Boston Investor Remains Bullish on Net Stocks
By Steven Syre and Steve Bailey
Special to TheStreet.com
4/19/99 3:36 PM ET
Joe McNay has reached the point in a money manager's career where you might expect him to turn conservative.
McNay, 65, built a firm over 23 years to the point that it now manages $7 billion for institutional clients and a small group of individuals that had until recently included President Clinton. He sold a majority interest in his Essex Investment Management last year to Affiliated Managers Group (AMG:NYSE).
It's an odd profile for one of the market's most aggressive Internet-stock investors. McNay's already made a bundle on his Web portfolio, and he believes there is plenty more where that came from.
Down the street from McNay's office, a few Fidelity managers such as Magellan's Robert Stansky, Contrafund's Will Danoff and perhaps even New Millennium's Neal Miller may have more money invested in Internet stocks. But McNay's Web stocks, worth more than $1.5 billion at the end of last year, represent the kind of portfolio concentration that no Fidelity manager can match.
Essex will not discuss the results of its institutional portfolios and most of its hedge funds. But two small, offshore hedge funds operated by Essex and available only to foreign investors do publish their results.
The Essex High Technology fund, up 120% last year, gained 52.8% after expenses during the first quarter of 1999. The Permal Media and Communications fund, up 72% last year, advanced 32.6% after expenses in the first three months of this year.
McNay also shies away from detailed conversation about the Internet stocks in his portfolios, but public filings for the end of 1998 are a good indication of Essex's core Web holdings. CMGI (CMGI:Nasdaq) was by far the firm's largest single holding, worth $489 million at year-end. Amazon.com (AMZN:Nasdaq) and America Online (AOL:NYSE) were second and third.
But Essex was a net seller of most of its favorite Internet stocks during the fourth quarter. Amazon, a holding Essex bought aggressively at its initial public offering and during its first months as a public stock, was slashed by nearly two-thirds with the sale of about 2.7 million shares. Essex sold more than half its sizable Yahoo! (YHOO:Nasdaq) investment in the fourth quarter and pared positions in America Online and CMGI.
In conversations with us in late December and the following month during the Morgan Stanley Dean Witter Internet and Technology Conference, McNay was as upbeat as ever about Web opportunities in general but sounded cautious about stock valuations that were exploding at the time.
He didn't sound wary at all when we talked with him again last week. McNay said most of the Essex sales in leading positions during the fourth quarter were, at least in part, a price of their own success. Some of the stocks became too large a percentage of assets for Essex portfolios due to price appreciation.
Stock prices aside, McNay believes it is now easier to forecast the business growth of the largest Internet companies than that of traditional, big-name retailers. With the likes of America Online and Amazon.com, "you can look further out compared to Wal-Mart (WMT:NYSE)," said McNay.
Still, he agreed that some other stocks with huge price runs had been reduced. "We have continued to cut back stocks that have exceeded our expectations in the short term," he said.
McNay isn't a one-man Net band inside Essex. His son, Colin, and portfolio manager Pamela Cutrell make up a team focused on Internet stocks.
After their success with Amazon.com, it isn't surprising that the Essex managers expect many of their future Internet investments to be placed in e-commerce companies. But they speak most enthusiastically about business-to-business Internet commerce rather than retailing, looking for companies that can use the Web to cut 25% to 30% of expenses.
Colin McNay and Cutrell raved about a handful of still-private e-commerce companies that made presentations at CMGI's annual investment meeting last week. They liked companies with retail strategies like Furniture.com and health-products seller Mothernature.com, but spoke even more glowingly about Chemdex, a Web-based company that sells research materials to scientists and institutions.
Another theme: Internet infrastructure companies, particularly those that overlap with telecommunications. Colin McNay and Cutrell singled out Navinet, another company in the CMGI investment portfolio.
For Joe McNay, this surely beats the days when he was trying to make money investing in biotech stocks. Finding the right one or two companies, loading up and staying patient were not nearly as much fun as the Internet age. "Everywhere you look, there are going to be opportunities," he said.
Fidelity Fifty Goes Wired
Fidelity Fifty has been soaring, up 30% through last week, ever since John Muresianu took over as manager in January. Everyone believed the portfolio had been restocked with Internet stocks and now the proof is in.
The fund's top 10 holdings in order, as disclosed by Fidelity last week: American Online, Amazon.com, Schlumberger (SLB:NYSE), Microsoft (MSFT:Nasdaq), Yahoo!, @Home (ATHM:Nasdaq), eBay (EBAY:Nasdaq), Merrill Lynch (MER:NYSE), Sepracor (SEPR:Nasdaq) and MCI WorldCom (WCOM:Nasdaq).
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