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Tech Funds -- Mid-Year 2002 Review

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July 3, 2002 — Here is a screen of the best- and worst-performing technology funds so far this year.

Investor sentiment in the second quarter went from bad to worse as new allegations of accounting fraud and fallout from WorldCom (WCOM) helped push the Nasdaq near its lows following the terrorist attacks last September. Higher-beta tech funds plunged 34.3% on average as of mid-year as stock prices continued to weaken. Most of the losses occurred in the second quarter.

Some of the best relative performers in this environment included, Matthews Asian Technology Fund (MATFX), which fell 7.2%, Franklin Custodian Fds:DynaTech Series/A (FKDNX), down 12.4%, and Kinetics Internet Emerging Growth Fund (WWWEX), down 17.7%. Kinetics Internet Fund (WWWFX) also made the list of the five “best” relative performing tech funds, losing 17.8%. Losses among tech funds remain severe. The worst performers are down over 50% so far this year, already having suffered steep losses in 2000 and 2001.

Matthews Asian Technology, a $15-million specialty fund that focuses on tech investing in the Asian region, was shielded, in part, by stronger domestic demand for tech products in Asia versus the U.S. The absence of U.S. tech shares in the fund has been a distinct benefit as corporate investment in both tech and telcom in this country have slowed dramatically from 1999 and early 2000 levels. The portfolio, which invests exclusively across Asia, including Japan and China, was in positive territory in the first quarter, partly aided by the anticipation of a recovery in the U.S.

Paul Matthews, chief investment officer of the Matthews Funds, still believes that the outlook for domestic demand in Asia is clearer than in the U.S. “We have gotten to the point in the lives of many of these countries where they are starting to buy significant amounts of technology, whether in consumer electronics in the form of cell phones and PCS in China or Thailand or Korea, or in more sophisticated products in the industrial sector,” notes Matthews.

Franklin Cust: DynaTech and Waddell & Reed Science & Technology Fund/Y (WSTYX) counted health care stocks among their holdings as well as high cash cushsions. Both Kinetics Internet and Kinetics Internet Emerging Growth funds, purer plays in Internet and technology investing, were better relative performers in the sector by avoiding mainstream tech firms that dragged the Nasdaq lower. The funds also hold a good cushion of cash.

“Everyone is still waiting for the earnings uptick that seems to be always one more quarter away than we saw last year,” notes Steve Tuen, co-manager of Kinetics Internet Emerging Growth. “Until the earnings really firm up, and investors are convinced we are back on the uptrend, I think it will be more of the same,” says Tuen going forward. “There is going to be a lot of hesitancy in owning the more speculative names, and that is usually technology.”

Standard & Poor’s currently recommends an underweight position in the information technology sector. While a fundamental recovery is beginning, valuations remain high for the early stage of the sector’s recovery. The group’s near-term technical outlook appears bearish. Semiconductors and semiconductor equipment are industries that are expected to be earlier movers, but the outlook is hazier for the hardware, software, and networking industries. The telecom equipment industry is likely to recover last.


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