Tech funds headed for first losing year since 1984

Tech-oriented mutual funds are on pace to finish the year in the red for the first time since the summer Olympics were held in Los Angeles and Ronald Reagan was president.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
4 min read
Tech-oriented mutual funds are on pace to finish the year in the red for the first time since the summer Olympics were held in Los Angeles and Ronald Reagan was president.

As of last Monday, tech mutual funds were down an average of 24 percent for the year, with Internet-specific funds posting even worse results, said Christine Benz, a senior analyst with Morningstar, a mutual fund research company.

Unless there is a dramatic bull run in the final weeks of 2000, tech funds will finish the year in the red for the first time since 1984--a particularly nasty turn of events considering that last year the average gain for the group was 135 percent. In 1984, tech funds were down an average of 10.3 percent.

By comparison, the Nasdaq composite index is down about 33 percent since Jan. 1, and the Standard & Poor's 500, a common benchmark for stock performance, is off about 8 percent.

"Technology funds have been the second-worst-performing domestic equity category year to date, with specialty communications funds the worst," Benz said.

Unhappy New Year
So far, 2000 has been a lousy year for most technology mutual fund managers. Chart shows performance from Jan. 1 through Nov. 20.
Top performers YTD % return
PIMCO Global Innovation A +50.8
Icon Information Technology +14.6
Red Oak Technology Select +9.0
Sit Science & Technology +0.2
Firsthand Technology V -1.9
Dresdner RCM Global Technology -2.3
MFS Technology -3.3
Rydex Electronics -4.2
Kinetics Internet New -4.5
Fidelity Select Electronics -5.1
Bottom performers YTD % return
Jacob Internet -70
Potomac Internet Plus -69.9
StockJungle.com Pure Play Internet -59.5
ING Internet C -58.8
Westcott Nothing But Net -57.7
Amerindo Technology A -55.5
Kinetics Emerging Growth -53.0
Monument Digital Technology A -51.2
Monterey Murphy New World Technology -49.5
Firsthand e-Commerce -47.9

Source: Morningstar

But she noted that tech funds represent a small percentage of all mutual funds, accounting for only 2 percent of the total at the beginning of the year.

Despite the losses most tech funds will encounter for the year, portfolio managers say investors need to take a long-term view on their investing.

"Our fund is still positive, but we've gotten our share of pain in the last month or two," said Doug MacKay, portfolio manager of Red Oak Technology Select. "If we end up negative for the year, investors shouldn't be negative. I think tech will have sustainable earnings growth for some time."

So far, investors appear to be heeding that advice: MacKay said few investors have jumped out of his fund and that new money has actually flowed in over the past few months.

Investors, many of whom are in mutual funds via their companies' 401(k) plans, have not run for the exits in favor other investment vehicles, said Tom McManus, equity portfolio strategist for Banc of America Securities. But he noted a shift has occurred in the fund industry.

"We have seen tremendous rotation. For the best part of this year, investors are selling their worst-performing funds and buying into the best performers," McManus said. As investors chase the better-performing tech funds, they tend to drive the stocks in those portfolios even higher, creating greater disparity.

"This has exacerbated the relative performance of (business-to-consumer) stocks and has boosted the shares in infrastructure stocks," McManus said.

Meanwhile, many mutual funds have fiscal years that end in October and, as usual, engaged in tax-loss selling. Simply put, funds that were facing paper losses on many holdings decided to sell those stocks to record a capital loss that could be used to offset capital gains on other investments. As these institutional investors divested large blocks of stocks that were underwater, these poorly performing stocks became even weaker.

As expected, the market turmoil has taken its toll on professional investors.

"It's been a real difficult year for money managers," said Phil Dow, a market strategist at Dain Rauscher Wessels. "There hasn't been a payoff in being a disciplined long-term investor this year."

The market swings have made it difficult for portfolio managers to simply buy stocks for the long term and watch them grow. The reason: Many stocks in the tech sector keep finding new lows rather than rebounding as they often did during the past few years. The constant slide forces managers to scratch out gains from more of a short-term trading strategy of buying and selling on relatively minor moves.

The recent downturn has created a "tentative demeanor" among investors, according to Dow, as they focus more on retaining the gains they have made or just not losing any more money.

"Greed is not in the picture," he said. "Investors are just as stimulated to avoid trouble as they are to make a quick hit."