By Craig Tolliver, CBS.MarketWatch.com
NEW YORK (CBS.MW) -- Tech stocks enjoyed a slight rebound in January and Dreyfus Premier Technology Growth rode the wave.
The technology-laden Nasdaq popped 12.2 percent during the first month of the year. The PSE Technology Index /zigman2/quotes/210598455/delayed PSE -0.0073% added 12.7 percent and the CBOE Technology Index shot up 16.5 percent.
While the $1.2 billion Dreyfus fund lags benchmark technology indexes, gaining 9.3 percent, it's in line with the average technology mutual fund - the fifth best performing mutual fund category in January - earning 9.4 percent. Telecommunications funds proved the best mutual fund objective, averaging 14.3 percent for the month.
As of Thursday, Dreyfus Premier Technology Growth /zigman2/quotes/206508031/realtime DTGRX +0.80% , rated five stars by Morningstar, was off 21 percent over the last 12 months but sported an annualized return of nearly 55 percent for the three-year period.
Fund manager Mark Herskovitz runs a concentrated portfolio of 40 companies, mostly in the telecommunications and semiconductor areas. Turnover runs at 112 percent.
As of Dec. 31, top holdings included Automatic Data Processing at 3.9 percent of assets, and Brocade and Nokia, each representing 3.7 percent of assets.
Class A shares charge a front-end fee of 5.75 percent and expences run 1.14 percent. B shares have a back-end load of 4 percent and an expense ratio of 1.93 percent and level-load C shares charge 1 percent front and back with an overall expense ratio of 1.91 percent.
What do you think accounts for this rebound in technology?
I think investors are already discounting the dreadful fundamental outlook for the short term and looking ahead. Tech is not going out of business. It's not like Japanese real estate in the 80's. It's not like oil stocks after the gulf war. It's a very dynamic sector.
What is the job of a tech manger, or any sector manager, when his sector hits a slump? I get a lot of e-mail from readers complaining about their fund's performance but they seem to ignore what's happening in the market.
My job is actually pretty easy. The requirements are pretty straightforward. My job is to outperform other tech managers - whatever direction the markets going. If the market is going down, my obligation is to lose less money than other managers. If it's going up, it's to make more money. It's a very binary decision.
I've got to be invested in technology.
This is a sector that requires a long-term perspective. All stocks by their nature are volatile and this sector is more volatile than the rest of the stock market. To the extent that any good will come out of the sharp declines we had since last March, it's to remind all of us that the Nasdaq doesn't just go up and that risk and reward really continue to be directly linked. My fund was up 98 percent in 1998 and 158 percent in 1999. If you're going to have that kind of potential return, you have to be aware of the risk.
What would you say to investors who purchased in March?
One of the advantages, I think, is that all of my funds are distributed through advisors. Hopefully, the advisor said we can't time this thing. The stocks are expensive. We're buying this for the long term, three years, five years, 10 years, 20 years. Over these longer time horizons, the fundamentals for tech seem to be quite strong. We continue to believe that technology over a long period of time will grow much faster than any other part of the economy.
How do you select companies for your portfolio?
We believe that there are two very general aspects to companies that we could invest in. One is the stock market aspect and the other is the same company as an operating entity. We try to focus the majority of our effort on the operating entity.
We want to understand where real demand from technology comes from. Ten years ago it was the personal computer. We think today it's communication. What specific areas in technology will experience the highest level of demand because of that? No one's going to go out and buy a main frame computer because there's growth and demand for communication.
I'll give you a very specific example. In order for the local phone companies to offer their subscribers a high speed broad band connection to the Internet, in our opinion there is just one technology that they can use. DSL - digital subscriber line technology.
Then from a bottoms-up point of view, who has the best strategic position? The dominant company in DSL technology, from a component point of view, is a company called GlobeSpan . They are the dominant manufacturer of chipsets that equipment manufacturers will buy to make DSL equipment. That's a core holding for us.
What other technology sub-sectors are you investing in?
We stay with ten very general sectors. Software, computer hardware, data processing, networking, things like that.
The nature of technology is that there's always new sub-sectors emerging. We don't want to spend very much time reclassifying things.
Telecommunications equipment and semiconductors virtually the same size, about 18 percent (of the portfolio currently.) Then the next biggest is software at about 14.5 percent. That gives you an idea of where we're focused.
You don't currently hold the new AOL Time Warner in your portfolio, but you believe that the recent merger will have a positive impact on your portfolio.
It's not inconceivable that one of the reasons that they did this merger is so they can somehow combine programming and adapt it to the Internet. To be able to have full motion video, movies, interactive games, whatever that will work great if you have a high-speed cable modem connection or DSL connection.
Where that gets me excited is that right now the infrastructure that physically has to carry that kind of program or data simply isn't in place. So that's really good for encouraging spending by all the service providers and their suppliers to accommodate this kind of new programming.
One of our top holdings, Taiwan Semiconductor /zigman2/quotes/204359850/composite TSM +0.67% is not a direct beneficiary. It is a contract manufacturer for advanced semiconductor companies.
The way the food chain works, if you need to have a high-speed broadband connection to be able to enjoy this programming, it means there's going to be more demand for equipment made by Cisco, Nortel, and Lucent. And in order to be able to build those boxes, they have to buy these very advanced communications semiconductors, many of which are manufactured by the Taiwan Semiconductors of the world.