Christensen's Picks:
As always, thanks tekboy!
Welcome to the world of media punditry. you just learned the first lesson: the time allotted is so short that it's practically impossible to say anything substantive. Next you'll learn that the camera adds 10 pounds--although radio might be, um, a preferable medium for you (given the tights and all).
tekboy/Ares@talkinghead.com
PS Here's what another of our gurus has to say about stockpicking, btw:
businessweek.com
When a Guru Manages Money
Author Clayton Christensen puts his theories to the test
Harvard Business School Professor Clayton Christensen is one of the rising stars of the New Economy. Futurist George Gilder, who organized a conference last summer around Christensen's ideas, has called him ''the most important business thinker in the world today.'' Christensen's best-selling 1997 book, The Innovator's Dilemma, broke new ground in explaining why big, successful companies can be toppled by upstarts with innovative products. Christensen calls these cutting-edge outfits that rise from obscurity ''disruptive technology'' companies. Think online bookseller Amazon.com (AMZN) or Cisco Systems (CSCO), whose routers and switches became the plumbing of the Internet.
What's less well-known about the modest, soft-spoken management guru is that he has turned his hand to professional stock picking--albeit not with great success so far. Based on his theories, Christensen, 48, recently launched a mutual fund with Neil Eisner, the owner of Eisner Securities, a four-year-old St. Louis brokerage firm with $1.5 billion in assets. Eisner, 62, got in touch with Christensen last year after reading The Innovator's Dilemma. The duo formed E.C. Advisors and set up the Disruptive Growth Fund, which they co-manage. The load fund is sold through brokers and financial planners.
PICKING WINNERS? Christensen has lots of experience advising managers on how to adapt to technological change. But can he pick the winning innovations of the future? It's unusual to base a mutual fund on management theory. One of the few such funds, launched last year, is AIM Dent Demographic Trends Fund, which draws on the demographic-trends research of Harry Dent Jr., an author and lecturer. Dent doesn't manage the fund, however. Instead, he provides direction to AIM portfolio managers. The Dent fund is up 14.6% this year, vs. a 2.8% gain for the Standard & Poor's 500-stock index.
Unfortunately, Christensen and Eisner, neither of whom has managed a mutual fund before, picked a terrible time to start. The Nasdaq Composite Index peaked on the fund's first day, Mar. 10, then abruptly lost 37% over the next 2 1/2 months. The fund, which has $3.8 million in assets invested chiefly in high-tech stocks, got caught in the downdraft and is off 24% since its inception. ''We stepped onto the tracks the second that the train came by,'' quips Eisner, who oversees the fund's daily operations. Adds Christensen, who has selected nearly all of the fund's 45 issues and confers weekly by phone with Eisner on holdings: ''I don't think you can draw any conclusions from the performance so far.''
PATTERNS OF SUCCESS. Christensen stresses that the Internet itself is not a disruptive technology, just a framework for innovation. He says his fund doesn't automatically invest in any company related to the Internet. Rather, he explains, his methodology provides a way to sort out technology's potential winners from the losers by focusing on ''disruptive technology'' companies that fit past patterns of success. These are companies whose innovative products ''enable a large group of less skilled people to do more things for themselves,'' he says. When desktop copiers hit the market in the 1980s, for instance, consumers no longer needed to go to copy centers and wait while technicians operated complicated Xerox machines for them.
The reason ''disruptive technology'' companies are successful, Christensen holds, is that traditional management practices make it tough for the biggest and best old-line companies to pounce on innovations. Initially, the quality of a ''disruptive technology'' product may be inferior, but its other attributes, such as low cost and convenience, cause it to catch on with a newer, broader group of customers. Established brokerage firms initially stood back and watched the online trading boom because they didn't want to cannibalize existing sales. So agile newcomers quickly moved in.
One investment area Christensen favors is the fast-growing server-appliance market. Such appliances are specialized data-storage computers that plug into servers, the powerful computers at the heart of the Internet and corporate networks. Server appliances, which sometimes handle a single function, such as e-mail, ease the burden on the general-purpose servers. In this category, Christensen likes established companies, such as Network Appliance (NTAP), EMC (EMC), and Veritas Software (VRTS). He especially favors Procom Technology (PRCM), in Santa Ana, Calif., which is the fund's largest holding. Procom's innovative storage systems, he says, fit the definition of a promising disruptive technology: They're cheaper and easier to use than similar products performing the same task. Indeed, Procom's newest storage system is so easy to use that ''you or I could install it in five minutes,'' he says.
Christensen believes Procom is likely to grab business away from EMC, a leader at the high end of the network-appliance market. So is it a contradiction for the fund to count both stocks among its top five holdings? It's a way to hedge his bets. ''Sometimes,'' he says, ''we own both the disrupter and potential disruptee.''
The fund's biggest industry concentration (24.5% of assets) is in semiconductors. Its biggest holding in the group: Broadcom, an Irvine (Calif.) designer of chips that send voice, data, and video over cable lines at high speed. Christensen especially likes Broadcom's home-networking card, which consumers can easily install in their PCs. The product lets all the computers in a household communicate with one another through a fast, broadband connection.
A few of the fund's holdings have nothing to do with the Internet, including SonoSite (SONO), a fledgling manufacturer of medical devices in Bothell, Wash. Christensen believes SonoSite's portable sonogram machine has the potential to revolutionize its market. The 5.4-pound, handheld device costs about $14,000, vs. around $250,000 for the more sophisticated machines used in hospitals. Although SonoSite's portable device isn't of the same high quality as top-of-the-line models, Christensen says doctors could use it to peer into the human body during routine office visits.
Christensen's theories have held their own in the management arena. Indeed, Intel chairman Andy Grove credits Christensen's principles with inspiring his company to pursue the chip market for sub-$1,000 PCs. But whether Christensen can make them work in the investment arena remains to be seen.
By SUSAN SCHERREIK
Disruptive Companies
The following are the top five holdings of Christensen's new fund
52-WEEK
COMPANY/SYMBOL PRICE* HIGH BUSINESS
1) PROCOM TECHNOLOGIES (PRCM):
$52.50 $89.75
Specialized data-storage computers called server appliances.
2) BROADCOM (BRCM):
261.44 261.56
Silicon chips that send voice, data, and video over cable lines.
3) VERITAS SOFTWARE (VRTS):
136.38 174.00
Data-storage management software.
4) DIGEX (DIGX):
94.00 184.00
Manages Web operations for companies.
5) EMC (EMC):
79.82 83.50
Computer data-storage systems.
* July 17
DATA: BLOOMBERG FINANCIAL MARKETS, BUSINESS WEEK |
