Second quarter sinks all but two tech funds

Of the 154 tech funds that existed before April 1, only two managed to end the quarter in the black: Red Oak posted a 3.5 percent gain, and Turner Technology rose 2.5 percent.

By comparison, the tech-heavy Nasdaq composite index dropped 13 percent in the quarter, the Dow Jones industrial average fell 4 percent, and the Standard & Poor's 500 dipped 3 percent. Overall, tech funds lost nearly 12 percent in the second quarter, according to research firm Morningstar.

Red Oak and Turner Technology were able to rise above the rubble by sidestepping big, brand-name blue chip stocks when the markets hit lows,

"We didn't aggressively add blue chip names like Cisco and Intel because they didn't come down as much as others," said Doug MacKay, Red Oak's portfolio manager. "We added names that were beat up a lot more, because if the market rallied, we'd probably see more upside. I think that's why we're one of the ones that are on the top (of the mutual fund pack)."

The fund has concentrated on fiber-optic and networking stocks, adding or increasing its position in Juniper Networks, Sycamore Networks and Brocade Communications Systems.

For the first half of the year, Red Oak has posted a 45.7 percent gain, placing it second among tech funds, while Tuner Technology has enjoyed a 35 percent increase. Turner placed fifth among tech funds.

Turner Technology is one of nine mutual funds in the Turner Funds family. Launched last July, Turner Technology manages $140 million in assets and selects 35 tech stocks out of the 125 total stocks that comprise its family of funds. These 35 stocks are frequently swapped in and out, based on their prospects of having a near-term catalyst to drive the share price up, such as pending earnings or product releases.

Like Red Oak, Turner Technology took a more aggressive stance as the Nasdaq tanked 40 percent between its record high in mid-March and its low in late May.

"In March, as the markets peaked, we held more conservative stocks like Intel, Northern Telecom, Cisco and Nokia," said Bob Turner, founder of Turner Funds. "But as the markets bottomed in late May, we sold those and owned companies like Broadcom, SDL and Juniper Networks."

Juniper was trading around $156 in late March but then fell as low as $70 around late May. The stock now trades around $145.

Christopher Traulsen, a senior analyst with Morningstar, said many tech fund managers were aware of the risk of a correction and sold a number of stocks in the first quarter. In the second quarter, they bought more young growth companies, such as Internet software makers.

MacKay and Turner also slightly ramped up the frequency of their trades during the highly volatile second quarter.

Turner Technology, which already has a high turnover rate in excess of 1,000 percent a year for the stocks in its portfolio, averaged about two to three trades a day before the market meltdowns. But during the long, steep slide, the fund upped the pace to about three or four trades a day, Turner said.

Red Oak, meanwhile, had a relatively low turnover rate of 20 percent last year. MacKay, however, said the turnover increased to 35 percent between October and the end of the fund's fiscal year. Tech funds, based on the most recent annual data, on average had a turnover rate of 132 percent, according to Morningstar.

The next step
With the bloodbath of the second quarter over and the markets showing some stability during June, MacKay and Turner offered their outlook on places to invest in the coming months.

"With semiconductors, there is some concern now about inventory levels, but I don't agree with it," MacKay said. "That area still provides some opportunities, and fiber-optics will still remain a good place to be."

Turner also said PC and related stocks--along with Nokia, i2 Technologies and Veritas--may provide good risk-reward opportunities.

"The group that has the greatest risk-reward is PC and related stocks like Gateway, Dell, Intel and Microsoft," Turner said. "Gateway has been under pressure since November, and this will be an OK second quarter. But we think things will turn around in the third quarter. PC sales are expected to increase in the second half."

He added that Nokia, which has fallen roughly 16 percent since mid-June, has taken a tumble on concerns that its wireless handset sales are slowing. Turner, however, said he is not that pessimistic, and he has increased his holdings.

i2 Technologies and Veritas have been pressured lately. Veritas is down about 25 percent since mid-June, and i2 Technologies has fallen 26 percent since early June.

"Both companies' stocks are under pressure, but we think they'll both have strong quarters and offer some upside with their earnings report," Turner said.

As for the overall market, Richard Cripps, a Legg Mason market strategist, said he thinks the markets will recover from their lows of May.

"We're up about 25 percent since May, and half of the mutual fund inflows are to those funds with strong technology positions," he said.