NEW YORK (Dow Jones)--FOCUSED fund managers seeking inspiration should turn to White
Oak Growth Stock (WOGSX). This 24-stock fund couldn't get any more concentrated, and its
returns couldn't be better. With a stellar 31.7% five-year average, White Oak's performance ranks
eighth out of the entire mutual fund universe, right behind such giants as Legg Mason Value Trust
(LMVTX) and Janus Twenty (JAVLX). This year co-managers Jim Oelschlager and Douglas
MacKay opened a new fund, Red Oak Technology Select (ROGSX), which is even more
concentrated. The fund holds 22 stocks right now, but has "the ability to go to 15," according to
MacKay.
That's 15 stocks in one sector. Have Oelschlager and MacKay completely thrown the concept of
diversification out the window? Not quite. White Oak has always been heavily weighted in
technology; its current position being 55.8%. (See story.) The new fund actually allows for more
diversification within the sector around a few leading names. And finding leading names is part and
parcel to Oelschlager and MacKay's investment strategy. So far so good. When we caught up with
MacKay at our New York office this Monday, his fund was up 11.8% year-to-date, a whisper
ahead of the 11.5% average for all tech funds. He talked about the future of his fund and the sector
itself.
SmartMoney.com: How has the technology sector been this year? MacKay: Volatile as always, but
strong. When we launched the fund on Dec. 31, the first thing everyone said was "Jeez, you're
launching a tech fund after the market just soared from Oct. 8 all the way up to Dec. 31. What're
you, crazy?" But we always take a long-term view, focusing out two to three years.
The current valuation in the tech sector should take care of itself so long as the growth is there and
the economic environment of declining interest rates remains intact.
SmartMoney.com: Wouldn't you think that this will be an unusual year, though, just because of
Y2K? MacKay: The good news is Y2K has been so heavily publicized everywhere that it's
sparked most companies to try to solve the problem. Microsoft (MSFT) and several other
companies have said they've seen a spike in demand because of Y2K. They've commented that
maybe we'll see a slowdown toward year end. Our view is so big picture that we truly believe this
is another Industrial Revolution and it's just in its early innings.
Sure, maybe Y2K will cause a blip in the road, but is it going to be something that's permanent?
No. SmartMoney.com: So you don't think we're in another Nifty Fifty period like the late 60s?
MacKay: There you had a period of high inflation and rising interest rates, so I think the economic
environment was different from today. In fact, most of the last 30 years have not been the norm. It's
a better parallel to look at the earlier periods, during the Industrial Revolution. In the late 1800s
declining prices occurred for years and years and years.
Industries were converging because of the new technology and because of that some companies
prospered while others were forced out of business. The same is true today. Is it going to be
Schwab (SCH) or Fidelity or Merrill Lynch (MER)? Bottom line, you don't know which company
is going to win, but you do know the consumer is going to win because of lower prices.
SmartMoney.com: Seeing how you don't know who the winner is going to be, I assume you try to
be well diversified. MacKay: Well, we're concentrated, OK, so by that definition we're not the
most diversified of funds. But there's a book called "The Gorilla Game." It's an awesome book
written by a Wall Street analyst [Geoffrey A. Moore] and consultant to the Ciscos (CSCO) of the
world. It makes the argument -- and we follow this -- that you should put a bunch of money into a
scattering of technology companies and as the winner [or top gorilla] emerges, you consolidate into
fewer holdings.
SmartMoney.com: You seem to hold mostly large companies.
MacKay: The top 10 are. The view is, in the top 10 we're owning the gorillas of today, and the
next 10 or 12 are companies that we hope may become big-time gorillas in the future. So it could
very well be that we own EMC (EMC), Network Appliance (NTAP) and Cisco for a while. But a
Cisco touches on competition with both EMC and Network Appliance in certain areas such as
network caching. So it could also be the case that we consolidate. As the winner there emerges,
we could sell something and put more of our eggs in one basket.
We have the flexibility to do that because we're a focused fund.
SmartMoney.com: What are your industry weightings? MacKay: It's fairly evenly split. PC
hardware is 10%; consulting services, 7%; semiconductors, 8%. Although we don't own any of the
dot-coms, we do believe what Sun Microsystems (SUNW) said many years ago that "the network
is the computer." That?s a unifying theme across all of our holdings. SmartMoney.com: How does
that play out in your portfolio? MacKay: Look at EMC for instance. Storage has become so
crucial because of electronic commerce that the concept of storage-area networks is coming about.
People are now networking stand-alone storage devices together. Much as you did that to share a
printer that was expensive, they're sharing storage space. In fact, most people buy a PC today to
connect to the network, not to run Excel or Word. That doesn't mean, "Why do you own
Microsoft then?" Because Microsoft has Internet Explorer. So it's also part of the 'network is the
computer" concept.
SmartMoney.com: Why don't you own any of the dot-coms then? MacKay: OK, we own a little
bit of AOL (AOL); we own a decent position in Schwab, which we view as an Internet play. And
really everything's an Internet infrastructure play here. But we don't own any of the little dot-coms
because of the valuations and because the leaders aren't defined well enough yet. That's been
changing in recent months, though, so we may be closer to buying now. SmartMoney.com: Which
of your stocks right now has the greatest prospects for 1999 and why? MacKay: I would say
EMC could see the biggest acceleration because of what I said before about storage-area
networking and electronic commerce. In its last quarter it had about a 40% growth rate in revenues
and earnings.
SmartMoney.com: Which would you say is the best bargain? MacKay: I would say 3Com
(COMS). Purely on the numbers, it looks awfully cheap, which can be very deceiving and
dangerous. [Laughter] It could be risky, but it has the leadership position in the Palm market, which
has been the fastest-growing peripheral device in history, even more so than the PC. Microsoft's
moving into that market; that is a bit of a concern. But just as we saw with Netscape, yes,
Microsoft crushed Netscape, but then AOL bought Netscape. A couple of splits later, Netscape's
done pretty well if you've held on. So there's value that can be recognized here. SmartMoney.com:
What have you been adding to most recently? MacKay: Network Appliance. And I've added to
some of the PC companies. Dell (DELL) and Gateway's (GTW) valuations have dipped lately so I
bought more.
SmartMoney.com: I've had some value managers tell me that PCs are just a commodity or a "box."
And a box is a box is a box.
Just because Dell has built a better mousetrap, doesn't mean it makes a proprietary product like
Microsoft. So do you think Dell can sustain its advantage? MacKay: I agree Dell is not a
technology company. It's a technology enabled company. But until its competitors are willing to cut
off their legs to right their situation, they're never going to be able to catch up. If you believe PC
prices will continue to fall, then the person that has the informational advantage and the least amount
of inventory will be the most successful. I mean, you go to a CompUSA (CPU) store and it's
unbelievable -- all the inventory its got sitting around. That stuff just sits there and becomes
obsolete. Direct vending is where everybody?s going and Dell's far ahead of that game.
SmartMoney.com: Tell me about some of the smaller companies in your portfolio. Which one will
be the next gorilla? MacKay: One is Uniphase (UNPH). The networks of the future are
increasingly fiber optics based. Uniphase supplies the components for the fiber-optics-transmission
market. A lot of things are going in that direction. There is even talk of semiconductors themselves
becoming fiber optics based. Another is Network Appliance, which I've already mentioned.
SmartMoney.com: What is a selling sign for you? What have you dumped recently? MacKay:
Well, we haven't sold anything in Red Oak yet, but in general we tend to have a buy-and-hold
strategy. There have only been two capital gains distributions in White Oak Growth Stock in the
past six years and they've been pretty small. We hope to take the same tack with Red Oak. |
