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Market Update

Fund Managers See Rough Ride for Tech Stocks

Fund managers such as Dave Brady, Eric McKissack, and David Lui say the market will be a roller coaster but investors should not get off.

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The volatility that has afflicted stocks, particularly those in the technology sector, in the new year should persist, several fund managers said Wednesday. But, they added, that's not necessarily a bad thing.

The Nasdaq Composite index swung wildly yesterday before finishing down a relatively modest 24 points. This was the index's second straight day of retreat. The decline, fueled by belated tax selling and nagging interest-rate fears, brought the tech-heavy index down about 6% off its all-time high and more than halfway to correction territory. Meanwhile, the Dow Jones Industrial Average recovered some of its losses from earlier in the week as investors sought refuge in blue-chip stocks.

Given tech stocks' incredible finish to 1999, managers were not surprised that the inflated sector was letting out some of its air. Stock pickers were somewhat concerned about the ramifications of rising interest rates, particularly for companies that don't expect to be profitable for a couple of years. Still, for the most part, they remain optimistic.

David Lui, manager of Strong International Stock (STISX), said that the Nasdaq's two-day 6% loss pales in comparison to its better-than-85% gain over the last year. "I really believe that this correction is, number one, helpful, and, number two, temporary," he said. "We're not talking about a crash here. We're not talking about the tech sector going into oblivion."

Lui, who had about a third of his $139 million portfolio in technology stocks as of September 30, says he is going to stick with his winners, a list that includes tech firms such as wireless-phone maker Nokia (NOK) and telecommunication-equipment supplier Nortel Networks (NT). "If you don't invest in these growth companies, where are you going to go?" Lui asked. "Are you going to feel any better if you own Bethlehem Steel (BS) as opposed to Cisco Systems (CSCO)? I don't think so."

Other managers hope the sell-off gives some long-suffering nontech issues room to breathe.

David Brady, portfolio manager for Stein Roe Young Investor (SRYIX) and Stein Roe Large Company Focus (SRLFX), was surprised that investors were punishing financial stocks so severely this week. Sure, the Federal Reserve is likely to raise interest rates by as much as 50 basis points. But, he said, that should hardly be a surprise given the Fed's recently hawkish stance and should already be priced into the market. "I would have to believe financials, at this point, would have to see some sign of life," said Brady, who sees vitality in Associates First Capital (AFS). The commercial and consumer lender is about to announce its 20th consecutive annual net earnings increase, but it is more than 51% off its 52-week high.

Eric McKissack, manager for Ariel Appreciation (CAAPX), hopes weakness in technology signals an end to the travails of value-oriented funds like his. Ariel Appreciation finished 1999 down nearly 4%. If the tech bubble continues to deflate, investors could turn their attention to cheaper fare, he said. "It's been a long time coming. I think the stage has really been set well for it."

McKissack is not changing his approach because of the sell-off, but he may take the opportunity to add to his fund's stakes in off-the-beaten-path stocks, such as rural telephone provider Centurytel (CTL) and housewares maker Newell Rubbermaid (NWL). "We're not going to chase last month's hero," he said.

Normally in a downturn, "the ideal thing is to have some cash and to add to some places that have been under some strain," said John Keeley Jr., manager of Keeley Small Cap Value (KSCVX). Things could change, but Keeley, whose fund focuses on companies in the midst of turnarounds or spin-offs, so far sees few opportunities created by the recent tech sell-off. The market's bearish turn has sent investors to the perceived safety of blue chips like IBM (IBM), he noted.

If anything, the Nasdaq's recent drops proved that tech stocks are not impervious to interest-rate fluctuations, which should give investors pause, Keeley said. McKissack noted that rising rates could erode the value of future earnings for the sector's growth stocks, especially those in the dot-com set that have no real profits yet.

Despite these concerns, nobody expects investors to stray too far from tech stocks. "It's natural to extend into the future what has happened to you in the past, and (tech stocks) have had a terrific run in that last 12 months or so," Keeley said.

Dan Culloton has a position in the following securities mentioned above: CFIMX. Find out about Morningstar’s editorial policies.