Optic Fund Seeks U.S. Partner

As the technology markets roar forward, fiber-optic components and systems are leading the way. And that's what is frustrating the founders of the PEH Fiber Optics Fund, a fund managed by Internet Asset Management AG, that was profiled here several months ago (see A Stock Fund as Pure as Light).

Why? They've recently launched the fund in Europe, where it is managed from Switzerland and traded in Luxembourg, but some archaic technology systems are making it difficult to reach customers in the United States, where investors are apparently climbing over themselves to get into a fund that exclusively focuses on fiber-optic technology.

"U.S. Brokers have computer systems that only allow them to place orders for U.S. funds (has ticker symbol, etc.)," wrote Mark Morris, a manager of the fund, in an email on Friday. "So that's our problem. Simple but impossible to overcome. We have U.S. clients dying to buy our fund ('Where do I mail my cheque PLEASE!')." Having a fiber-optics mutual fund is handy for many investors, because the high prices of many of the larger players make it difficult to build a diverse portfolio of the leading fiber-optic companies.

The PEH Fund was built on a list of the well-known names in the industry, with the top holdings initially including Ciena Corp. (Nasdaq: CIEN), MRV Communications Inc. (Nasdaq: MRVC), and SDL Corp. (Nasdaq: SDLI). Other large positions have included Adept Technology Inc. (Nasdaq: ADTK), Alcatel SA (NYSE: ALA), Bookham Technology PLC (LSE: BHM; Nasdaq: BKHM), Corning Inc. (NYSE: GLW), Extreme Networks Inc. (Nasdaq: EXTR), JDS Uniphase Inc. (Nasdaq: JDSU), Newport Corp. (Nasdaq: NEWP), SDL Corp. (Nasdaq: SDLI), Sycamore Networks Inc. (Nasdaq: SCMR), and Vitesse Semiconductor Corp. (Nasdaq: VTSS).

Fund managers Morris and Dale Baker say they actively manage the portfolio based on fiber-optic technology trends.

"The biggest problem for most companies is getting enough components to fill their orders," emailed Baker. "We don't own Lucent Technologies Inc. (NYSE: LU) because management has not executed in this competitive environment. The component companies are selling everything they can make.

The fund recently made some adjustments to their holdings, beefing up on Ciena and trimming some of their position in Sycamore.

"We cut SCMR from 8% to 3.5% because I don't like the fact that SCMR is 85% dependant on Williams," writes Morris. Sycamore's recent setback on the ODSI standards front (see Sycamore in Standards Setback) was also a factor, he said.

The two managers, however, have an optimistic outlook on the sector and say the high valuations are warranted in many cases.

"Our overall market call is bullish for the fall now that the Fed seems to be done and tech stocks have stabilized following the March runup and sharp selloff," says Baker, comanager of the fund.

Baker divides the players into "Gorillas" such as Alcatel, Nortel, Ciena, JDSU, and Corning, and "interesting second-tier" players such as Newport, Redback Networks Inc. (Nasdaq: RBAK), and Juniper Networks Inc. (Nasdaq: JNPR). He also likes International Fibercom (Nasdaq: IFCI), which he calls a "bright" stock with a lot of potential.

Baker is adamant about the fact that fiber-optics sector is not a bubble but, rather, an infrastructure conversion that will last five to ten years.

"It's important to note that many [fiber optic] companies are profitable or headed that way as revenues ramp up. These are NOT Amazon plays where companies lose more and more money trying to build market share."

The PEH Fiber Optics Web site, expected to go live in one week, will be at http://www.i-am-funds.com and will service customers who hold a European bank account. In the meantime, Morris says the fund is continuing to look for a U.S. partner that will enable it to sell the fund through a U.S. broker.

-- R. Scott Raynovich, Light Reading http://www.lightreading.com

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