Dreyfus fund manager interview.
He likes Dell among others.
April 27, 1999
Electronic Q&A
"Numbers Are a Result, Not a Cause"
Investment Philosophy
By LAWRENCE STRAUSS
Herskovitz's Favorite Stocks1 | Performance Snapshot | Top Holdings
To say technology stocks have been the
engine driving the rest of the market is a
truism. Mark Herskovitz, portfolio manager of
the Dreyfus Premier Technology Growth
Fund, tries to find the right ones. Launched in
October 1997, the fund has delivered big
results so far, its returns powered by
households names such as Microsoft, Intel
and Lucent Technologies. So far this year, it
has garnered a total return of about 41%, vs.
about 10% for the S&P 500, according to
Morningstar. In 1998, it returned close to
100%, putting it in the top 10% of
Morningstar's specialty-technology category.
Bullish on technology companies and their
long-term growth prospects, Herskovitz looks
for top names in the fastest-growing sectors. He holds an A.B. from The
University of Chicago, where he studied economics and history.
Barron's Online: What is your investing philosophy for the fund?
Herskovitz: I would describe it as a fundamentalist approach. I am very
focused on the fundamentals of industries and the companies. I try to identify
those parts of the technology world that I think are growing the fastest.
So I am looking at it as a business primarily and [whether] growth has what I
think is a real good chance of continuing for the long term. Because I think
much of what happens follows cycles that can be fairly extended. So the first
[questions] are top/down, trying to identify the fastest-growing sectors. Second
is to buy the best companies in those sectors: I want to own a leadership name.
And that is essentially it. Other criteria that other portfolio managers look at
may not be as important. Valuation, while always important, is not the primary
criteria. Market capitalization is not the primary criteria. Style, meaning value
[or] growth, are not the primary criteria. It is first the industry and then the
leadership position of the company in that industry.
Q: Do you do a lot of screening?
A: I am not very quantitative. The numbers are a result, not a cause. What I
like to do is spend a great deal of time trying to understand what is happening
from a business point of view [and] what the themes are -- [like the building] of
a broadband, high-speed communications network and in particular,
connecting that to residential customers. I think this is right at the very
beginning. Virtually no residential users in this country have high-speed
broadband connection to the Internet. I think it is inevitable that that happens.
So if I am right about that sort of grand theme, it has lots and lots of investment
implications.
What I try to do is find companies that fit into every part of that theme, starting
from the component level to the system level to the service provider level.
Dreyfus Premier Technolgy Growth Fund
Top Holdings (as of March 31, 1999)
Company
Ticker
1. MCI WorldCom
WCOM
2. CMGI
CMGI
3. Lucent Technologies
LU
4. Dell Computer
DELL
5. Microsoft
MSFT
6. Rambus
RMBS
7. Lexmark International
LXK
8. Cisco Systems
CSCO
9. Intel
INTC
10. SDL
SDLI
Q: With tech stocks getting so high [in valuation], is that a concern?
A: Valuation is always a concern. Has it become a much bigger concern? I
would say, "No." I think that what you want to take a look at are the growth
rates of these companies [and] their sustainability, which has to do with the
markets that they are selling into. I think if you take a look at some of the larger
tech companies like Microsoft, Cisco Systems,Dell Computer, Lucent --
whatever -- these stocks have real growth. If you compare them to the typical
S&P 500 company -- [and] if growth rates are a multiple of the S&P -- the
S&P is supposed to grow under 5% in earnings in 1999. That is selling for
what -- 26-27 times?
Q: 27 [times calendar 2000 earnings estimates.]
A: So, if I have a tech company that is a market leader, that has tons of cash
and is growing earnings at 20% or 30%, which is a multiple of the market, is it
worth a 20% premium [or] a 50% premium? To me, the answer is yes. The
other thing I would like to point out is that investors always want growth. You
just don't see on a secular basis where you are more likely to get growth -- real
growth from revenue and earnings -- than you will in technology.
Q: Do you think [small cap stocks] are going to show any signs of life in
the next year or so?
A: The weighting of markets caps in the fund is the result of the investment
process. So, in looking at market leading companies, if it is a large segment,
you will tend to have very large companies [like] telecom equipment
[companies.] If you want to own market leading companies because you think
telecom equipment is a good sector -- which I do -- you are probably going to
start off with Lucent, because it is a number one company. Same thing in
networking, with Cisco. So small cap is not an investment criteria. It is, again,
growth of the sector and the leadership position of the company.
Now the small cap companies that I do own are because they dominate what is
a fairly new sector, [which] still has the kind of growth characteristics and
sustainability that I like.
Performance Snapshot
(Total Return as of April 22, 1999)
Year to Date
1998
1 Year
Dreyfus Premier Technology
Growth Fund
41.64%
98.36%
96.99%
S&P 500
10.91%
28.58%
23.17%
Source: Morningstar
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