Microsoft warning leaves fund managers gloomy

BOSTON: US mutual fund managers, already hit by a cascade of corporate profit warnings, got a real wake-up call late Thursday when software giant Microsoft Corporation rang its own earnings alarm. Money manager comments on Friday were tinged with a fin de siecle mood as they watched Microsoft shares, among the most widely held in the nation, plunge 12 per cent on top of an already withering loss of 52 per cent for the year.

That's causing many to rethink their most basic views on technology investing. Some money managers now contemplate cutting back on the entire tech sector even more, others see opportunities in fast-growing sectors like fiber optics, which help data travel at the speed of light.

"The question with Microsoft is: 'Has the business fundamentally changed?' And, I am beginning to think it may have," said Jon Burnham, who manages the $197 million Burnham fund, a large cap growth portfolio up 5.94 per cent this year. Microsoft late Thursday became the latest tech icon to warn that the last quarter of 2000 would yield lower profits as consumer and business spending on technology fell. The rash of lowered expectations has hit virtually every sector of the economy as it slows from its rapid pace of the last few years.

"What the weakness in Microsoft is telling me is that a lot of institutional investors are bailing out of it, not so much because the warning was unexpected but because people think they may not post any growth next year," Burnham said. Burnham, who has been in financial services long enough to remember the market break of 1963, said he cut his stake in Microsoft on Friday to 50,000 shares from 75,000.

"I sold some Microsoft, about a third of our position today, because I think it might be dead money for the next year or so. That, combined with the antitrust suit, things have fundamentally changed," he said. Microsoft may be the biggest name to warn of an impending disappointment but the entire technology sector, particularly the personal computer-related area, has suffered. PC makers Dell Computer Corp., Compaq Computer Corp. and Gateway Inc. have all warned of slowing performance.

Assets in science and technology portfolios tracked by fund watcher Lipper Inc. have fallen 17 per cent to $123.4 billion in the past month due to market falls and investor redemptions. The average tech fund is down 26.82 per cent so far this year. All the major market indices are down in 2000, with the Dow Jones industrial average off 7.15 per cent, the S&P 500 down 8.73 per cent and the Nasdaq composite index lower by 32.95 per cent.

"People are saying maybe we don't want to stay in tech," said Robert Armknecht, who manages the $2 billion Galaxy Equity Growth fund. "If the ship's going to sink I'd just as soon get out now." "People are going to look around. The Internet build-out is still viable, memory may be viable, wireless - if we go to G3 - there may be a new thing, but everybody is scratching their heads," said Armknecht, whose fund, with a technology exposure of about 23 per cent, is off 2.02 per cent this year.

He declined to say whether he was a seller of Microsoft or offer specifics on investment plans, but suggested the gloomy outlook for PC-related technology could lead to some changes. "It's causing us to examine a lot of different areas of tech where we haven't been," he said. "Because the whole sector has been under pressure there may be opportunities in the optical networking area or other places."

At least one newcomer said he is steering away from the PC sector. Steve Marshman, who launched the Columbia Technology fund on November 9, said he has started with investments in non-PC-related software and genomics-related biotechnology, among other things.

"We have a very minimal exposure to PC-related stuff because we had the benefit of when we started the fund," Marshman said. His fund, with $4 million in assets, is off slightly after its first month of life. Despite the gloomy outlook, managers said there was no doubt technology would remain a cornerstone of the economy. "I think tech is the place to be," Burnham said. "It's been the place to be for many years and it's still the place to be but that doesn't mean that there won't be some changes in where you should put your money."

(C) Reuters Limited 2000.