SMARTMONEY.COM: Investing Isn't Rocket Science
By DAWN SMITH
October 3, 2000
NEW YORK -- If the crash of '87 didn't put scientist John Gipson off investing, probably nothing will.
Thirteen years ago, Gipson, then employed as a scientific consultant, was in negotiations with Salomon Brothers, discussing the possibility of working for the firm as a quantitative analyst. The talks were cut short, though, on Oct. 19, 1987 - Black Monday, when the Dow Jones Industrial Average plunged 22.6%. Gipson remained in science, eventually signing on with NASA, where he studied variations in the Earth's rotation.
But that brief brush with Wall Street ignited his interest in investing, and more than a decade later, he again headed for the financial fold, quant model in hand. At 45 years old, he's one of two managers of the Alpha Analytics Digital Future fund (sorry, no snapshot available). Launched in late December 1999, the fund is up 33.91% year-to-date, which makes it the third-best-performing technology fund in 2000, according to Morningstar. Ahead of it are two funds from better-known families: Pimco Global Innovation fund (PAIVX) and Red Oak Technology Select fund (ROGSX).
In many ways, Gipson seems an unlikely fund manager. Although he enjoyed managing his own portfolio in the early 1990s, it wasn't until 1997 that he developed his quant formula - at the request of his brother Reg, an attorney, now president of Alpha Analytics Investment Group. Using daily information from Standard & Poor's Compustat database, the model combines approximately 70 factors to rank and weight stocks, then discards the bottom 25%. "One of my colleagues asked me if I missed doing science," says Gipson. "I said, 'No, I'm still doing science. It's just a different kind.'"
The unquant half of the fund's management duo is 35-year-old Michael D. Cohen, a technology analyst, who selects the stocks to be subjected to Gipson's computer model. "Mike has to like them, and the model has to like them," says Gipson of the fund's holdings. "To me," he adds, referring to the stocks' tickers, "they're just symbols."
Gipson and his computer crunch numbers in Silver Spring, Md., but Cohen meets face to face with executives from current and prospective holdings in Silicon Valley. A month ago, seeking "an environment that lives and breathes tech," Cohen relocated from Los Angeles to Pleasanton, Calif. He keeps an eye on some 200 companies, but develops an "inner circle" of 50 that he regularly submits to Gipson for scrutiny. The system: Cohen looks for stocks with good prospects over the long term - at least two years - and Gipson screens them for short-term tactical merit. His computer model analyzes nine to 12 months of past performance and fundamentals in order to forecast what a stock will do next month, Gipson says.
Cohen seeks out technology sectors that promise future earnings. He describes Digital Future as a "hypergrowth fund," and says he networks intensively in his quest to find fast growers that will surprise the market. The company that is expected to boost earnings by 20% but surges 50% is the company for him - not the one that meets estimates.
Among the fund's best performers so far is optical-component-equipment manufacturer Newport (NEWP), which the fund began buying in first-quarter 2000. Cohen says he first proposed the stock because one of its customers, JDS Uniphase (JDSU), was planning to ramp up production. The fund's split-adjusted average cost is $28.19; the stock recently traded at $163.63.
Another favorite is chip-technology company Rambus (RMBS). In the near term, Cohen sees the stock trading largely on news related to its various legal entanglements. Long term, he expects the product price for RDRAMs - DRAM chips using Rambus technology - to drop and market share to increase. He also expects Rambus to settle the patent-related lawsuits out of court, though he says the company's fight with chip maker Micron Technology (MU) will be "the nastiest battle." The fund purchased Rambus at a split-adjusted average cost of $19.60, and it recently traded at $83.
Cohen's stock-picking skills have clearly been good for the fund - at least as evidenced by the failure of the company's pure quant fund. In July, it liquidated the Alpha Analytics Small Cap Quant fund, which was launched in December 1998 alongside the Alpha Analytics Value fund (sorry, no snapshot available). Assets were few, and the fund lost 16.68% over its lifetime, compared with an 18.07% gain for the average small-cap blend fund, according to Morningstar. Gipson says he recommended shutting the fund, which employed a quant model similar to Digital Future's, since the other two portfolios were thriving. (The Alpha Analytics Value fund, managed by Brian Barish without a heavy quant component, is up 8.31% year-to-date, which puts it among the top 16% of all large-value funds, according to Morningstar. It ranked among the top 1% of its category in 1999.) "The feeling was that it would have been hard to overcome the record," says Gipson, but he adds, "We hope to bring out another [pure] quant fund sometime."
At the moment, Alpha's Digital Future and Value funds are small - $5 million each - though they're attractive, given their no-load status and expense ratios of 1.3%. The minimum investment is $5,000. Company employees, says Gipson, are heavily invested in the funds: He has divided his entire personal nest egg between the two, while Cohen has 95% of his money in Digital Future.
The only manager not invested is the computer.
For more information and analysis of companies and mutual funds, visit SmartMoney.com at smartmoney.com |
