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High-tech rebound buoys funds

'More rational' industry has managers smiling again as firms clean up books


Science and technology mutual funds, the financial basket case for much for this decade, are on the rebound.

Many technology firms have cleaned up their books and tech shares are enjoying a modest bull run. Fund managers may not be ready to party like its 1999 but, for the first time in years, they are optimistic.

"Things look pretty good," said Stephen Kahn, manager of the Talvest Global Science and Technology Fund. The past six years have not been kind to the fund; assets under management have shrunk to about $50-million today, down from a 2000 peak of about $350-million. Nevertheless, returns are improving. For the 12 months ended March 31, the fund is up 14.6 per cent.

"It's a more mature industry . . . a little more rational. A lot of the companies that had no business model went away," Mr. Kahn said.

To the surprise of some investors, the Nasdaq Stock Market has been on an impressive run of late. Since hitting a low of 1,114.11 points in October, 2002, the tech-heavy exchange has more than doubled in value, hitting a five-year high of 2,370.88 points Wednesday. So far this year, the exchange is up 7 per cent in value.

"Performance has definitely turned around," said David O'Leary, analyst with Morningstar Canada.

A look at the long- and short-term results of 74 technology-focused mutual and segregated funds tracked by the on-line research firm shows how the sector's fortunes have shifted dramatically.

Five-year average annual returns for the period ended March 31 were punishing, thanks to the tech meltdown and a surging Canadian dollar. Only four funds posted positive returns for the period: Northwest Specialty Innovations Fund, TD Entertainment and Communications Fund, TD Nasdaq RSP Index Fund and the GGOF Global Technology Fund. In contrast, all 74 funds reported positive returns for the 12-month period ended March 31.

"There is a stigma attached to technology and it may be overblown. . . . There are opportunities to profit in this space, which hasn't been the case since 1999," Mr. O'Leary said.

Cisco Systems Inc. is a good example of how companies have matured and valuations shifted. In 2000, the shares of the U.S. computer networking giant traded at a lofty price-to-earnings ratio of 80 to 100 times. Over the past six years, the company has slashed costs, restructured operations and been opportunistic, snapping up rivals and complementary businesses at bargain-basement prices. It's a leaner company that now trades at a down-to-earth P/E ratio of about 20 times.

Good valuations across the sector prompted Jeff James, manager with Chicago's Driehaus Capital Management LLC, to double his tech exposure over the past year. The Driehaus Small Cap Growth Fund and the Driehaus Micro Cap Growth Fund held 10 per cent to 15 per cent tech stocks through much of 2004 and 2005.

Today, both funds have a more than 30-per-cent weighting in technology.

"You have stocks that are in the right areas, stocks with the right product cycle, stocks that are exceeding expectations and gaining market share. . . . It's very selective. Six or seven years ago, it didn't matter," Mr. James said.

And fortunately for potential fund investors, it's easier to separate the good from the bad. In 1999, all boats rose with the tech tide; today, there's a wider range in the performance of tech fund managers.

"If you work in a more stable environment, the results of your work are much more transparent," said Howard Sutton, president of Tera Capital Corp. The Toronto tech specialist's Tera Capital Global Innovation Fund returned a stunning 71 per cent for the 12 months ended March 31. "Good companies that perform and have good cash flows will outperform. . . . It's a healthier climate."

© 2007 The Globe and Mail. All rights reserved.

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