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Tech funds improve after a year of losses

Technology mutual funds may finally be turning around, showing progress for the first time since the first quarter of 2000.

Technology mutual funds may finally be turning around, showing progress for the first time since the first quarter of 2000.

Seven funds have had net gains since the first half of the year, according to data from Morningstar, a fund analysis firm. The Kinetics Internet Emerging Growth Fund and the Seligman Communications & Information Fund vied for the top spot, with year-to-date returns of around 8 percent.

True, technology funds have lost 28 percent for the year on average, according to data from Lipper Analytical, a mutual fund tracking company. But the second quarter's average gain of 10.6 percent was a big improvement from the first three months of the year.

The funds were performing dismally at the outset of 2001; only two were able to post gains for the first quarter, and one of those was a fund that specializes in bets against Internet stocks by short-selling them.

Science and technology funds did "fairly well" in the second quarter, gaining 7.27 percent sequentially, said Tom Roseen of Lipper Analytical. That's the group's first positive movement since the first quarter of 2000.

"For the first time in five quarters, growth (funds) outperformed value (funds)," Roseen noted, something that goes against the recent trend towards the more traditional valuation models, which value earnings over high growth.

The Kinetics Internet Emerging Growth Fund, which reported gains of 7.59 percent for the year, was second only to the Seligman Communications & Information Fund, with gains of 8.02 percent as of late Friday afternoon.

The "Internet" moniker apparently did nothing to damage the Kinetics Internet Emerging Growth Fund; earlier this year, a spate of Internet funds closed down or changed their names to banish the "Internet" stigma from their title. Some analysts took it as a sign that Internet funds might be going out of style.

Source of the turnaround?
At the heart of this shift may be a renewed interest in companies with small and mid-cap stocks. Steven Tuen, manager of the Kinetics Emerging Growth Fund, which specializes in small and midsized capitalization stocks, attributed the turnaround to better scouting for undiscovered stars and the dearth of initial public offerings.

"We've avoided some of the really big disasters" by avoiding traditional industry heavyweights like Cisco Systems and JDS Uniphase, Tuen said. "Our focus has been on the undiscovered companies."

Actrade Financial Technologies has been one of the fund's best performers this year, Tuen said. The financial software company's earnings have grown by 100 percent year over year, yet the stock is trading at a price-to-earnings ratio of only 15, giving investors a low-risk winner, Tuen said.

Tuen added that a broad definition of Internet has helped the fund. Still, he invests in some of the more purely defined dot-com companies.

London Pacific, for example, is an insurance company that uses its venture capital arm to nurture Internet businesses. But unlike incubators such as CMGI and Safeguard Scientifics, which have suffered as the IPO market has dried up, London Pacific is insulated by its insurance business, which generates cash flow.

Other holdings that have helped the fund this year include Entrust, Interactive Data and IDT. Winstar, on the other hand, "really held us back," Tuen said.

One of the biggest boons to his fund's performance has been the evaporation of the IPO market, Tuen said. The flood of initial public offerings in recent years took investors away from stronger companies, Tuen said. Now that the tough economic environment has turned off the IPO channel for private companies, "the survivors are getting stronger," he said.

But investors aren't exactly coming back to technology funds in droves. Tuen said that cash flow for the year has been flat. Investors are still "feeling a burn, especially from 2000," and are thus reluctant to get into technology funds.

But if a look at the second quarter's performance compared with the first's is any indication of things to come, tech fund investors are in for strong results. The average return for technology funds in the second quarter was 10.6 percent, compared with negative returns of 27.63 percent for the year, according to data from Lipper Analytical.

"To knock off 10 percent in a quarter is pretty impressive," Roseen said.