Technology funds have had such phenomenal performance lately that many with above average returns are losing cash.
That is because those who are investing in technology funds are seeking spectacular returns, right away. So, these investors are only putting their money in funds that demonstrate their mettle virtually as soon as they are introduced.
Financial Research Corp. of Boston found that the only tech funds that had net inflows in 1998 were those that performed in the top quartile for one-year performance that year, or new funds which did not have a one-year performance record at all.
Those tech funds in the top quartile at year-end 1998 had net inflows of $915 million in 1998, according to FRC. Those funds that were not ranked brought in $852 million.
But, tech funds in the second, third and fourth quartiles for one-year performance as of year-end 1998 had net outflows of over $1 billion in that year, according to FRC. The second quartile of funds alone, which has above average performance, had net outflows of $221 million. By comparison, growth funds in the second quartile of one-year performance as of year-end 1998 had inflows of $9.6 billion. Even below-average growth funds, those in the third quartile, had inflows of $9.5 billion.
This phenomenon may arise from the extraordinary returns of Internet-heavy tech funds like The Internet Fund, managed by Kinetics Asset Management of North Babylon. That fund returned 196 percent in 1998 - the top technology fund as measured by one-year performance. Performance in 1997 was average, at best, and so 1998 sales were modest at only $17 million. But in 1999, the fund has pulled in $107 million, based largely on its one-year performance numbers, according to Michael Evans, an analyst at FRC. The data shows just how important short-term performance is to people who invest in technology funds.
"The one-year (performance) is the key to generating some sales," Evans said.
Not that impressive numbers for both one-year and three-year performance would not help. It is just that three-year performance numbers are generally not as outstanding for technology funds.
For instance, the best performing fund according to its three-year performance numbers at year-end 1998 was the Dresdner RCM Global Technology Fund with a 37 percent return. That fund had very modest inflows during 1998, Evans said. But as a whole, the top quartile of funds, based on three-year performance, had outflows of $67 million in 1998.
The average for that group of funds was hit particularly hard by the short-term performance of one fund, the Fidelity Select Electronics Portfolio. That fund had a three-year return of 51 percent, but in the fourth quarter of 1997, it lost 22 percent. As a result, the fund had net outflows of $520 million in 1998 after net inflows of $657 million in 1997.
"That (the fourth quarter loss) might have scared people away," Evans said.
The fund has since rebounded, and has attracted $123 million in 1999 so far, according to FRC.
Clearly, the key to marketing technology fund sales is performance, according to an FRC report. Fund companies must "shoot the lights out" when they start their fund in order to generate impressive sales. The numbers indicate that investors in these funds have little patience for anything other than spectacular returns.