March 12, 2015

Remembering the Tech Boom

This month, fifteen years ago, signalled the end of the bull run that has come to be referred to as the dot-com boom or the tech boom by some, and the dot-com bubble or the tech bubble by others.  As the monikers suggest, it was a period that was marked by the steep and questionable rise in the share prices of technology companies.  As I see it, what happened during that phase, and what followed afterwards, has a lot to offer current investors in equity schemes to think about.  In this post, I propose to take a walk down memory lane, and share some observations.

A number of people trace the start of this boom to December 1996.  But it was two years later that the boom truly gained momentum.  And though the biggest gains were seen by investors in the shares of ICE companies (information technology, communications, and entertainment), investors in equity schemes also saw significant gains, on account of the investments made by their schemes in these companies.  Consider this: over the fifteen month period from 1 Dec 1998 till 1 March 2000, 25 equity schemes and 2 balanced schemes saw their NAVs at least triple, while another 9 equity schemes and 4 balanced schemes saw their NAVs double.  There were 8 equity schemes whose NAVs went up 5 times or more, during this period.  Leading the pack was Kothari Pioneer Infotech Fund (now, Franklin Infotech Fund), whose NAV (adjusted for bonus units) astoundingly went up over 10 times during the same period.

An industry observer with whom I was speaking recently, had this to say about the gains during that period:  “Never before, or since then, has there been such an opportunity for the masses to legitimately make so much money, in so short a time.”

While the opportunity may have been there, the fact is that when the boom took off, very few people actually had investments in any of these schemes. Most investments in these schemes happened much after their NAVs had surged.  While this may be somewhat true of any bull market, in the case of the tech boom, this was partly because the sharpness and suddenness of the rise caught most investors by surprise, and partly because of a general lack of trust in mutual funds.

To go back a bit in time, the bear market from 1994 to 1998, on account of its prolonged tenure, had tested the patience of most investors,  particularly those in mutual fund schemes.  Funds such as UTI’s Mastergain 1992 (now, UTI Equity Fund) and Morgan Stanley Growth Fund (now, HDFC Large Cap Fund) had attracted large numbers of investors, but their investment performances had left a lot to be desired. Then there was the news of CRB Mutual Fund being wound up under charges of fraud.  Lastly, and probably, most significantly, UTI’s reputation took a major dent when it announced that the reserves on its flagship scheme, US 64, were wiped out and there loomed the possibility that it might not be able to meet commitments to unitholders in the scheme. 

It was not surprising, therefore, that most investors were naysayers or skeptics when it came to mutual fund schemes.  There were very few investors for whom the conceptual merit of investing in mutual funds remained intact in spite of all of these episodes.  When the tech boom took off (quite out of the blue, within months of UTI’s announcement), it was these few investors who gained the most.  In contrast, the naysayers and skeptics were left out for most of the rally.  By the time they shed their reservations to enter these schemes, the markets were into the last few months of the boom.  Given how late they entered the boom, the vigor with which these investors pumped in money, was truly astonishing .  To give some perspective, the gross investments into equity schemes in the quarter Jan-March 2000 were more than the total gross investments made into these schemes across the previous 11 quarters.  The net investments into equity schemes in that quarter were over 13 times the total net investments across the previous 4 quarters.  Obviously, these investors had no inkling of the brutal downslide that was to follow.

Over the nineteen months that followed the bursting of the tech bubble, most equity schemes saw their NAVs fall by over 60%, with some seeing a fall of over 80%.  As would be expected, investors who put most of their money around the peak were the worst affected.  Those who preferred tech funds (or funds with an overdose of tech stocks) were much more affected than those who preferred diversified equity schemes.  The differences were all the more starker for those investors who chose to hold to their investments for longer.  For instance, if an investment in a diversified equity scheme made at the peak of the tech boom were to have been held till today, the return on such an investment (without adjusting for loads) could range from 22% p.a. to 7% p.a. (most diversified equity schemes have given a return in excess of 15% p.a. over this period, which is the equivalent of growing one’s money by over 8 times). On the other hand, if an investment in a tech fund made at the peak of the tech boom were to have been held till today, the return on such an investment (without adjusting for loads) could range from 5% p.a. to 6% p.a. That would be equivalent to just over doubling one’s money.

But what about those people who were already invested by the time the boom gained momentum?  Returns in equity schemes over the 34 months from 1 December 1998 to 1 October 2001 ranged from 51% p.a. to –24% p.a. (without adjusting for loads).  Most equity schemes had gained enough on the upside to weather the downside and generate positive returns, with 10 schemes clocking returns in excess of 20% p.a.(without adjusting for loads).  Returns in Franklin Infotech Fund (the lone tech fund over this period) were close to 18% p.a.(without adjusting for loads).  If investments in any of the diversified equity schemes were to have been held till today, the returns would vary from 32% p.a. to 11% p.a. (without adjusting for loads) with as many as 28 schemes showing returns in excess of 20% p.a. (this would be equivalent to growing one’s money by over 19 times).  If an investment made in Franklin Infotech Fund were to have been held till today, the returns would be close to 22% p.a.(without adjusting for loads).  That would be equivalent to growing one’s money by over 24 times.

Would investing through a SIP have helped?  Obviously, those investors who invested large sums at the peak of the boom would have been better off staggering those investments. It would have particularly helped in the case of schemes which fell the most.  Consider this: A one-time investment on March 1, 2000, in the worst-performing, diversified equity scheme (based on returns over the entire cycle), would have taken nearly 8 years to double in value.  A monthly SIP in that scheme for 1 year from that date would have taken less than 6 years to double in value. 

Should investors have timed their investments?  As I see it, good timing involves getting two things right: the time of exit and the time of re-entry.  Getting even one of these wrong can have a significant negative impact on one’s returns.  Given the odds against getting both right, I do not advocate such an approach.  I do, however, recommend that one rebalance one’s portfolio in line with one’s asset allocation.  Looking back, I remember that some of my clients, against my advice, did indeed try to time their exit, and re-entry.  As far as I recollect, all of them would have been better off not doing so.

I’d like to share one last observation before I close this post.  It’s about two diversified equity schemes and highlights the fickle nature of equity performance and fund manager success.  The first was a scheme that did exceedingly well during the tech boom.  It was an iconic fund, managed by a ‘star fund manager,’ as people like to say. In the last fifteen months of the boom, its NAV went up over 5 times, and by some accounts, its performance in calendar year 1999 was a world record of sorts.  In the downturn, it fell sharply, losing over 70% of its value from the peak.  In the years since the boom, its performance has been patchy.  The scheme still exists but is all but forgotten, its past glory relegated to a footnote in the annals of history.  The other scheme was one whose returns during the tech boom placed it in the bottom quartile of equity schemes.  In the downturn, its performance continued to be unexceptional.  Yet, in the years since, it has delivered spectacular returns that have caused investors to regard it as an iconic fund, and its fund manager as a legend.  For those of us who like to predict future winners among funds, the tale of these two schemes should serve as food for thought.

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