Not many managers of stock mutual funds had a good 2002. Even many of the top-performing funds for the fourth quarter declined sharply for the year.
Managers of three of those funds talked about what drove their returns in the fourth quarter and what they expect for the stock market this year.
PHOTO: NY TIMES
For investors in technology, the fourth-quarter rally closed the circle on a very long haul, said Steven F. Crowley, 39, who manages the US$239 million Kopp Emerging Growth fund with Sally A. Anderson, 60, and LeRoy C. Kopp, 68. The fund took fifth place for the quarter with a return of 21.3 percent, but it fell 51.7 percent for the year.
"Investors have swung from thinking in 2000 that technology companies were the ultimate secular growth story to not even believing that they could be cyclical growth stories," Crowley said. "The fourth quarter has demonstrated to some folks that these stocks can go up."
Kopp Emerging Growth holds about 70 stocks with a median market capitalization of about $250 million. Roughly 65 percent of its assets are in technology stocks, compared with 16 percent for the Russell 2000.
The managers adhere to a buy-and-hold philosophy, and the fund's turnover averages 20 percent a year, compared with 129 percent, on average, for small growth funds, according to Morningstar.
Nine of the fund's stocks more than doubled in price in the quarter, Crowley said. Among the biggest winners were Vitesse Semiconductor, which more than tripled. Vitesse supplies high-performance integrated circuits, mostly to systems manufacturers in the fiber optic communications industry.
"We think that much of the value added in the communications hardware business is moving to the chip level," he said. "This stock had been deeply oversold, but investors have realized that the company is solid, and it's a good growth business."
The fund also made money with Vastera, a company in Dulles, Virginia, that develops international trade management software and services. The stock rose 163 percent. "It's another rebound story," Crowley said, adding, "International trade is a bigger and bigger part of the global economy, and the company is continuing to expand its footprint to Latin America in Europe."
Rational Software, up 140 percent, is another long-term growth story, he said. Based in Cupertino, Califoernia, it provides tools to develop and test software by geographically dispersed development teams, Crowley said. IBM announced a cash acquisition of Rational for US$10.50 a share late last year; the transaction is expected to close in the next 30 days, he said.
Crowley looks forward to a better 2003.
"We expect these companies to re-establish themselves as growth stories," he said, "and rebuild their credibility with investors who had largely discarded them."
Technology also drove the returns of the US$114 million Legg Mason Focus Trust. For the quarter, it was in fourth place over all with a return of 21.4 percent, but it declined 9.1 percent for the year.
Its manager, Robert G. Hagstrom, 46, makes big bets on a small number of stocks; the fund holds no more than 20.
"We were willing to add risk when many high-quality technology and telecommunications companies were mercilessly sold off during July and October," he said.
One of his biggest winners was Nokia, the Finnish cell phone giant. Its American depository receipts rose 17 percent in the quarter.
"It's a big global leader in an economy-of-scale business," Hagstrom said. "More people are able to afford cell phones, and the models are carrying more and more features."
He also made money on the ADRs of the Vodafone Group of Britain, up 41 percent. Vodafone is one of the world's biggest wireless providers based on the number of subscribers.
"In technology and telecommunications, the biggest players are the winners because they have the ability to negotiate good deals with customers and suppliers," he said.
He said that he expected Vodafone and Nokia to gain significant numbers of customers, especially among 12-to-18-year-olds.
The fund's biggest holding is Nextel Communications. "The market mistakenly mispriced the security at the end of the second quarter, when it was down to about US$4 share," Hagstrom said. It ended 2002 at US$11.55.
He says he is bullish about this year.
"We recognize that some geopolitical risks need to be resolved," Hagstrom said. "After that, we believe the market will do substantially better going forward and the economy will pick up speed as companies are willing to hire more workers and increased capital spending."
The US$30 million Gabelli Blue Chip Value AAA fund took eighth place in the quarter with a return of 19.6 percent. But it fell 31.65 percent for the year.
"The stocks that led out of the third quarter were the ones that had taken it on the chin," said the fund's manager, Barbara Marcin, 45.
"Many companies were tremendously discounted because investors had a fear and loathing for any companies that they perceived to have any risk."
Marcin says she is a "core value investor."
"We look for companies with poor earnings or cash flow because of incorrect strategies or bad acquisitions that we expect to get back on their feet in the next one to three years," she added.
She also made money in Nextel, which she described as uniquely positioned among wireless companies because of its "push-to-talk" service, which essentially transforms cellphones into walkie-talkies.
Nextel is about six months to a year ahead of its competitors with that service, she said, so its earnings grew strongly in the last year while other companies' subscriber bases eroded.
Another winner was Hewlett-Packard, up 49 percent. Earnings and cash flow have steadily improved since the company's merger with Compaq last year.
"The multiple is beginning to expand as the luster comes back to Hewlett-Packard's image," she said, "as people see that Carly Fiorina is a quality CEO and the company has a lot of good products."
Marcin profited from the Sprint Group, which rose 59 percent. "It's a plain rebound story," she said, "because the company got very cheap in the third quarter."
Despite their strong fourth-quarter performance, Sprint and Hewlett-Packard were down for the year and are still undervalued, Marcin said.
Looking ahead, she says she expects the overall market to strengthen.
"There's a broad range of companies and sectors, like telecommunications and drug companies, that are trading at attractive historical multiples," she said.
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