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Tech Futures: July 16, 1999 By Michael Volker Technology Portfolio to get you started, Pivotal's IPO, VCP Update  A Technology Portfolio  A friend called me recently to ask me if I had any suggestions as to how he might invest some of his RRSP money in BC technology stocks. He's been following the T-Net20 index and noted that it had more than doubled (actually 2.5 times) in a year and a half and was wondering how he might emulate the index's performance. Similarly, a few investment dealers have also expressed an interest in forming a mutual fund which mirrors the T-Net20. The index, which was pegged at 1000 on Jan 1, 1998 now stands at 2468.  Because the T-Net20 is market cap weighted, not price weighted as many indexes, it is actually a very good proxy for structuring an investment portfolio comprising 20 stocks. It would be ideal for those who would invest more than $100K in such a pool, like some institutional funds or well heeled private investors, for example. But, in the absence of any small mutual funds, how could one invest a smaller amount, say $10K or $25K in such a way as to represent an investment in BC's technology sector?  One reason why the T-Net20 may not be an ideal proxy for the industry is that it may be skewed by one or two dominant companies. Recently, in fact just today, this fact has been borne out by PMC Sierra Inc. Eighteen months ago, PMC was trading at US$31 and today it is trading at US$84. And, this is an increase of U$14 in just one day (due largely to "buy" recommendations by various investment houses). The one day increase in the value of PMC raised the T-Net20 index by 217 points. Furthermore, PMC now represents almost one half the value of the top 20. As other companies follow PMC's lead, hopefully PMC's dominance in the index will decrease.  Students and others often ask me how to get invested in this sector in a modest way. Which stocks are attractive from the perspective of providing a healthy return while at the same time not being too nascent?  To address some of these questions, I thought it would be fun to put together a couple of portfolios and use them as workable examples which we can track over time. Readers can use these as presented or make their own modifications to reflect their own preferences. In creating such portfolios, the real challenge is often figuring out when to sell a particular stock and replace it with another. In the T-Net20, for example, we have an "algorithm" for doing this. The rule that we follow is simply to invest in the top 20 companies, ranked by their valuations, i.e. market capitalizations, and to invest pro rata to these market caps. We review this "portfolio" every month and add new companies to the list whose valuations have increased while deleting those whose valuations have decreased on a relative basis. This adjustment assures that we are always invested in the top group. And, it tells us when to sell a stock (i.e. when it drops off the index).  Presently the total market cap for the top 20 companies is approximately $16.6 billion. PMC, whose value is C$7.9 billion, would thus account for 47.5% of our portfolio while QLT Phototherapeutics with a market cap of $2.4 billion would represent 14.4% and Burnt Sand Solutions (one of my favorite emerging firms) with a market cap of $72 million would account for only 0.4%. Hence, to approximate the T-Net20, an investor would only need to buy the top few (e.g. 4 or 5) companies on the list. This could be one such portfolio.  Another portfolio could consist of a sampling from the T-Net20 list as well as some selections from the T-Net list of public companies. There are some 100 publicly traded BC technology firms. The following table is an example of this. Although I prefer to invest in the smaller emerging companies, I've sprinkled the list with a few larger ones as well. This is done to provide some balance between the more mature, theoretically less risky, firms and the emerging higher risk companies. I've based this on having about $25,000 to invest spread out over 10 companies. You should be able to use margin to achieve this with a lower amount of capital or you can scale and modify according to your own preferences. Let's see what happens!  Sample "Starter" BC Technology Portfolio: Company Symbol # Shares Price $ Invested Sierra Wireless Inc SW.TO 200 13.00 2600 A.L.I. Technologies Inc. ALT.TO 300 9.60 2880 Sideware Systems Inc SYD.V 1000 3.18 3180 Burnt Sand Solutions Inc BRT.TO 1500 1.95 2925 Inflazyme Pharmaceuticals Ltd  IZP.V 1500 1.35 2025 Spectrum Signal Processing Inc SSY.TO 400 7.00 2800 Avcorp Industries Inc AVP.TO 1000 2.00 2000 Pacific Insight Electronics PIH.V 1000 2.81 2810 Marine Bioproducts International Corp MBP.V 2000 0.90 1800 Avcan Global Systems Inc. ACN.V 2000 1.10 2200 TOTAL PORTFOLIO VALUE       $25,220 I'll update this periodically, doing a little buying and selling along the way. Perhaps I'll add a super speculative portfolio as well just for a more thrilling roller coaster ride.    