To: Gregory Mullineaux (1872 )
From: bp Sunday, Jan 30 2000 3:44PM ET
Reply # of 1903
Greg,
Lifted this article from another thread, mentions EXDS (and a couple of our other favs)...
Some Insights from a Leading Tech Fund Manager...
<<January 28, 2000 //BusinessWeek.com
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.
Q: What other technologies are you counting on?
A: We have remained with our wireless [telecom] exposure, such as Nokia (NOK),
Motorola (MOT), and Ericsson (ERICY). We added to Ericsson.
Q: What about the Internet?
A: In the fourth quarter, we increased our exposure to a lot of Internet
infrastructure companies. And that's a very loose term. Internet itself is loose
term because it is so all-encompassing, and ultimately it's going to mirror the real
world, the physical world.
Q: What stocks do you like there?
A: BEA Systems (BEAS) and Mercury Interactive (MERQ).
Q: Which do what?
A: Mercury Interactive is basically an Internet testing company. It tests the
software to make sure it runs correctly. BEA Systems is literally the operating
system of e-commerce. Most of the e-commerce engines of the world on the
Internet run on BEA software.
Q: I see.
A: Another one is Critical Path (CPTH). This is e-mail outsourcing. Another one is
Exodus Communications (EXDS). The simplistic way of describing it is to say it's
Web hosting. They're the biggest company in that field. Network Solutions, which is
domain name registration. VeriSign (VRSN), which is trusted secure transactions.
The company is trying to be the service provider that enables trusted transactions.
Q: Such as?
A: For example, you would know who Amazon is and Amazon knows who you are, and
there's no question that you're both getting who you think you're getting at both
ends of a transaction. I call this class of company Internet infrastructure because
they enable a lot of what we see that's happening.
Q: Which are less risky?
A: All of the ones that I just mentioned have better risk-reward [profiles] than
many other stocks. One [area] that I will admit to having missed in this fund is the
Aribas (ARBA) and the Commerce Ones (CMRC). They're setting up these
exchanges on the Internet, and we wonder if the physical-world players, everybody
from distributors to the Oracles and SAPs (SAP), I wonder if they're not going to
take some market share. Whereas the companies that I mentioned for the most
part really don't have physical world competitors.
Q: Really?
A: Exodus may have competitors indirectly from Qwest Communications (Q) to Intel
(INTC). But they've sort of carved out a niche. I think it's quite defensible. But if
you look at BEA, you know that the only competition they have is IBM (IBM), and
IBM is not very far along. If you look at Critical Path, I'm sure they have some
competition, but I think they're far away ahead of other folks.
Q: What else are you buying?
A: Just recently, we have decided that our semiconductor weighting was too low.
Our realization comes from the fact that we were a bit afraid that there was an
inventory accumulation going on in the fourth quarter, a fear of Y2K, and that simply
doesn't look like it's going to matter. Capacity utilization is very high, and in general
supply is the problem, not demand.
Q: So what have you purchased? KLA-Tencor (KLAC) and Applied Materials
(AMAT)?
A: Those, yes, and ASM Lithography (ASML). We feel that we are in the middle of a
multiyear semiconductor expansion cycle, and we also have 12-inch, or 300
millimeters, in front of us. This industry is going to go from [using] 200-millimeter
[silicon] wafers to 300-millimeter, and that may give us a longer cycle than we're
used to.
Q: So you're confident?
A: I'm never sure that I'm right on any given individual stock, but in a situation such
as this, I like my odds. I think that at the end of the day, somebody's going to say,
"wait a minute -- there's no problem here." If I'm wrong, it's [just] one of my 75
stocks.
Q: Do you still own Amazon? And, if so, since at the end of the day, we all eat cash
flow, what's your outlook on Amazon's when cash flow might be positive?
A: There is a fierce debate internally on Amazon. The two leaders of that debate
are Walter Price and myself.... I sold it. I'm being very candid with you -- probably
more candid that I should be. But I sold it without his blessing. We will do that from
time to time. Rarely, but we will do that. We will each do that when one person very
strongly about something and the other person feels medium-strong. The strongest
feeling prevails in the portfolio.
Q: What's the argument?
A: Well, let's take Walter's idea. He thinks that [there is] nobody but Amazon who
has the brand name, who has the mindshare, and who is trying to do the hard work to
be the next Wal-Mart (WMT) of the Internet. So this is potentially a $200 billion
market-cap company. I completely agree. I have just decided that it's going to be
pretty difficult getting there, and the patience of investors is now wearing kind of
thin. I don't think I need to own this stock for the next six months because I don't
think investors are going to put up with this continuous postponement of earnings or
cash flow for much longer. And time will tell who's right. I sold it at the beginning of
the year.
Q: So the fund doesn't hold it now?
A: Nope.
Q: Anything else?
A: We've gotten our performance over the years by being exposed to exciting
industries yet not taking a lot of company-specific risk. So I think that recipe has
stood the test of time. There are [other] recipes that may be great for a year or
two, but haven't necessarily stood the test of many, many years.
Barker covers personal finance in his weekly column, The Barker Portfolio, for
Business Week from Melbourne Beach, Fla. And he appears every Friday on
Business Week Online
EDITED BY DOUGLAS HARBRECHT _ >>
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