|
|
|
|
Ask the Analyst
Nanotech and the pitfalls of specialty funds
Beware of investing in the hot new thing. Remember the Internet fund craze?
By David Kathman, Morningstar
Is there a fund that specializes in nanotech stocks? It seems that this technology is the coming thing. -- Sue S.
Nanotechnology, or the science of making and manipulating very, very tiny objects -- at the level of individual cells or molecules -- is indeed cool from a scientific perspective. It also has potential applications ranging from sunscreen to microchips, and the National Science Foundation recently estimated that the market for nanotechnology-related products could reach $1 trillion by 2015. This has, of course, caught the attention of the market; in fact, this is the second question about nanotech funds that we've received in the past couple of months.
But just because something is cool and seems like the next big thing doesn't mean it's necessarily a good investment. It's possible that nanotechnology could turn out to be the greatest thing since sliced bread, as its most fervent promoters are hoping. But the history of previous hot new technologies and the funds rushed to market to take advantage of them offers some sobering lessons for anyone tempted to jump on the latest investing bandwagon.
What the heck is nanotechnology?
Let's take a quick look at what nanotech actually is. The term refers to the creation or manipulation of objects smaller than 100 nanometers across. (A nanometer is one-billionth of a meter.) The technology is used in many different industries, most notably electronics, industrial materials and biotech, and it usually improves the performance of existing products rather than create new ones. For example, Intel (INTC, news, msgs) and Advanced Micro Devices (AMD, news, msgs) have both used nanotechnology to create smaller, denser semiconductors, and Advanced Magnetics (AVM, news, msgs) has used it to create more accurate magnetic resonance imaging scans. Flamel Technologies (FLML, news, msgs) has used nanotechnology to create an improved drug-delivery system that it licenses to big pharmaceutical companies.
To answer the original question: No, there are no mutual funds specializing in nanotech stocks, at least not yet, but it might just be a matter of time. In April of this year, Merrill Lynch rolled out a Nanotech Index ($NNZ.X) of 25 stocks (all small and micro-caps). You can't invest directly in this index, but I wouldn't be surprised if some fund company rolls out an exchange-traded fund tracking it. In addition, you can buy shares in Harris & Harris (TINY, news, msgs), a publicly traded venture-capital firm specializing in nanotech companies.
The buzz surrounding this new technology caused most nanotech stocks to do spectacularly well in 2003, when small- and micro-cap stocks in general were the market's best performers. For example, Harris & Harris gained 369% despite having virtually no revenue, let alone profits, and 13 of the other stocks in the Merrill Lynch nanotech index gained at least 100%. In 2004, however, things have cooled considerably. Nineteen of the 25 stocks in the index have lost ground so far this year, most by more than 20%, and the index itself is down 25% since its April 1 launch.
Bubble, bubble
This rise and fall is disconcertingly familiar and seems to be following the market bubble pattern set by other hot, "can't-miss" industries over the past few years. Internet stocks and fuel-cell stocks, and to a lesser extent, biotech stocks, all had eye-popping returns for a year or two, glowing research reports predicting multi-billion-dollar markets and loads of hype. All of them eventually came crashing down to earth.
Trendy mutual funds tend to appear most frequently right near the peak of a bubble. That is the worst possible time to invest because the smart money, such as it is, has already been made. Many of the purveyors of these funds are just jumping on the bandwagon and don't necessarily have any special expertise in the realm. What's more, the diversification benefits normally found in mutual funds are largely negated in such offerings.
The Internet fund craze is a case study in the pitfalls of glomming on to a trend in the hopes of making overnight riches. Internet funds sprouted like weeds between 1998 and 2000, and most of them shouldn't have existed in the first place. Those that have bitten the dust or merged into other funds include such classics as Zero Gravity Internet, Westcott Nothing But Net, Amerindo B2B, Turner B2B E-Commerce and StockJungle.com Pure Play Internet. The few survivors, such as Munder NetNet (MNNAX) and Jacob Internet (JAMFX), have been wildly volatile and destroyed lots of shareholder value. (Both the Munder and Jacob funds are Analyst Pans in Morningstar's technology category.)
Biotechnology is another field that has experienced market bubbles in the past. While some biotech funds have fared reasonably well over time, others, particularly more narrowly focused ones, have suffered from the same problems as Internet funds have. Of the dozen biotech funds that are still around, three of the oldest, Fidelity Select Biotechnology (FBIOX), Franklin Biotechnology Discovery (FBDIX) and PIMCO RCM Biotechnology (DRBNX), have more than $500 million in assets apiece. On the other hand, there's the gimmicky GenomicsFund (GENEX), formerly GenomicsFund.com, which focuses on the very narrow niche of genomics-related stocks. It lost nearly 80% of its value between 2001 and 2002, and its adviser resigned in early 2003 in favor of Robert J. Sullivan, a microcap manager with no particular expertise in biotech.
Nanotech stocks add another layer of risk, because most of them are very small. All but one of the 25 stocks in the Merrill Lynch Nanotech Index have market caps under $1 billion, and half have market caps under $250 million. Such micro-cap stocks are very risky to own under any circumstances, and most of these have still-unproven business models. Nanophase Technologies (NANX, news, msgs), for example, went public in 1997 -- one of the first nanotech companies to do so -- but it has never come close to making a profit, and its stock is currently trading below its IPO price. Of course, it's possible that one or two of these nanotech names will be hugely successful and grow to megacap size, as eBay (EBAY, news, msgs) did among Internet stocks and Genentech (DNA, news, msgs) did among biotech stocks. But there's no guarantee of that, and trying to pick out the long-term winners at this early stage is certainly a gamble.
I think it's a good thing for investors that there are no nanotech mutual funds now, because such funds would be the height of gimmickry. If any do come along eventually, I would treat them with extreme caution. Any money put into such funds should be money you're prepared to lose.
|
|
|
|
