HO HO HO! This is priceless, an interview with (j)ANUS twenty "superstar" fund manager Scott Schoezel in the Wall Stree Journal this morning! Comedic GENIUS!
online.wsj.com
Janus Twenty Fund's Schoelzel
Looks Back on Lessons Learned
Scott Schoelzel says the past three years have left him with a valuable cache of experience. He also says they've left him with less hair.
During the 1990s bull run, the manager of the $9 billion Janus Twenty Fund rode big bets on the likes of wireless titan Nokia and America Online, which then became promising media giant AOL TimeWarner. His aggressive and concentrated fund leapt up 73% in 1998 and 65% the next year, when it shuttered to new investors with a whopping $26 billion in assets.
But spreading so much money among a concentrated portfolio made it tough to move in and out of holdings. That inflexibility lead to painful losses when once-prescient picks turned poisonous. The fund averages a 29% annual loss over the past three years, trailing 85% of the nation's large-cap growth funds, according to Chicago investment researcher Morningstar Inc. Adulation has turned to derision.
Still closed to new investors, the fund's cash mounted to more than 30% of assets at one point last year, as Mr. Schoelzel had trouble finding companies he liked.
Scott Schoelzel
That said, the Twenty Fund, which he took over in August 1997, has still beaten its peers over the past five years. And two smaller sibling funds, Janus Adviser Capital Appreciation and Janus Aspen Capital Appreciation, have lost far less ground than their peers during this downturn (see article).
Though Mr. Schoelzel rarely grants interviews, he talked this week with the Online Journal about today's market, lessons learned and what he'd say to shareholders who've held on.
I had more than seven questions for Mr. Schoelzel. Read more from him on whether the Twenty Fund got too big, the state of Wall Street research, and why a growth-stock fund manager owns Level 3 Communications bonds.
1. Microsoft, ExxonMobil and Viacom were the Twenty Fund's top three holdings at the start of this year. Are you consciously striking a more diversified stance than before, when you focused more on tech, telecom and media? And what's your take on media picks like AOL TimeWarner that have hurt the fund?
It definitely is a broader stance, but I'm definitely still just looking for the best opportunities. Right now, the top four names are Microsoft, ExxonMobil, eBay and UnitedHealth Group. The common thread there has been stability and, in eBay's case, significant revenue growth. These companies have strong balance sheets and are actively buying back their own shares. Exxon and now Microsoft are paying dividends, and the free cash-flow metrics on these four businesses are truly extraordinary. The fact that these four are in different industries, that's kind of an added bonus.
SCOTT SCHOELZEL'S FUNDS
Fund 1-Year Return 3-Year Return 5-Year Return
Janus Twenty -15.6% -29.4% -2.7%
Janus Aspen Cap App -13% -21.1 3.3
Janus Adv Cap App -13.5 -20.7 3.5
Avg. Large-Cap Growth Fund -22.9 -23.3 -5
S&P 500 -21.1 -15.8 -3.5
Note: Annualized returns through April 9
I'm torn on the media business. And don't say the AOL word. I've lost more sleep and hair over AOL TimeWarner than I care to discuss.
There are things that I really like about media. You often find franchises that aren't easily duplicated there. You and I can't go out and create another MTV. It's also kind of like the software business where you write something once and print it a million times.
But to me, it's also a very insecure, unstable business. It's very trendy. Similar to what you see in retail, there's a consumer fickleness. You're also running up against the law of large numbers there because you have gigantic revenue lines [that] make it difficult to keep growing at meaningfully higher rates. Even though I have a couple of fairly large media positions [Viacom and AOL], it's an industry I constantly wrestle with. I'm still asking what its true economic dynamics are.
2. What did blow-ups in big holdings like Nokia and AOL TimeWarner and a smaller holding like Enron teach you?
With AOL and Nokia, I could fill a book with what I learned from those two companies. I think the mistake I made was giving them about nine months too long a leash. I'm a big believer in the idea that the way you make real money in the market is by owning stocks for long periods of time.
We were also treading in some uncharted water in terms of the size of the fund … with it being above $25 billion at one time. So we had these enormous positions that weren't liquid. It was difficult to say, "Go in and sell 80 million shares of AOL TimeWarner." So we were forced to take a longer-term view….That's no excuse though. I gave those positions about nine months too long to right themselves. I didn't fully come to grips with how much the environment for those two companies was deteriorating. Those nine months spanned late 2000 into 2001. We've meaningfully sold those positions down.
Now they are much smaller positions and are at valuations that reflect their current economic outlook. Neither story is 100% clean, but I think their valuations reflect that for the most part.
…I did own Enron, but as you point out, it was a small position. I think the Twenty fund only lost 40 to 50 basis points [0.40% to 0.50%]. I also avoided so many others. No Tyco International. No WorldCom. No Adelphia Communications. No HealthSouth.
If I look back [at some missteps], I just made the wrong judgment about people. At AOL I really made a wrong judgment about some of the people there. I still think Bob Pittman is terrific, but I let that blind me to some of the shortcomings of Barry Schuler, a name that is not as widely known but who was hugely detrimental to that business for a number of years. [Mr. Pittman replaced Mr. Schuler as AOL's CEO last April.] Candidly, I was never really thrilled with Steve Case [co-founder of AOL].
As you get older [Mr. Schoelzel is 44 years old], as you see more circumstances and hear more business models being articulated, you develop a reservoir of experiences to draw on. With respect to Enron, I simply made the wrong judgment about the people there. The ironic thing about it is that I kind of knew it at the time. Some lessons are more painful than others. It had some other characteristics I was interested in and I overlooked a judgment about the people involved.
