Fund Spotlight, S&P: "Roulston Emerging Growth Fund bullish on BRCM"...
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>>>Thursday November 16, 2000 (11:27 am ET)
Looking for Winners Among Fledgling Techs and Biotechs
By Palash R. Ghosh, S&P FundAdvisor
NEW YORK, Nov. 16 (Standard & Poor's) - Reflecting the red-hot market for high-tech stocks and IPOs last year, Roulston Emerging Growth Fund (ROEGX) rocketed 174.4% from its July 1999 inception through yearend. This year, in a colder market environment, the fund has risen just 2.4% through October 31, while the Russell 2000 Index, its benchmark, is down 0.5%.
Portfolio manager Howard Harpster looks for stocks that are in their post-venture-capital stage -- that is, companies that have not been public for too long -- and tries to figure out which ones are best positioned for high growth. Not surprisingly, the bulk of the fund's assets are in high-tech and biotech issues. The fund is too new to have a ranking from Standard & Poor's. Other key points:
Identified Avanex Corp (AVNX) as a potential breakthrough company in the optics industry
Plans to raise exposure to biotech stocks because new pipelines of innovative products are expected to come onstream
Avoids business-to-consumer dot-coms and PC-based companies
The Full Interview:
S&P: How big is your fund and how many stocks are in it?
HARPSTER: Our fund has about $26 million in assets, comprising about 70 stocks.
S&P: What kind of stocks are you looking for?
HARPSTER: We primarily invest in companies that have recently completed their post-venture-capital stage. Generally, these stocks have not been publicly traded for long periods of time and are usually small-caps. Through our familiarity with various venture capital firms, we select stocks that we think have the potential for above-average growth. Thus, we put a lot of emphasis on the quality and track record of the venture capitalists who originally finance these companies. We often participate in IPOs. We're looking for companies that can become market leaders in their niches. We want the Oracles and Ciscos of the future.
S&P: What are the top ten holdings in the fund?
HARPSTER: Broadcom Corp'A' (BRCM),Millennium Pharmaceuticals (MLNM, i2 Technologies (ITWO),Commerce One (CMRC),Ariba Inc (ARBA),VeriSign Inc (VRSN), CacheFlow Inc (CFLO),Avanex Corp (AVNX), Art Technology Group (ARTG),and Agile Software (AGIL). These top ten holdings account for 42.4% of the portfolio's assets.
S&P: Can you take one of your top holdings and discuss how it fits your investment philosophy?
HARPSTER: Avanex, a fiber-optics products maker, was started up by Sequoia Venture Capital Partners. They had some interesting technology and had assembled some top managers and venture capitalists to back them. We identified Avanex as a potential breakthrough company in the optics industry.
S&P: What are your sell criteria?
HARPSTER: We'll usually sell a stock when something goes wrong, like they miss a revenue target. For such early-stage companies we're initially more concerned with top-line growth, rather than the bottom-line. We want to see a rapid increase in revenue growth, something on the order of 20-30% quarter to quarter. As long as the business model looks solid, we'll stay with it. But, if a company can't establish itself in its sector, we'll get rid of it. We have relatively high annual turnover of about 200%.
S&P: Can you cite a stock you sold and why?
HARPSTER: We sold off Foundry Networks (FDRY), which makes end-to-end high-performance networking products. We determined that their growth rate, relative to their competitors, was decreasing.
Similarly, earlier this year we eliminated our stake in Gadzoox Networks (ZOOX), a manufacturer of storage-area-network equipment, when we realized they were rapidly losing market share to their main rivals, Brocade Communic Sys (BRCD) and JNI Corp (JNIC). We haven't purchased either Brocade or JNI yet because they're too expensive right now, but we think these two firms will be the dominant players in this niche.
S&P: What are the top sectors in the fund?
HARPSTER: We generally have 60% to 70% of the portfolio invested in technology, with another 15% to 20% in biotech.
S&P: What is your take on biotech?
HARPSTER: We are actually planning to increase our exposure in this sector; there are some biotech companies that will deliver some exciting products in the next few years. One of our favorites is Immunex Corp (IMNX), which has an arthritis drug in the pipeline. This is a huge market. Our other biotech holdings include Coulter Pharmaceutical (CLTR), IDEC Pharmaceuticals (IDPH), and Millennium Pharmaceuticals. People who invest in biotech firms must understand that the drug approval process is long, and this is a very volatile sector. But some biotech companies are on the verge of releasing drugs with huge potential. Keep in mind, however, that if a biotech company's drug trials fail, we eliminate it.
S&P: What areas within tech do you especially like or dislike?
HARPSTER: We're particularly optimistic about the business-to-business, or "B2B," companies that facilitate Web-based transactions between corporations. Companies save a lot of money by setting up these B2B exchanges. We bought several of the stocks that we think will become major players here, including Ariba, Commerce One, and i2 Technologies. Stocks in this sector have suffered a selloff this year, but we feel they're poised to come back strong.
We're also bullish on optical networking, as exemplified by our positions in Avanex and Broadcom.
We avoid the business-to-consumer dot-coms as well as PC-based companies. We believe the PC era is coming to an end. Three to four years from now, people will access the Internet through things like the Palm Pilot, and the demand for PCs will fall off dramatically.<<< |
