A Must to a Bust: Scores of Funds
Get Burned on Big Qualcomm Bets
By Ian McDonald
Senior Writer
6/15/00 7:04 PM ET
Even if you don't own Qualcomm (QCOM:Nasdaq -
news - boards), chances are you own Qualcomm,
thanks to your mutual-fund manager.
Though ill-informed and panicky amateurs are
routinely blamed for overheated run-ups, it looks like
the pros played a major role in this riches-to-rags
story.
Last year, while the maker
of technology used in
digital wireless
communications systems
was rocketing to a 2619%
return and analysts were
claiming Qualcomm to be
the next Microsoft
(MSFT:Nasdaq - news -
boards), Cisco
(CSCO:Nasdaq - news -
boards) and Intel
(INTC:Nasdaq - news -
boards) rolled into one, scores of mutual-fund
managers threw valuations to the wind and anted up.
What a difference a year makes. Today, Qualcomm's
stock fell 13% on analyst warnings about dimming
Asia prospects and Qualcomm's stake in embattled
satellite-phone concern Globalstar (GSTRF:Nasdaq
- news - boards), pushing the stock down 69% since
January. Guess who's left holding half the bag.
Mutual funds own 49% of Qualcomm's shares
outstanding, according to the latest reports compiled
by Morningstar. (As a comparison, funds own 13%
of Microsoft's shares outstanding.) Fund industry
insiders and observers acknowledge many stock-fund
managers got swept up in the Qualcomm momentum
juggernaut.
The Qualcomm case highlights many of the potential
pitfalls that trip up fund managers, not the least of
which is the "must-have" mentality. There are some
stocks that are seen as such stellar performers that
they have become must-haves, giving rise to such
money manager mantras as, "You won't get fired for
owning GE." Until Microsoft's recent antitrust
entanglements, the software titan was in the
"no-brainer" club, too. But other stocks attain
must-have status based in large part on upward
momentum, particularly for growth fund managers
fiercely competing for investor dollars. Qualcomm
last year was the quintessential example.
"The pressure on funds in the growth area was
probably tremendous to own hot telecom names like
this one," says Burt Greenwald, a Philadelphia-based
fund consultant.
Of the 177 funds that posted triple-digit returns on
1999, nearly one in five owned Qualcomm. Today one
in three large-cap growth funds own shares, and 29%
of all large-cap funds have a slice of Qualcomm.
"It's one I thought I needed to own," says Michael
Gallipo, manager of Monument Telecommunications,
who says he felt like he was late to the party when
he started by buying shares in October and late
November. Despite the skid, he's still holding on, in
part because his stake remains a slim 1% of his
portfolio.
But some resisted the temptation, and for a time
faced the ire of shareholders.
"We stayed out because of valuations, but we had a
lot of shareholders calling up and asking why we
didn't hold it," says Adrian Brass, comanager of the
Guinness-Flight Wireless World fund, which
launched Feb. 28.
One money manager offered another explanation for
the heavy mutual-fund exposure: window-dressing.
This is the fund-manager game of buying winners and
dumping losers at the end June and December -- just
ahead of mandatory semiannual portfolio reports -- so
investors would see a portfolio of well-regarded
stocks in portfolios. After the stock posted a 454%
percent return in the first half of last year, many funds
jumped on board with both feet.
"It's not insignificant that the stock's climax took
place at the end of the year," says Don Luskin,
portfolio manager of the OpenFund. "It was perfect
timing for window-dressing."
Thanks in part to a sky-high price target from a
PaineWebber analyst, the stock shot up 50% in the
last two weeks of the year.
Now, as the first-half of 2000 approaches, we might
be seeing the opposite of a feeding frenzy from
portfolio managers. Of the 10 funds Morningstar lists
as having the biggest percentage of their net assets
invested in Qualcomm, a closer look at more recent
information shows many have reduced their positions
in this stock that has little, if any, room to grow.
Hanging Up on Qualcomm
The ten funds that sold the most Qualcomm shares
in the first quarter.
Fund
Qualcomm Shares
Sold in Q1
Lord Abbett Affiliated
1,000,000
Vanguard Growth & Income
449,000
Marsico Focus
312,000
Strong Growth
300,000
Dreyfus Founders Growth
147,000
MSDW Information
120,000
Strong Large Cap Growth
120,000
ASAF Marsico Capital
Growth*
80,000
Diversified Investors Growth
& Income*
64,000
RS Contrarian
64,000
Source: Morningstar. Figures as of March 31 portfolios. *April 30
portfolios.
The $883.9 million MFS Managed Sectors fund had
10.4% of its assets invested in Qualcomm at
year-end, but by March 31 manager Toni Shimura
whittled it to 2.3%. Shimura and the firm's other
managers were meeting on Cape Cod, Mass., and
unavailable for comment, according to MFS
spokesman David Oliveri.
Calamos Growth had a 6.8% Qualcomm position at
year-end and promptly dumped it completely on Jan.
26, when it appeared the firm couldn't keep trouncing
analysts' rosy estimates.
"It was a very large position for our firm, but we got
out of the stock because of the negativity and
analyst's downgrades," says John Calamos, Jr.
Even Luskin, who gushes over the stock, has cut
down his Qualcomm stake from around 4% at its
peak last year to 1.2% today. He says analysts'
estimates left no room for error, essentially setting
the firm up to fail.
"What you're seeing today is what happens when
bad analysts happen to good stocks," he says.
Fund managers say they're generally bullish on the
company's prospects, but few say they're stepping
up to the plate to buy its still pricey shares now.
Translation: Look out below, because the stock is
still far from cheap.
"There's a whole class of tech and wireless stocks
whose valuations were absurd and now they've only
fallen to ridiculous," says Syl Marquardt, director of
research John Hancock Funds.
If you're wondering if mutual funds sellers aren't
moving the stock down, talk to Jeff Provence,
comanager of the Wireless fund.
"Fundamentally the company is fabulous and long
term it's a great company to hold," he says. Despite
the glowing review, Provence notes that the fund
dropped its Qualcomm weighting to 0.75% from 4%
in the last week of May. "It worked out real well."
If he likes the company so much, why isn't he
charging in to buy now?
"I think a lot of institutions will reduce their positions
and that will put a lot of pressure on the stock," he
says.
Keep that in mind next time you see a can't-miss
stock tumble and someone blames it on day-traders
and E*Trading grandmothers. |
