From an interview with Huachen Chen, manager of the stellar-performing Dresdner RCM Global Technology Fund. Does anyone know: does Furukawa still hold 20 percent of JDSU?
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Tech-Stock Insights from a Tech-Stock Champ
Huachen Chen co-manages the fund with the best record over the past four years. Here's what he thinks now
No way around it, tech stocks are expensive. But Huachen Chen, co-manager of the Dresdner RCM Global Technology Fund (DRGTX), thinks surging demand for tech products and services give some select stocks plenty of room for future growth.
I'm always dubious of pricey stocks myself, but Chen is worth listening to: He and co-manager Walter Price Jr. have guided their no-load fund to the single-highest return over the past four years of any fund in Morningstar's database -- 64.5%. This year through Jan. 26, the fund is up 8.7%. Better yet, to my mind, is that Chen and Price haven't suffered a losing year since they began running an institutional tech fund back in 1985.
Chen spoke with me by phone recently from his San Francisco office. He told me why he still sees potential for tech investors, which areas he thinks will enjoy the greatest growth, and -- intriguingly -- why he dumped the fund's stake in Amazon.com (AMZN) despite Price's steadfast support of the online retailer. All that, plus a cheap way to buy shares in red-hot JDS Uniphase (JDSU), are in the edited excerpts from our discussion below:
Q: You did great last year, right?
A: We were up 183%. So, I think, to expect a repeat of that would be greedy.
Q: Your fund's assets, now around $480 million, are rising swiftly. Does it worry you that running more money may hurt performance?
A: It's a minor worry. Let me give you an example.... I just talked to Chip Morris of T. Rowe Price (PRSCX) a couple of weeks ago. He's a very good guy. He's running $17 billion now. I think we can get to a few billion without it becoming a serious problem. And the most important reason is our style. Walter and I have always run a very diversified fund. We diversify across geography, industry groups, market capitalization. And so if we got to $3 billion or $4 billion, we should have a conversation about how much it's hindering me. But right now it's not.
Q: Why not?
A: It really doesn't matter a heck of a lot what we do in Cisco (CSCO), Microsoft (MSFT), Intel (INTC), Sun Microsystems (SUNW), Oracle (ORCL). That kind of stock can absorb tremendous flows before we can possibly impact the market. We're not Fidelity.
Q: Let's talk tech.
A: I think we are faced with unprecedented, fundamental opportunity in the technology marketplace. And yet we have many stocks which are selling at unprecedented valuations. We have unprecedented valuations because we have unprecedented opportunities. Nonetheless, valuation is a potential problem that we all have to ponder, and none of us knows the answer. And so far it hasn't really mattered a whole lot. But if we're going to have a problem, that is the problem.
Q: That said, what are you buying?
A: In the fourth quarter, we actually increased our photonics, or optical, weighting.
Q: Besides fiber-optic components maker JDS Uniphase, which you've made a lot of money on, what else have you bought?
A: We went across to Japan and bought Furukawa Electric (ticker JP5801). It's got a market cap of about $9 billion, U.S.
Q: O.K.
A: And JDS Uniphase has a market cap of about $68 billion. I believe Furukawa owns about 20% of JDS still.
Q: So Furukawa owns a $13 billion stake in JDS Uniphase, but its market value is only $9 billion? Interesting.
A: That's a moving number, because they have sold some...but we knew we were getting the company for free.
Q: What does Furukawa do? Does it have any value in its own right, so that you'd want to buy it except for this arbitrage?
A: It was a boring components company, but we actually think they have a nascent optical business that may amount to something -- or maybe not.
Q: I see. What else?
A: We bought Corning (GLW).
Q: For its fiber-optic cable?
A: Right.
Q: Hasn't the market already recognized the potential in fiber-optics?
A: From a fundamental point of view, up until recently hands down the two most significant inventions other than fire, gunpowder, the wheel, and stuff like that is the invention of the transistor and the integrated circuit.... That has enabled virtually everything we know of as technology today. You wouldn't have the software industry that we have today because what would it run on?
Optics is going to make integrated circuits look tame. The amount of bits you can transmit down a pipe, a fiber-optics strand, is close to advancing at the rate of doubling every year. So we have a fundamental revolution going on, and that explains my reluctance to -- our reluctance to -- cut back in this area even though it has appreciated significantly. |
