The few, the proud, the survivors.
A small number of stalwart domestic technology and aggressive growth funds withstood the market's battering during the second quarter and prospered, despite the tech sector's 22% decline for the period.
Among funds comprising 50% or more technology issues, only 20 had year-to-date returns of more than 30% through June 30, according to Morningstar Inc., Chicago. On the flip side, 162 had negative year-to-date returns for the same period.
Some of the winners were the Nationwide Midcap Growth Fund, the Turner Technology Fund, the Calamos Growth Fund and the Red Oak Technology Select Fund.
"It seemed to be more a matter of what you did own than what you didn't own," said Paul Herbert, mutual fund analyst at Morningstar. The primary area to avoid was Internet stocks: the Jacob Internet Fund was down 40%; the Monument Internet Fund declined 20.5%; and Wakefield, R.I.-based Integrity Global Asset Management's Internet Index Fund fell 27.4% -- all among the worst performers year-to-date through June 30.
On the other hand, some industries within technology, such as opticals and semiconductors, fared much better.
Rosanne Pane, director of fund services at Standard & Poor's Corp., New York, said it's more difficult to pick the winners from the losers in this technology market. Not only is it necessary to understand the fast-moving changes within the industry, said Ms. Pane, but "you have to understand the fundamentals and the sentiment in the market relative to the stock because there's so much volatility."
Mr. Herbert said those managers who took a thematic approach and constructed their portfolios around an emerging industry such as opticals performed relatively well.
One of those managers was Aaron Harris, who manages the Nationwide Midcap Growth Fund for Nationwide Financial Services Inc., Columbus, Ohio. The portfolio is about 60% invested in technology and was the best-performing midcap growth fund in the second quarter, according to Morningstar. It was up 17% for the second quarter and 44.5% year-to-date through June 30.
Mr. Harris came to Nationwide in April from Nicholas-Applegate Capital Management, San Diego, where he managed the Nicholas-Applegate Global Technology Fund, which posted a record-setting one-year return of 497% in 1999. He took over the Nationwide Midcap Growth Fund on April 10, right in the middle of the technology selloff that saw the Nasdaq ultimately plunge 39% by May 24.
At Nationwide, Mr. Harris began ramping up the fund's technology exposure, looking for sectors that were undergoing positive fundamental change such as opticals, Internet infrastructure and semiconductors. Within those industries, he looks for companies that can deliver earnings.
"I'm a big believer in the idea that price follows earnings," said Mr. Harris. "As long as you can continue to have earnings acceleration and earnings revision upward, you're going to continue to have price following earnings."
The fund's top holding is Corning Inc., representing 2.4% of the portfolio. Corning, like Ciena Corp. and SDL Inc., also top 10 holdings, supply components that make optical communications -- the transfer of data using light -- possible.
More specifically, he looks these companies that are solving industrywide problems. "It's called investing at the bottleneck," said Mr. Harris, and right now optical companies are solving network bottlenecks.
Corning's per-share price climbed to $269 on June 30 from $70 a year ago. Earnings per share climbed to 94 cents from 49 cents during the same period. SDL saw its per-share price go to $285 on June 30 from $25 one year earlier. The earnings per share rose to 30 cents on June 30 from 5 cents a year ago.
Mr. Harris steered clear of Internet stocks, or, more specifically, portals and content sites with business models that rely on Internet advertising. "I don't think you build brand on the Internet," said Mr. Harris. "You've got an Internet company telling you to build your brand online, while they're spending millions of dollars on traditional media" like TV spots during the Super Bowl. "It doesn't makes sense to me."
Despite being almost entirely invested in technology, the Turner Technology Fund managed to gain 3% in the second quarter and is up 35% year-to-date. It ranks second among technology funds in year-to-date performance through June 30, behind the Red Oak Technology Select Fund, managed by Oak Associates, Chicago. The Red Oak fund returned 3.4% in the second quarter and was up 45.7% year-to-date through June 30, according to Morningstar.
"Even though technology seems to go up and down in a monolithic sort of way, there's always going to be some stocks that act somewhat differently," said Robert Turner, chief investment officer at Turner Investments, Conshohocken, Pa., and portfolio manager of the Turner Technology Fund.
Mr. Turner said opportunistic trading helped him weather the second-quarter storm. He identified three times in a two-month period when opportunistic trading made the difference: mid-March, around the time the Nasdaq composite reached its peak; mid-April, when the market dropped sharply; and around May 24, when the market hit bottom.
In mid-March, Mr. Turner sold off some new-economy stocks such as Juniper Networks Inc., Broadcom Corp. and Sycamore Networks Inc. in an attempt to get more conservative, and added more old-economy stocks such as Intel Corp., Dell Computer Corp., and Northern Telecom Ltd.
Then, the volatility created new opportunities in mid-April and late May, and Mr. Turner got more aggressive, buying back at better prices many of the stocks he had sold in March.
In the second quarter, said Mr. Turner, the market began to discriminate between the stocks that could maintain their leadership positions in a fast-growing industry and those that merely rode on their coattails. The trick, he says, is weeding out the higher quality names from the lower quality ones.
"When the wind's at your back, all the boats sail really fast," said Mr. Turner; "but when the wind is coming from the side or facing you straight on, the better sailors are able to go the fastest."
Although his Technology Fund is just a year old, Mr. Turner has covered the technology sector for 10 years and has seen the different cycles that it has gone through -- from PCs, to data networking, to the Internet and, now, to opticals.
Mr. Turner said he relies on finding these emerging industries and picking the winners within them. From the opticals industry, Mr. Turner also has Corning and SDL in his portfolio.
The Calamos Growth Fund, managed by John Calamos and his son Nick Calamos, was up 5.6% in the second quarter and 45% year-to-date through June 30.
While the managers decreased technology in the portfolio to 52% at the end of the second quarter, from 60% at the end of 1999, they feel strongly about the sector. "We do believe this is the second industrial revolution going on," said Nick Calamos, adding it's being driven by technology and communications.
They also stayed away from Internet names in favor of technology infrastructure stocks such as JDS Uniphase Corp., Juniper Networks Inc. and Tri-Quint Semiconductors Inc.
Nick Calamos said they take a bottom-up approach and focus on attractive sectors and industries. "Making the right industry decision is key," he said. The managers also look for companies with sales and earnings growth of more than 50% per year.
To find them, they use a quantitative model that helps to identify where trends are developing across sectors. Then they narrow down the portfolio with fundamental research. Because market volatility has created such an opportunistic environment, Nick Calamos said, "We feel if we do our homework, it's going to pay off for us."