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June 21, 1998
Learning to Live With Volatility
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By WILLIAM R. LONG
earsome volatility? Here's a pair of fund managers who have lived and breathed it for years.
Kevin Landis and Kendrick Kam founded an investment club -- the Winners' Circle -- back in
1987, venturing into the stock market just about a week before the October crash.
"We had the good sense to stay invested, and actually we capitalized some more and bought more
stock," Landis, 37, said. The club kept going for years, he said, and "in the end we all made a lot of
money."
It's a story the two portfolio managers for Firsthand Funds in San Jose, Calif., are likely to think about
these days, as technology stocks get whipsawed every which way.
The fund they co-manage, Firsthand Technology Value, which is based in San Jose, Calif., and used to
be called simply Technology Value, has posted some seriously big returns since it started in May 1994.
For example, it returned 61 percent in 1995 and an almost identical amount in 1996. Last year,
however, it badly underperformed even its beleaguered technology fund rivals with a 6.5 percent
return. The fund rebounded in this year's first quarter with a 15 percent return, only to see that nearly
wiped away in the latest technology stock reversal.
Investors should know that volatility is part of the Firsthand package. Looking at the fund's longer-term
returns, though, shows how results have leveled out to create an impressive record. Over the
three-year period ended June 12, Firsthand returned 31.1 percent, more than double the 15.5 percent
return of its rival technology funds.
The recent technology swings have not forced the managers to think about about tamer sectors. In
fact, they are so stoked that they have started three additional technology funds in the last eight
months. And Landis and Kam say they are looking for a third manager to help expand the firm's
offerings.
Whoever they tap will have to share a trait of the two managers: industry work experience and a
Rolodex of contacts. Landis and Kam contend that firsthand knowledge helps them when it comes to
picking stocks in this wild sector.
Landis worked for two years as new product marketing manager for S-MOS Systems Inc., which
makes integrated circuits.
Kam, 38, was a co-founder of Novoste Puerto Rico Inc., a maker of medical devices.
Part of the original concept for Technology Value was that technology professionals would not only
invest in the fund, but serve as industry informants to help the managers evaluate companies. And, in
fact, that has led them to some buys.
About three years ago, some of Landis' industry contacts suggested that he check out a company
called Pacific Microelectronic Center in Vancouver, British Columbia. The company makes
asynchronous transfer mode controller chips, a kind of communications semiconductor that is an
essential part of Internet hardware. "And everybody I asked said, 'yep, PMC is the right company,"'
Landis said. But it was then owned by Sierra Semiconductor, which had what he called an otherwise
"stale product portfolio" and so it did not interest him.
In August 1996, Sierra Semiconductor announced that it was discontinuing its old product lines to focus
on PMC's networking chips. The fund then began its purchasing in Sierra Semiconductor, which
changed its name to PMC-Sierra Inc.
Landis first bought PMC-Sierra stock in August 1996, when it was was trading at under $11. It closed
last week at $45.625 and a year from now, Landis said, the price "should be north of $60."
PMC-Sierra is the highly concentrated fund's biggest position, about 10 percent of assets. Other big
positions are 8.8 percent in Avant Corp., 7.2 percent in Vitesse Semiconductor Corp., and 5.9 percent
in Adaptec Inc.
Christine Benz, an equity fund analyst for Morningstar Inc. who follows Firsthand Technology Value,
said that despite the fund's spectacular run in 1995 and 1996, she had some concerns with a lack of
diversity in the portfolio, which is heavy in computer chip companies.
There's no doubt the fund's tactics can lead to major air pockets in its portfolio. Landis calls Integrated
Process Equipment Corp., which sells equipment used to plane the surfaces of semiconductor wafers
as they are being made, an "undiscovered gem."
Chip industry leaders like Intel and IBM have adopted Integrated Process technology, Landis said, and
"the mainstream is getting ready to." But, Landis concedes, he was "way too early" in buying
Integrated Process stock. He started at about $30 last summer, and the stock closed Friday at $10.25.
Both Landis and Kam emphasize that in rapidly developing technology companies, like Integrated
Process, share value often is not easy to discern from company reports. The company had a net loss of
$33.7 million on revenue of $144.7 million for the fiscal year ended June 30, although it has since turned
a profit. Landis predicts that in the next two years, the company's shares will hit $60.
One of Kam's favorite picks for Technology Value has been Arterial Vascular Engineering Inc., a
company that makes coronary stents, small devices of stainless steel mesh that cardiologists implant in
diseased arteries to hold them open after balloon angioplasty. Kam started buying Arterial Vascular on
a pre-split basis above $10 in the summer of 1996, and he kept buying as the stock dipped to $6 in early
1997.
At the time, Arterial Vascular's stent was not yet approved for sale in the United States, and
competitors were coveting its dominant position in Europe. But Kam again took advantage of contacts,
learning from from European cardiologists that none of the new stents offered medical advantages
over Arterial Vascular's, and doctors preferred to keep using a product they knew and trusted.
In 1997, Arterial Vascular got United States approval for its stint, helping the stock surge to more than
$30. Kam said he got out at an average price slightly below that. It closed Friday at $30.125. Kam says
he has begun buying it again as its valuations make it as good a buy now as it was in 1997.
"One of the principal things we believe here," Kam said, "is that the people who understand any
industry best are those that have run companies or managed successful companies in these industries." |
