The investment performance of technology companies is giving the mutual fund industry a healthy boost this year, providing unprecedented sales for technology funds as a sector and creating new product opportunities for fund companies.
Net sales of technology funds have risen from $490 million for all of 1998 to $17.8 billion year-to-date through Oct. 31, according to Financial Research Corp., a fund tracking and consulting firm in Boston. That 1999 total is approximately $7.4 billion greater than the net sales for the tech sector for the previous five years combined, according to FRC.
Indeed, the $2.7 billion in net sales for tech funds in October alone was greater than the annual sales for four of the past five years. Only 1995, with net sales of $4.4 billion, had higher annual sales for tech funds.
The sales numbers are not a coincidence. Average returns for technology funds have been approximately 98 percent for the year compared to about 17 percent for the S&P 500, according to Morningstar of Chicago, the fund tracking firm. That stellar performance is driving sales, industry observers said.
"You'll see investors chasing that performance," said Ray Liberatore, a senior research analyst for FRC.
The boom in the tech sector contributed to a strong month for sales in the mutual fund industry. Stock funds had net sales of $20.4 billion through Oct. 31, the Investment Company Institute reported Nov. 29. That was nearly twice September's sales of approximately $10.8 billion. And, it put net sales for the first ten months of 1999 of approximately $142.9 billion about 1.3 percent ahead of 1998 net sales of $141 billion for the same period.
The ICI report does not break out sales by fund group. FRC reported, however, that Janus funds of Denver, Colo. displaced the Vanguard Group of Malvern, Pa. as number one in net sales for October. Janus's $2.9 billion in net sales edged Vanguard's approximately $2.6 billion, according to FRC. October marked the first time since November 1996 that Vanguard has not been the top selling fund complex, according to FRC.
Tech investing played a major role in Janus's success. Four of the firms' funds placed among the top 10 sellers for October, including its Global Technology Fund. The fund had net sales of $385 million for the month, according to FRC. Janus Global Technology is second to the Munder NetNet Fund of Birmingham, Mich. in net sales for the year among the 64 funds FRC tracks in its technology category. Janus Global Technology had nearly $2.3 billion in net sales through Oct. 31, according to FRC.
The burst of sales activity among the tech funds has caused some concern that these funds will not be able to sustain their performance. It is difficult to imagine that performance in this sector will remain at its current level long-term, said Christine Benz, an associate editor at Morningstar. Nevertheless, over the long haul, investing in technology companies seems to be a wise move, she said.
Indeed, while unemployment stays low, technology companies and their products can expect to remain in demand, said Alan Harris, co-portfolio manager of Munder NetNet. Companies will continue to look for technological solutions to increase their productivity because of difficulties in hiring more staff to increase output, Harris said. That demand in turn can be expected to help the investment performance of technology companies, Harris said.
"Our prospects for the tech sector remain very favorable," Harris said.
Munder NetNet year-to-date has returned 114.5 percent, Harris said. Munder NetNet had $2.7 billion in net sales through Oct. 31, according to FRC. The fund's assets have increased from $101 million on Oct. 31, 1998 to nearly $3.7 billion through Oct. 31, 1999, FRC reported.
Those kind of sales numbers have attracted attention from mutual fund companies, who are rushing to market with new technology and Internet-only funds. The number of technology funds, counting all share classes, has increased from 97 as of Dec. 31, 1998 to 127 through Oct. 31, according to Lipper of Summit, N.J., the fund tracking firm. There are 16 Internet funds in registration now with the SEC, according to Wiesenberger of Rockville, Md., a fund tracking firm.
"It seems like we see one or two every week in registration" with the SEC, said Benz.
The increase in tech fund sales can have its drawbacks. Many technology companies have small market capitalizations, a fact that can make it difficult for funds to readily move in and out of the companies' stock. Also, the bigger funds become, the more difficult it can be to gain a benefit from investing in small-cap companies.
Executives at the Firsthand Funds of San Jose, Calif. cited the difficulties size can pose in announcing Nov. 18 that they planned to close Firsthand's Technology Innovators Fund when its assets reached approximately $450 million. The fund had approximately $370 million in assets at the time of the announcement. It is difficult for a large fund to invest in a small company and benefit significantly from that investment, said Kevin Landis, the fund's portfolio manager, in a statement. Technology Innovators has concentrated its investments in companies with market capitalizations of less than $5 billion, Firsthand said.
Although executives continually evaluate the fund's size, Munder NetNet has not set an asset level at which it would close to new investors, Harris said. Munder NetNet invests in such liquid large-cap tech stocks as America Online of Dulles, Va., Harris said. In addition, the number of new technology companies in which to invest is increasing dramatically, he said. The combination has provided the fund with a range of investment opportunities despite the fund's growth, he said.