What Goes Up

When we spotlight a mutual fund each month, we pro

Illustration By Jonny Mendelsson

W. Somerset Maugham once wrote that perfection has one grave defect: It is apt to be dull. Aren't we lucky, then, that mutual funds perform imperfectly enough to be the life of the investment party. Almost every month, we spotlight a fund that has piqued our interest, and that we hope will pique yours, too. Since our crystal ball is in the shop, we had to wait until now to report how our chosen ones fared.

To ease the suspense, we'll say right up front what you probably already know: Tech stocks skyrocketed, Asia funds came back with a vengeance, and bonds bombed. Buffeted by the winds of these trends, our funds sailed through the year in similar fashion. Of the 10 funds we featured, six blew past the Standard and Poor's 500 index - which finished the year at 22% - and two of the other four hold debt, not equities. Indeed, most returns of funds we featured seem decidedly otherworldly. (See page 60 for the rundown.) All in all, it was a very good year - for our funds, and for most equity markets in general. But don't look for a carbon-copy replay of all of this next year. That would be boring.

So what's the skinny? Let's look first at technology, which in general enjoyed a fabulous year, notwithstanding the sector's inherent volatility. Everyone, not just professional money managers, wanted a piece of techno action. While many feared software during '99 (unflappable San Jose-based Firsthand Funds proceeded to build some great positions in Internet infrastructure companies), technology proved its mettle in the wake of New Year's Eve. Firsthand Managing Director Steven Witt calls the Y2-OK roll into the millennium "as great an affirmation of technology as I can imagine." Surprising to some is the fact that its Technology Value Fund doesn't own a single PC or dot-com stock. Instead, as Witt explains, the fund's stockpickers, notably company co-founder Kevin Landis, scour Silicon Valley for investments no one has ever heard of. Examples include PMC Sierra and AMCC - "huge holdings" and stellar 1999 performers that Landis picked three and two years ago, respectively.

Mutual Fund Spotlight Scorecard
Here's how the mutual funds we profiled each month during 1999 performed for the year.

The lines in the graph correspond to the colors of the funds listed in the chart below.

Net assets

(millions)

Median

Market Cap

(millions)

Expense

Ratio

Turnover 3-year

Beta

1999

Return

3-year

Return

(annualized)

5-Year

Return

(annualized)

Baron Asset, New York, NY o 800-992-2766 o Manager: Ronald Baron o Tenure: 13 years
$5,952 $2,412 1.31% 16% 1.18 16.28% 17.53% 21.78%
PIMCO Total return instl., Newport Beach, CA o 800-927-4648 o Manager: William Gross o Tenure: 13 years
$23,379 - 0.43% 154% 1.08 -0.28% 6.44% 8.62%
MFS Massachusetts Investors A, Boston, MA o 800-637-2929 o Manager: Laupheimer/Dynan o Tenure: 6 years
$8,208 $44,450 0.73% 54% 0.91 6.95% 20.09% 24.89%
Van Eck Asia Dynasty A, New York, NY o 800-826-1115 o Managers: Hulme/Semple o Tenure: 2 years
$27.5 $1,223 2.43% 122% 1.04 118.27% 14.51% 10.53%
Kobrick Capital A, Boston, MA o 800-225-7670 o Manager: Frederick Kobrick o Tenure: 2 years
$114.6 $8,950 1.75% - NA 73.21% NA NA
Undiscovered Managers Behavioral Growth, Dallas, TX o 888-242-3514 o Manager: Fuller/Stanske o Tenure: 2 years
$133.1 $4,131 1.30% 72% NA 65.67% NA NA
Eaton Vance Prime Rate Reserve, Boston, MA o 800-225-6265 o Manager: P. Swaffield/S. Page o Tenure: 4 years
$4,045 - 1.29% 56% 0.01 5.90% 6.59% 6.94%
Firsthand Technology Value, San Jose, CA o 408-294-2200 o Manager: Kevin M. Landis oTenure: 6 years
$884.9 $5,708 1.95% 126% 1.66 190.40% 56.39% 58.15%
Thornburg Value A, Santa Fe, NM o 800-847-0200 o Manager: William V. Fries o Tenure: 5 years
$438.4 $15,111 1.61% 100% 1.05 37.44% 30.97% NA
Excelsior Optimum Growth, New York, NY o 800-446-1012 o Manager: Michael Shields, et al o Tenure: 4 years
$21.0 $133,390 1.05% 22% 1.27 44.47% 46.83% NA

"It's not who's going to win the front end, like Amazon, Yahoo!, and eBay," says Witt, "but that regardless of who does, we know there's going to be an increase in traffic. That story has not only played out during 1999 but has a long way to go." In terms of year 2000, Witt in no way expects a repeat performance of 1999. "We know this year and next, tech stocks will go up and down, but over the long haul we're confident they'll be more up than down."

In Asia, the cloud that descended in the summer of 1997 and began lifting in August a year later resulted in a bounce-back far stronger than some expected, as evidenced by Van Eck Asia Dynasty's 1999 return, compliments of the fund's ability to capitalize on that uncertainty. "Our good performance is due to the power of our convictions as to what shape and form recovery was taking in Asia," notes portfolio manager David Semple, who took over from Gary Greenberg, whom we interviewed for our May issue. "We remained steadfast even when things looked a bit rough."

The strategy? Refrain from buying utilities, spend little time on asset allocation, and concentrate on growth-oriented stocks. The fund's main performers, as elsewhere around the globe, were technology and telecom, in which Dynasty took an outsized position that was to pay off handsomely.

The growth trend in Asia markets, and for the Dynasty fund, is just beginning, says Semple, although he'd be very surprised if his fund were to post another 118% return. Still, he expects another very good year. He admits that Asia shares may be having things too good too soon, but that the fundamentals underlying developments in Asia will definitely shine through any short-term volatility.

"The point is that structural changes that are being put into place now will drive the return on equity even further than it was in the past," says Semple. "Typically, these Asian companies would be earning 10% to 13% on equity, compared with a norm stateside of 25% to 27% or so. I think Asian companies can move up toward that, and therefore surprise people on the upside with earnings. What we have are structural changes in the context of a strong cyclical recovery, and that's a very powerful story."

That the bond market bombed out, with prices dropping and yields rising since early October 1998, is a reality that PIMCo Funds Chairman Brent Harris doesn't sidestep. "From an absolute return standpoint, 1999 was the worst year since 1994, the last bear market in bonds," he states. The company's Total Return Institutional fund did manage to best the Lehman Aggregate by 60 basis points or so, which Harris terms "nice in a defensive year when you're trying to hold onto your assets." Factors aiding the bond decline during '99 included stronger GDP growth, some uptake off the lows of inflation, and the fact that investors were piling pell-mell into equities. Looking ahead, Harris believes some of these negative factors will moderate, and that the environment will be much better than in the past 13 months. Overall market growth, though not recessionary, will slow from recent peak levels. He believes the technology mania will cool and that the Federal Reserve will keep things in check with some increases in short-term rates. All this should help the bond market trade back to its range, which Harris has forecast to be 4.5% to 6.5% during the next three to five years. "We are unlikely to see a return to the double-digit bond returns of 1995, following the 1994 sell-off, but we expect to post some solid returns during 2000," Harris says.

At present, the strongest area of the bond market is mortgages, Harris says. "The current spread is quite attractive relative to Treasuries, and you don't have to give up on credit quality, which is of some concern if the economy moves downward."

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