A significant downturn in Microsoft’s share price could have a real impact on all major US indices. David Masters takes a closer look at the consequences for funds
ALTHOUGH the Microsoft antitrust ruling has generated a great deal of speculation, it has not yet had the feared impact on the US equity market, as many professional investors maintain their positions, biding their time as events unfold.
The potential for this action to damage the broader market cannot be ignored, however. With a market cap $471bn, a significant downturn in the share price of Microsoft could have a depressing influence on all the major US indices – the S&P 500, the NASDAQ 100 and the Dow Jones Industrial Average, which could easily spark a sell off.
There is a flip-side, however. Where Microsoft stands to lose, others stand to gain. Especially companies such as Intel, AOL (who own Netscape) and Sun Microsystems. Other players, such as the recently floated Red Hat may also get a boost. Although none of these stocks on their own can rival Bill Gates’ company in terms of individual market cap, their aggregated size means that a 10% drop in Microsoft would be neutralised by an average gain of 9% in the three largest .
Microsoft is one of the most widely held stocks in fund portfolios, and the ruling comes at a time when, according to anecdotal evidence, many managers have been re-balancing their portfolios to increase the exposure to the technology sector which has really been the driving force behind the US market of late. Currently, technology stocks make up 23.5% of the S&P 500, and 34.6% of the S&P 500/Barra Growth Index. Year to date, the technology stocks in the S&P 500 have risen by 32.22%, against a 12.03% gain in the index overall. During a period when the broader market has been faltering, active managers come under even greater pressure to outperform.
While this may provide a boost to the funds’ short term performance in relation to their benchmarks, it may not serve the long-term interests of the consumers, many of whom may be holding other technology focused investments. Also, for funds with a stated “blend” or “value” style, increased allocations to technology will increase the “growth style” characteristics of the fund. Aside from the fact that the investor did not buy these funds for their growth characteristics, this deliberate style drift may be outside of the managers direct area of expertise, and will almost certainly cause over-weighting to the end investor . The obvious downside is if the antitrust ruling on Microsoft decimates that stock without the necessary rebound for its competitors. It is by no means inconceivable that many of these funds may find themselves overweight in exactly the wrong sector.
One area of the technology sector which continues to blossom, however, is the internet. Thus far this year, H&Q’s Internet Index has gained 98.04%. Already there are a number of different approaches being utilised in internet investing. Funds such as Munder: NetNet, the largest single internet fund with $3.2bn across its four asset classes, invests both directly and indirectly, picking companies such as the Gap whose e-commerce strategy has set it apart from many of its rivals. As at September 30, the fund’s top 10 holdings included AOL as its second largest holding (3.4%), with Intel and Sun Microsystems also both in the top ten with 2.7% invested in each; Microsoft does not figure in the fund’s top ten. The fund has gained 68.2% year-to-date, and 445.9% since it started pricing in September 1997.
Other funds, such as ING Internet fund take on companies directly involved in the internet world. Overall, e-commerce and internet infrastructure appear to be two of the strongest internet themes at present.
In addition to the 11 dedicated internet funds currently being marketed to US investors, another 16 have recently been filed or are currently in the filing process.
David Masters is senior fund analyst at Standard & Poor’s in New York

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