SMARTMONEY.COM: Wrestling With the Bear
By DAWN SMITH
NEW YORK -- "In a down market, it's always what you don't own that helps you more than what you do," says Doug MacKay, the 32-year-old co-manager of the Red Oak Technology Select fund (ROGSX).
Indeed, avoiding the Internet highfliers is what has helped this 22-stock technology fund maintain its lead this year. While the average tech fund has plunged 21% over the past 13 weeks, Red Oak has fallen just 14%. The fund's one-year 172.9% return still ranks in the top 2% of technology funds.
"While we thought the dot-com space was pretty interesting, it was difficult for us to come to some conclusion as to who the sustainable winners might be," says MacKay. So he and his partner, Oak Associates founder James Oelschlager, stuck to sectors that had identifiable leaders with positive earnings. Today, semiconductors, storage and optical-technology stocks constitute 75% of the fund's assets.
The bear market in tech is certainly painful to Oelschlager and MacKay, but they're not making many changes to their portfolio. In general, they are buy-and-hold investors whose 16.5% annual turnover is low, especially compared to the tech fund average of 117%. That's because they know their holdings so well, they don't necessarily drop them at the first sign of trouble. Also, the expense ratio is only 1%.
In doing their stock selection, Oelschlager and MacKay first identify the tech sectors that are expected to experience the highest revenue growth over the next three to five years. Then, they search for the leaders in each field, defined as those with sustainable competitive advantages and strong management. To find those companies, the pair visit lots of management teams and asks questions just like the venture capitalists do. Finally, softer issues come into play. "We like to ask ourselves whether it's the type of place we'd like to work," explains MacKay.
Of course, they look at the numbers, too. "We think two things matter - interest rates and earnings," says MacKay, pointing out the fund's attention to both macroeconomic and microeconomic factors. Overall, the holdings in the fund's portfolio have a three-year forward earnings growth rate of 34.6%, according to Morningstar.
What changes is MacKay making this year? He sold the fund's positions in Dell (DELL) and Gateway (GTW) due to shrinking profit margins and a slowdown in PC sales growth.
And in May, he added to his positions in Brocade Communications Systems (BRCD), Juniper Networks (JNPR), Qualcomm (QCOM) and PMC-Sierra (PMCS) - all of which are significantly down from their 52-week highs. And he added at least one new holding - optical-switching player Sycamore Networks (SCMR). The company recently acquired private optical-networking start-up Sirocco Systems, whose products for smaller networks will help Sycamore battle Cisco Systems (CSCO), another Red Oak holding.
Once Red Oak's astonishing 1999 return of 143.4% was widely published, the money came flooding in. Assets ballooned from $362 million at the end of December to $980 million by the end of March. Even though investors have suffered net losses since then, there haven't been any days of net redemptions, says MacKay, who reports that assets now stand at more than $1 billion. If Oelschlager's success at his older funds, White Oak Growth fund (WOGSX) and Pin Oak Aggressive Stock fund (POGSX) is any indicator, Red Oak's investors are right to hang on. |
