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February 17, 1999
Price Is Relative
By Lewis Braham
WHAT DOES IT mean when a fund called Nifty Fifty
(PANFX) beats the S&P 500? Some would say it
means investors have thrown their copies of Graham
and Dodd's Securities Analysis into the waste bin. But
John Tilson and Jim Mair, co-managers of the
Phoenix-Engemann Nifty Fifty fund don't think there's
anything wrong with that. After all, investors who held
on to the Nifty Fifty (those high-priced growth stocks of
the 1970s like Polaroid (PRD) and Xerox (XRX)) would
have eventually matched the returns of the S&P 500.
Last year the Nifty Fifty fund beat the S&P 500 with a
35.1% gain. And in 1999, the fund is again out in front
with a 3.9% return. Its recent gains are being powered
by high-priced growth stocks like MCI WorldCom
(WCOM), Medtronic (MDT) and Microsoft (MSFT).
Tilson, 54, and Mair, 57, were both financial
professionals back in 1972 when Polaroid sold for 95
times earnings. The aftermath was ugly. But this time
is different, they say. Why? Overcapacity and low
interest rates. We spoke with the California-based
managers this week to find out more.
SmartMoney.com: Doesn't the name Nifty Fifty have negative connotations?
Tilson: Over the years, a lot of brokers have told us that the name is not a plus, but we didn't name it
for that era. We thought 50 stocks would be ideal for a portfolio.
Mair: We were just looking for a name. Our growth fund didn't have one for a while and when we finally
called it the Phoenix-Engemann Growth (PASGX) fund, people said: ‘That's not too good; it's too
plain vanilla.' So we wanted something more eye-catching for this fund. Also, the launch date of this
fund coincided with Roger [Engemann's] birthday, and we thought that was pretty nifty.
SmartMoney.com: Seriously?
Tilson: Of course, we knew the association, but we didn't think it was all that negative. If you bought
the entire Nifty Fifty back in the 1970s and held them till today, your returns would have matched the
S&P 500. And if you had just kept the winners like Disney (DIS) and Coke (KO) and eliminated losers
like Polaroid and Xerox, you would have outperformed by several percentage points.
Nifty Stocks
HOLDINGS
% HELD*
12-MONTH
FORWARD P/E**
12-MONTH
RETURN**
MCI WorldCom
5.9
42.6
113.9%
EMC
4.4
53.7
174.0
Medtronic
4.1
51.9
44.7
Cisco Systems
3.9
67.4
123.4
Intel
3.8
27.5
45.0
Pfizer
3.7
53.0
50.0
Texas Instruments
3.6
31.3
72.0
Microsoft
3.5
61.3
82.5
Lucent Technologies
3.5
42.6
83.9
Merck
2.9
31.4
-39.3
*As of 1/29/99
**As of 2/16/99
Source: Phoenix-Engemann and Morningstar
SmartMoney.com: Is that what you did?
Tilson: None of us was invested in the Nifty Fifty back then. The prices were too high while the rest of
the market was very cheap. As a growth investor, you want to own the best businesses that are
growing the fastest, but there's always a price to pay for that. Sometimes you make trade-offs because
something else is more attractively valued.
SmartMoney.com: But isn't the same true today? Supercharged growth companies like Microsoft and
America Online (AOL) are too expensive, while the rest of the market is very cheap.
Mair: Not at all. The early 1970s are almost 180 degrees from where we are today. Inflation and
interest rates were really picking up back then, and in an inflationary environment, the value of growth
goes down on a P/E basis. In fact, financial assets, in general, become worth less, while real assets
such as commodities and real estate become worth more. Today we have expanding P/Es and no sign
of inflation anywhere in the world. That makes the value of growth worth more than any time in recent
history.
SmartMoney.com: But Microsoft? Come on, it sells at 61 times 1999 earnings.
Tilson: For a premiere company in a low-inflation world, paying three times its growth rate is not out of
line. We expect earnings at Microsoft to grow 25% annually for the next three to five years. So 61
times earnings isn't overpriced.
Mair: Price isn't something you should get hung up on, anyway. It's all relative. You're always asking
yourself, "What is the value of an alternative investment?" With Treasurys yielding just above 5% in an
environment of slow growth and no inflation, the value of growth increases geometrically. The difference
in the value of a 15% earnings growth rate and a 30% one is not just double. It's significantly more than
that.
SmartMoney.com: Are you at all concerned that inflation could rise again?
Tilson: We don't see anything today that qualifies as a scarce resource. People are willing to make
almost everything in the world at its current price or less. But if inflation were to pick up, we would have
to adjust our thinking. Then commodity prices would rise and value investors [who tend to invest in
commodity-driven industries] would have a shining moment.
SmartMoney.com: What about AOL?
Tilson: Is AOL risky at today's prices? You're damn right it is. But if this business proves to be what
we expect it to be, it'll be worth it. Fifty percent growth in a near-zero inflationary environment is worth
almost anything....OK, not almost anything, but 150 times earnings is not too unreasonable. With 16
million subscribers and powerful strategic alliances, AOL's future is secure. Still, at these prices, we
are being cautious. We only established a small position in the past few months.
SmartMoney.com: What is your favorite stock?
Mair: We don't have any favorites. We truly believe in diversification. But our largest holding is MCI
WorldCom, which is currently 5.9% of our portfolio. This company is in the very early stages of
developing a worldwide telecom franchise, and we expect it to grow a minimum of 25% a year.
Currently, it's trading at closer to one times its growth rate rather than two times, so it's also very
attractively valued.
SmartMoney.com: I noticed that you've also built up positions in cheaper financials such as Wells
Fargo (WFC), Citigroup (C) and American Express (AXP). So you're not totally opposed to value
investing.
Tilson: That was purely opportunistic. We bought a basket of financials last October after the prices
came down 50%, 60%, even 70%, because of a perceived financial crisis, which we didn't believe. We
don't think these are the fastest-growing companies, but those prices were too good to ignore. But
we've already begun to unwind those positions. As I said before, it's always a matter of trade-offs.
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