3. You've retooled the Twenty portfolio in recent months, shifting out of bigger drug stocks like Pfizer and moving into drug distributors like Cardinal Health, for example. What's behind these moves, and what's an example of a company that has caught your eye during this downturn?
The drug distributors are starter positions that quite frankly haven't been working that well because their revenue lines are slowing slightly thanks to the move to less expensive generic drugs. I'm watching that situation closely. The data from IMS [Health, a health information and consulting company], have been poor in terms of prescription trends. Like I said, it's a small position and it's something I'm trying to get my arms around.
About a year to a year and a half ago, I really became convinced that eBay was a very real business that had moved way beyond the hobbyists and collectors. They sell a car now every six minutes. It's kind of an amazing business. I think the entire automotive department, which handles well in excess of $1 billion in auto sales, is comprised of about 20 people. They've moved that business into new product categories and new geographies. They've also grown their customers from individuals to small, medium and even large businesses who use them to sell excess inventory. So, I built a very large position, [5.6% on Dec. 31], that's been a huge contributor [to the fund's returns].
4. What's your take on the war's effect on U.S. markets and the economy?
Clearly there has been a giant pause in the economy. People call it the "CNN effect." Whatever moniker you want to put on it, there's been a pause…. [If the war's resolution is positive and swift, then maybe] consumers will start to re-loosen their purse strings and businesses will start to spend again incrementally. From there you could get the seedlings for an improved spending cycle.
The pessimistic view is that the economy is just terrible right now, that the pause is a pause in a downward spiral. Consumers have pulled back, businesses have pulled back and [a faltering economy] becomes a kind of self-fulfilling prophecy.
To me, it feels like the next quarter or two will start to define where we are and where we're going. That goes for the markets as well as the economy.
5. The Twenty Fund's cash stake topped 30% at one point last year and it was down to 11% at the end of February. Do you like the market more or was a sizable cash stake leaving you worried that you might be caught wrong-footed in a rally?
The cash stake is not in any way a call on the market. It's just a residual of the investment process. When I can find businesses that make solid economic sense, run by people I have high degree of confidence in, I'll invest shareholders' money. When I can't, I'm confident to continue the search.
I have been criticized for [holding a lot of cash]. Morningstar is apoplectic about that from time to time, but I just have to live with that. I've always run money the way I think shareholders would run their own money. I don't think they'd necessarily be 100% invested. I don't think they'd invest in every single industry group. I'm trying to find the best companies run by people I firmly believe are creating or building compelling products or services. That's sort of the mantra of the fund.
… Over the past 12 to 15 months I've focused on [companies whose results offer] predictability and consistency. I've really tried not to be surprised because the market isn't giving anyone the benefit of the doubt. There was a period where I just wasn't finding anything that really provided that kind of predictability.
6. Oracle CEO Larry Ellison recently said biotechnology was today's high-growth area and that the computer industry is going to be a smaller, tougher business in coming years. Do you agree and what areas are you avoiding?
I think there's some truth to that. A while ago I saw a list of all of the companies under $10 that are still publicly traded. It was incredibly long and there were maybe one or two that needed to exist. I think there's still a big shakeout coming in technology, which is why I don't own much in my fund. I think the cyber security area is going to be huge and that there are tremendous opportunities there. Byron Wien, [senior investment strategist] at Morgan Stanley also says biotech is one of the few areas that is really open-ended in terms of growth. There are many opportunities to use genomics to treat disease, but in talking to people in the scientific community, many of them think major breakthroughs are a decade away.
…In terms of what I'd avoid, I think telecommunications continues to be a very tough space. In wire line communications there's a lot of capacity that isn't going to be used for years and will likely be obsolete in five years. Valuations there are depressed so you'll see value investors buying them. But for the foreseeable future they're in a tough business. It's like Buffett's cigar butt theory. There might be a couple puffs left in a cigar butt you find on the ground, but not much else. You could get a short-term improvement in fundamentals in telecom that might move those stocks a bit, but it's not a good picture over the long term.
I think there has to be more consolidation in that industry and the same goes, to a lesser extent, for the wireless industry. The overseas markets [for wireless telecom] are more rational, with two or three competitors in each market. Here you have five or six. The guys at AT&T Wireless Services should be hooking up with other players. Same goes for Sprint PCS. But they're too stubborn and nobody wants to sell at today's prices. CEOs are telling me, "We're a buyer but nobody has their reality hat on yet."
7. If we gathered the shareholders of the Twenty Fund into a room, after a tough three-year stretch what would you say to them?
I'd say 99% of the money I have invested the stock market is in the Janus Twenty Fund and that I've felt the ups and the downs with them. I think my profile is similar to that of many shareholders. I'm 44, married with three kids, saving for some of the same things [shareholders] are. In running the fund, I try to invest the way shareholders would probably invest their own money.
…I have a very strong sense of obligation to get those shareholders who've hung in there over the past couple of years, that maybe had the unfortunate distinction of buying the fund in the spring of 2000, to get them back to some level of respectability. Now, the guy who had the bad luck to only buy in the spring of 2000 [rather than making regular investments over a longer period], I'm not even sure we'll get back to that high water mark during my career. But if they're willing to invest along the way at some more depressed levels too, that's the guy I'm trying to work for.
[Janus founder Tom] Bailey always used to tell me, and I think about this all the time, that it's not the guy with $3 million invested in the fund that you should be thinking about. You need to think about the single mom with two kids who has put $10,000 in the fund over a couple of years. If you can build that up to $20,000 or $25,000, you've really moved the needle for that investor. Those are the kinds of things I'm thinking about.
Frankly, I can't believe he said that last sentence with a straight face....this dood "moved the needle" all the way to the red for tens of thousands of investors! UFB! |
