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Technology funds:The year after

March 7, 2000 was an al-time high for most equity funds. But just 52-weeks down the line, the gains have evaporated and technology-heavy funds have hit yearly lows. Yet, as historical numbers reveal, normalcy in returns should be restored

March 7, 2000 - Technology heavy equity funds are defying the law of gravity. As net asset values soar, lakhs of investors are euphoric as returns move in geometric progression. Money pours and assets multiply. Aggressive fund managers with their concentrated portfolios are the toast of the town while contrarians funds are shunned. Even as portfolios are replicated across varied risk-return products, fund managers are delightful at discovering that "magic combination" of software, telecom and media stocks. Technology stocks hit an all-time high on March 7 and so do NAVs of most funds. Three days later, Nasdaq pierces through the 5000-barrier and hits an all-time high. Has the party just started?

March 7, 2001 - Oh! What a fall it has been. Technology does not bring smiles anymore; it instead means despair. The mighty kingdom of technology stocks has been razed to the ground. And though most market pundits still a long-term success story in tech investments, the immediate aftermath of the ICE meltdown is devastating. The bulging assets of funds have been cut to size and the fund industry's growth has suddenly hit a road-bloc. Funds managers scamper for cover as gains on ICE stocks evaporate with savage intensity. Just a year down the line, funds have hit their one-year lows. The hitherto "pariah" old economy stocks are now finding favour and ratios like P/E and P/BV have rediscovered their relevance.

It is the first anniversary of the great tech run but no one wants to celebrate. There are more pressing worries ahead - a slowing US economy and a sharp cut in IT spend is bound to impact the bottomline of domestic IT majors. If IT budgets see a drastic drop, it will also hit the much "trumpeted" outsourcing to Indian companies. "The stock prices of top rung Indian software companies have come down due to the prevailing negative sentiments in the US markets. Still, they look very attractive at current levels even after factoring in slower growth rates in the short-term,'' says a cautious Sukumar at Kothari Pioneer, whose once-ballistic KP Infotech has lost 69% since March 7, 2000.

For a snapshot of losses, consider this. The average equity fund has lost an average 40 in the last one-year! And among the 77 equity funds (including sectoral schemes), there are only three gainers, including the two petro funds. While UTI Petro tops the chart with a 86% gain, UTI Software is at the bottom of the heap with a loss of 75%! The fund's NAV has plummeted from a high of Rs 49.48 to Rs 12.21. Other prominent losers include the tech heavy SBI Equity funds. The four funds (including Magnum IT) have lost an average 71%.

The Way Ahead The losses are surely steep and cannot be possibly recouped in the short-term. While the decline surely does not warrant an obituary for the fast-growth technology sector, the days of stratostrophic gains are also gone. The vaulting stock prices during the peak of early 2000 were uncanny and had to correct. So is the current slump in technology prices, which now seems to have gone to the other extreme and must recover.

It's a basic rule that governs the investment world as well - however random the movement in stock prices; they revert overtime to normal levels. While its difficult to predict the time of the comeback, it should definitely occur. While the current lows would have upset you, it is the right time to invest in a quality portfolio when NAVs are at possibly rock-bottom levels. Further, average out your costs by periodic or systematic investments - it will help bring down your aggregate cost of investment and cut losses. Last but not the least, stick (adopt, if you haven't) to the other tenet of investing - do not put all your eggs in one basket. A sectoral fund or even a sector-heavy equity scheme cannot be the core of your portfolio. Hence, diversify!

The Bottom.....
  ShortName  07/03/2000  05/03/2001  % Change
  UTI Software 49.48 12.21 -75.32
  Birla IT 40.01 10.17 -74.58
  IL&FS eCOM Fund 14.55 3.75 -74.23
  Magnum Taxgain 80.74 22.26 -72.43
  Magnum IT 54.64 15.30 -72.00
  Magnum Equity 115.41 34.27 -70.31
  Magnum Multiplier Plus 54.80 16.44 -70.01
  KP Infotech 112.30 34.80 -69.01
  Alliance New Millenium 18.45 5.72 -69.00
  Tata IT 38.69 13.00 -66.41
  Magnum Global 25.23 8.52 -66.23
  Libra Leap 51.51 18.58 -63.92
  Tata Tax Saving Fund 69.39 25.10 -63.83
  Birla Equity Plan 39.16 14.96 -61.79
  Birla Advantage 88.60 33.97 -61.66
*Adjusted for Bonus and Dividends



....And the Top
    07/03/2000  05/03/2001  % Change
  UTI Petro 9.33 17.36 86.04
  JM Basic 17.55 28.92 64.77
  UTI Pharma & Healthcare 10.66 11.15 4.60
  Alliance Basic Industries 9.53 9.24 -3.04
  KP Pharma 10.47 9.98 -4.68
  Magnum Pharma 10.53 9.87 -6.27
  Zurich India Capital Builder 12.86 11.72 -8.86
  GIC D'MAT 11.10 9.53 -14.18
  Pru ICICI FMCG 11.56 9.70 -16.09
  Magnum Contra 10.79 9.00 -16.59
  Templeton IGF 17.30 13.89 -19.72
  KP FMCG 14.34 11.42 -20.36
  GIC Fortune '94 7.71 6.04 -21.66
  Master Plus '91 28.68 22.29 -22.28
  Birla MNC 37.22 28.87 -22.43
 
*Adjusted for Bonus and Dividends