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'02 winners, losers offer lessons

LAGGARDS: Tech funds gave new meaning to that old phrase 'the wrong place at the wrong time'

The worst performers on last year's roster of mutual funds were all heavy with tech stocks. Science and technology funds produced a 41.4-per-cent loss for 2002, but funds with the biggest drops far exceeded that.

One of the biggest science and tech losers was the $4.3-million Tera Capital Venture Fund. Established in 1996, it produced a bounty of money for unitholders when techs were flying high, returning 74.1 per cent in 1999, and 73 per cent in 2000, when it was the top science and tech fund.

But after dropping 38.7 per cent in 2001 and taking a 73.7-per-cent hit for 2002, the fund is being wound up, said Duncan Stewart, portfolio manager at Tera Capital Corp. in Toronto.

The explanation for the fund's dismal showing is relatively straightforward, Mr. Stewart said. The fund had to write off its investments in several firms including Selvagen, an early-stage biotech company in Toronto, after it burned up its capital. It also wrote off Resonance Photonics Inc., a Toronto-based fibre-optics company that also ran out of money and time, Mr. Stewart said.

There were, in fact, no winners among the 15 companies the fund held last year, he added.

Mr. Stewart said he never fell for the novel metrics of high technology, such as attempting to find value in clicks per Web site or counts of eyeballs scanning Web pages. Yet the fact is, as he said, "we are down as much as funds that did accept those measurements.

"When you buy a sector, no matter how you do it, you are on the same roller coaster. And if you are at the top of the hill, you are going for the same ride as everybody else."

The fund's pain will be felt by its unitholders -- institutions and high-net-worth individuals who were able to pony up $150,000 to get in.

Those who stayed in for the full trip will be cashed out, not because of poor performance, but because the fund had a limited life span and was due to be ended.

There are lessons in the fund's fall from grace, Mr. Stewart said.

"People should always be cautioned that when a fund like ours, a sector portfolio, declares a dividend, they should not reinvest in the same fund. 'Go somewhere else with the money,' would be our advice. That applies today to gold and oil and gas. It applies to every asset class there has ever been."

Meanwhile, among small-cap funds, Mavrix Growth Fund, a $3.6-million portfolio, was one of the poorest performers in 2002.

That was largely as a result of the growth momentum strategy followed by Mal Spooner, president and CEO of Mavrix Fund Management Inc. in Toronto. The fund had strong years, including 1999, when it was up 59.3 per cent, but it lost 7.2 per cent in 2000, 66.2 per cent in 2001 and followed that with a 52.5-per-cent loss in 2002, ranking second from the bottom in its category for the year.

Mavrix Growth had two things going against it -- a substantial weighting in industrial products, including some technology-related companies, and a style that depended on the rate of growth of earnings. When earnings grow at an increasing rate, the stock price usually follows in dramatic fashion. And the same thing happens when the rate of earnings growth turns into absolute earnings declines. The momentum style of investment hurt the fund severely, Mr. Spooner said.

Mavrix Growth's losers included Cerritos, Calif.-based Omni-Lite Industries Canada Inc., which fell to 70 cents from $2.20 over the course of the year. But there were winners, too, like Vancouver-based Rubicon Minerals Corp., which moved up 300 per cent in 2002.

Looking back at a bad year, Mr. Spooner figures that he ran the portfolio according to plan. "I would not have done anything differently," Mr. Spooner said. "For the last year, very little activity took place except on the downside for small-cap and less-followed stocks. It has gotten to the point where market price did not and does not bear any resemblance to business value. A growth manager has to understand this and not panic with the rest of the world. We won't change style because that would eliminate the potential gains from a rebound -- which is coming."

So he remains faithful to his growth momentum style. The S&P/TSX composite index should go back over 10,000 within five years and even the Nasdaq Stock Market composite index, which has suffered an average annual compound loss of 31 per cent for each of the past three calendar years, will come back within a decade, he predicted.

"We are at the cusp of sector performance and momentum is due to come back."

Even a value orientation and a nose for fundamentals did not help technology portfolios. The Caldwell Technology Fund, a $1.4-million portfolio of 80 per cent techs and 20 per cent biotechs, lost 51 per cent in 2002 in the midst of what Brendan Caldwell, portfolio manager and president of Caldwell Securities Ltd. in Toronto, called "two years of desperately serious bear markets in technology."

Caldwell Technology had the misfortune to have been launched in July, 2000, just after the Nasdaq had lost 20 per cent of its value. The fund took its cue from a sense of relative value being available in technology and opened for business. Its launch slogan was "the timing couldn't be better." The truth, of course, turned out to be that it was the wrong time to open a tech fund.

"We entered the market and focused on big names like Nortel Networks and JDS, RIM, and U.S. names like Cisco, Intel and eBay. Of those names, all fell except eBay, which has been a great success," Mr. Caldwell said.

He now believes that tech is not right for buy-and-hold investing nor for any kind of momentum management. "We want to buy techs when they are out of favour and trade them more actively," he said. He is also confident that the fund is going to have better times. "2003 can't be as bad as 2002," he said.

© 2007 The Globe and Mail. All rights reserved.

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