Pivotal's IPO Pivotal Corporation of North Vancouver has, as hinted in earlier columns, filed its first public offering of shares. Pivotal proposes to offer 3,500,000 common shares at a price between US$12.00 and US$14.00 US per share, i.e. approximately C$67 million. The preliminary prospectus (all 124 pages of it), filed on July 14th, can be retrieved from SEDAR (http://www.sedar.com).  It looks like Pivotal is heading straight for the American NASDAQ market and has applied for the ticker symbol, "PVTL". Based on 19.5 million shares outstanding after the offering, this puts a market value of C$375 million on the company - not bad for a company doing US$25 million in sales (for the year ended June, 1999). Gross margins are running around 85% but the company is still reporting some red ink on its bottom line (reporting a recent loss of US$2.8 million). At this valuation, local early stage investors like Ventures West Management and Bank of Montreal Capital Corp. ought to do well when they cash in.  Pivotal Corporation is a provider of customer relationship management solutions that enable businesses to increase revenues by more effectively managing their interactions with customers and partners in the selling process. The company's "360 degree Customer Relationship Management" solution includes corporate network- and Internet based applications supported by an array of professional services and the company's global network of partners called the Pivotal Alliance. This includes the company's Pivotal Relationship software product which automates and unifies the internal sales, marketing and customer service functions within a business, and the company's recently introduced Internet application, Pivotal eRelationship which simplifies the collaboration and sharing of information with customers and partners that are external to the business.  What I find impressive about Pivotal is that it started out as Pen Magic Software and its original business plan, like those of many technology ventures, called for a completely different future than what has transpired. This gives credence to my claim that it is the people behind a company that can make it or break it - not the technology. In this case, management was able to shape the company by pursuing new opportunities and capitalizing on them.  If you'd like to get in on the action, the common shares will be offered by an underwriting group managed by Merrill Lynch & Co. and by Bear, Stearns & Co. Inc. and Dain Rauscher Wessels. There's an information line you can call at (604) 904-5303. (That's a nice touch!)  In case you're wondering about the status of CREO Products Inc.'s IPO, the company filed an amended preliminary prospectus (on SEDAR) dated July 1st. Hence, it looks like it will still be another month or two before CREO starts to trade.  In other company news, Spectrum Signal Processing Inc (TSE:SSY) of Burnaby deserves some recognition for a superb comeback. Just weeks ago, Spectrum was trading in the $2 range and was even bumped off the T-Net20. Due to company CEO Barry Jinks' knuckling down and focusing on new business deals, Spectrum is now trading in the $7 area.  VCP Update Xenex Innovations Ltd.(VSE:XX), mentioned in the previous update has started trading and is off to an impressive start currently hovering in the $1.20 range. Offered at $.20, it has been trading in the $0.42 to $1.25 range.  Of the other recent in-progress IPOs, Darwin Capital Corp (VSE:DWN) has not yet started trading although it has been conditionally listed. Similarly, Ceduna Capital Corp (VSE:CUN), has been conditionally listed and is expected to trade shortly.  Castle Bay Enterprises Ltd (VSE:CAY) has started trading and is presently in the $0.40 to $0.50 range.  Check our Venture Capital Pools chart for a complete updated list all the VSE's VCP companies. To date, only two of the 23 VCP's that have issued a prospectus have completed their "qualifying transaction" (QT) thereby removing their VCP status.  Michael Volker is the Director of the University/Industry Liaison Office at Simon Fraser University, Chairman of the Vancouver Enterprise Forum, and a technology entrepreneur. He owns shares in many of the companies he writes about. Contact: mike@risktaker.com.  Copyright, 1999.  What Do You Think? Talk Back To Mike Volker Tech Futures is a bi-weekly column that focusses attention on new and emerging BC publicly listed technology companies. Mike Volker is the Director of the University/Industry Liaison Office at Simon Fraser University, Chairman of the Vancouver Enterprise Forum, and a technology entrepreneur. He owns shares in many of the companies he writes about. Contact: mike@risktaker.com Tech Futures Archive T-Net 20 High Tech Stock Index