Silicon Valley investment bankers have one burning question: What's the next move for the "technology mafia" - the dozen or so influential hedge and mutual funds that turned technology issues into Wall Street's new blue-chip stocks?
The funds could only watch as Microsoft, Dell Computer, Cisco and Intel were dragged down when the global market rout finally hit New York on the last day of August.
"It's white-knuckle time for them," says an investment banker of the secretive group who were "in the bunker, taking all the pain" during the recent sell-off. Traders say the selling was led by European investors wary of a US recession followed by US retail investors happy to lock in the lofty profits of the past three years.
Outside the circle of investment bankers and venture capitalists who court them and the institutional investors who finance them, the members of the technology mafia are not well known. They include Bowman Capital, Dawson Samberg, Integral Capital Partners, Palantir Capital, Janus Fidelity, T Rowe Price, Nicholas-Applegate, Wall Street Associates and Amerindo Investment Advisors. Some of these are run by managers who started the early tech funds at Fidelity and T Rowe Price. Dawson Samberg is run by alumni from leading technology investment bank Goldman Sachs.
Many of the funds made tremendous gains in the first six months of the year, as tech stocks, now accounting for 16% of US stock-market capitalization outperformed the broad market. Bowman Capital was rumoured to be up 70%. Others are starting to see their returns dwindle. Wall Street Associates reported on its website that one of its funds was off more than 18% in the year ended July 31. Amerindo reported that its net asset value had declined by 0.9% as of August 31.
Neither does the immediate future look too good. The tech market, under strain from mid-July, cracked on August 31 with the selling of the big-cap tech issues. "It's decision time for these guys," says a Silicon Valley banker, who notes that "the technology mafia guys have been playing a high-stakes poker game up to now, refusing to take their profits out of stocks".
As a group, these investors have been the driving force behind the high valuations of internet issues and are said to make or break IPOs. Bankers say the risk is that the funds have driven the prices of certain tech issues, especially internet stocks, too high by their strategy of "momentum investing". That strategy means "they will continue buying the stock as long as it is going up and will buy the stock of a company as long as its top-line growth is accelerating", explains one banker.
That creates a huge risk for technology issues, the one sector of the global markets that by and large had emerged unscathed from the fracas until recently. But while the pro-internet camp continues to argue that "the internet will change everything", thus justifying the high valuations, others disagree. One of the latter is Barton Biggs, managing director at Morgan Stanley Asset Management, who - probably to the chagrin of the firm's tech bankers - wrote in early August that "the big-tech names are valued at premium multiples of peak earnings even as a recession in their basic businesses looms. As for the internet stocks, the pricking of the euphoria could cause Asian-style wipe-outs."
So, will the technology mafia be forced to sell, closing the IPO market and further dragging down the tech stocks? "My view is that they're shaken but they have not capitulated," says Scott Sipprelle, who left the number-one tech banker Morgan Stanley early this year to start his own New York firm, Midtown Research Group.
But their favourite names have already been suffering. During the slow summer for the tech IPO market, when 24 out of 30 new issues had to be pulled, only internet issues were able to get out of the box. But soon the bloom was off these new internet issues, most of them trading below their offering price by September. Indeed, the universe of internet stocks is down by about 50%, says Sipprelle. Most of the technology mafia funds, he says, have been "selling to some degree or another". How much more selling is to follow?
It's not clear how highly geared some of them may be and whether selling may have been driven by margin calls - or will be in the future. At least one of the technology mafia names, Nicholas-Applegate, could find itself in that predicament. A group of Fidelity funds that markets itself to US baby-boomers, Nicholas-Applegate, also offers emerging market "growth" funds that have been hammered in the emerging-market fracas.
Moreover, many of these funds also invest in small-cap names outside the internet and the indices for such funds, such as the Russell 2000, are well into a bear market, down more than 30% for the year.
Any shifting sentiment from the technology mafia will be hardest felt in the new-issue market, which had been one of the remaining profit centres for Wall Street firms besieged by global troubles. Michelle Celarier
CORRECTIONS
In our interview with India's finance minister, Yashwant Sinha (July, page 14), we said that Moody's downgraded India to one notch above Indonesia in June. In fact Moody's lowered India's rating from Baa3 to Ba2. That is four notches above Indonesia's rating of B3.
There was an error in the Greece section of our awards for excellence, (July, page 104). Sigma Securities is not the securities arm of National Bank; it is part of the Piraeus Bank group. We meant to say that Sigma Securities is a rival to both Alpha Credit Bank and the securities arm of National Bank.