New Internet angle
"DBC can break its own operations and no longer has to include CBS MarketWatch. It showed DBC was profitable on an operating basis, and we decided to invest in the company. They represent 9 percent of our holdings and are the largest in our portfolio," he said.
Tuen added that the rest of his portfolio has largely been hurt, as with the rest of the tech sector, but what has helped his performance is that most of his companies are small and midcaps.
Kinetics Internet Emerging Growth, a $5 million fund formed in December 1999, is one of 11 Kinetics Funds.
As the second quarter gets underway, Tuen said he's likely to look for investments in companies that benefit from the Internet, rather than companies that are pure Internet technology companies.
He added that his fund is increasing its position in Micro General, which owns escrow.com. Micro General is affiliated with title insurance company Fidelity National Financial, which has a stake in Micro.
"They help old stodgy companies come into the 21st century and it behooves them to use (Micro)," Tuen said.
Fund watchers caution that the second quarter and year may still remain bleak.
"If this trend persists, this could be the first quarter since 1987 when each of the fund categories on average are in the red," Benz said.
Tuen also has a cautious outlook.
"We're flying through a storm and looking for a way out. Every time we think we've found the bottom, we get taken for a loop again," he said.