Bob Turner's Turner Funds is one of the fund industry's best-kept secrets.
Turner and his colleagues are some of the most skilled growth managers out there, with returns that rival
Janus' better-publicized numbers.
Vanguard and
Merrill Lynch recently added Turner's funds to their lineups. Despite the ups and downs that tech stocks have gone through this year, his
(TTECX Quote)Technology fund is the No. 2 fund overall over the past 12 months with a whopping 262% return, according to
Lipper. The fund has even managed a 47% return since Jan. 1.
How much does he like technology? A cool 95% of the assets in his
(TTOPX Quote)Top 20 fund were sunk into tech stocks at the end of the first quarter. He sees good times ahead for the mercurial sector, with some intriguing insights on
Qualcomm (QCOM Quote),
Microsoft (MSFT Quote) and the greedy streak at fund companies.
Robert Turner |  |
Fund
(TTOPX Quote)Turner Top 20 |
Managed Fund Since
July 1, 1999 (inception) |
Assets
$247 million |
YTD Return/Rank in Category
36.1%/ 5 of 542 |
Load/Expense Ratio
None/1.35% |
Top Holdings
1. Veritas Software(VRTS Quote)
2. Nokia(NOK Quote)
3. Dell Computer (DELL Quote) |
| Source: : Turner Funds and Lipper. Performance figures through July 20. Holdings as of July 17. |
1. What sectors and stocks look good to you in today's market? Turner: Technology's a sector that should not be affected greatly by slowdown in public activity, simply because people continue to buy technology to improve productivity. Within technology, a segment we continue to favor is communications, and if we wanted to narrow that down further, we would focus on the optical space.
Our favorite name had been
JDS Uniphase(JDSU Quote). However, it seems that the stock may take a plunge now with its recently announced acquisition of
SDL(SDLI Quote), therefore our top large-cap holding at this point would be
Corning(GLW Quote).
Other stocks we like within this area include
Ciena(CIEN Quote),
Avanex(AVNX Quote), and
Sycamore Networks(SCMR Quote).
2. On the flip side, what areas look overhyped? Turner: Though we like the segment, certainly there's been a lot of hype around B2B e-commerce. At the end of the day, probably the biggest beneficiaries will be the big industrial companies that can save money by using the B2B e-commerce. Certainly some of the bigger software companies like
Oracle(ORCL Quote) will benefit, and then there's the hardware companies that supply the hardware, like
Sun Microsystems(SUNW Quote). The ones that have been hyped are some of these that offer software to create one niche within that marketplace and as such, it's just going to be hard to make a lot of money long term if you just have a specific sort of software solution.
3. You've just launched a few funds and one focuses on B2B. Why launch the fund if you think the area might be overhyped? Turner: We don't think the area's overhyped, we just think certain stocks within it. Groups like
Forrest or
Gartner come out and say this is a $4 trillion dollar industry or $7 trillion per year, and it truly is, though the bulk of that will continue to be with corporations like
General Electric(GE Quote) and the auto companies and things like that.
However, you know, there are opportunities within that marketplace, and the way we're approaching it, which is somewhat unique, is that we have analysts who cover all sectors of the stock market, including analysts that cover autos and transportation, the energy sector, materials and processing, some of the old industrial areas.
For example, within this portfolio we own General Electric; we have
Enron(ENE Quote); we have
UPS(UPS Quote), which does the package delivery;
American Express(AXP Quote), which does a lot of the financial transactions; and have also we have some of the stocks which are involved in the security B2B commerce. We have companies that are the contract manufacturers that manufacture the products as companies conduct the e-commerce.
Overall, we're using companies that will benefit from what's happening but not tying their fortunes specifically to it.
That said, we have invested in some companies that people perceive to be the direct B2B e-commerce plays.
Ariba(ARBA Quote) is in there now, and
Commerce One(CMRC Quote). We like those two and there's
Internet Capital Group(ICGE Quote).
4. Do you see a bumpy ride ahead for technology? Turner: We're extremely bullish on technology, but saying that, technology is not a homogeneous group. What I mean by that is the history of technology [consists of] a few winners and many, many losers, but if you can identify the winners, you get paid off magnificently.
So for example, during the 1990s, one of the fastest-growing segments was data networking. The company that became the clear leader was
Cisco Systems(CSCO Quote) and the stock went up 65,000% during the decade.
On the other hand, companies that initially, were on the same footing with Cisco such as
Cabletron (CS Quote),
3Com (COMS Quote) and
Wellfleet Synoptics did not do nearly as well. And just in terms of recent history of the 400-plus companies that are Internet-related that have come public since the mid-1990s, well over three-fourths of the value has been created by about 5% of the companies.
What you've seen in the last five years will continue the next five years: The gains will be concentrated among a fairly narrow group of stocks.
How do we figure out which stocks to buy? Find a fast-growing segment, then try to identify companies that established themselves as clear leaders. The leadership can be measured in several different ways. Just measuring the technology capabilities that they have is hard: Who has a better optical switch, Ciena or Sycamore?
Short of being an optical engineer, I'm not sure anybody could tell you that. But saying that, what you do want to see is kind a company that begins to expand its customer base, a company that sees its revenues accelerating, a company that sees its margins expand, and at the same time, still expenses a significant amount of its revenues on R&D and a company that begins to have partnerships with other key technology companies.
The inverse side of that is if there ever is a disappointment in earnings, just get out of the way and wait for a long time to see if it makes sense to come back in. And it necessarily doesn't need to be. When I say "disappointment in earnings" that's kind of a general statement, because some of these companies don't have earnings, so it could be a revenue disappointment, a margin disappointment, a disappointment on the receivables or something like that: Some financial measure didn't come up to what expectations were.
5. We've seen a slew of new funds this year focusing on the pricey wireless sector. What's your wireless fund going to look like, and is there room for growth from here? Turner: This is a portfolio that is more pure in its focus than the B2B fund. Names within this portfolio would be the very visible names that everybody's familiar with such as Cisco or
Nokia(NOK Quote) or
Nortel Networks(NT Quote), some of the emerging, fast-growing stocks such as
Juniper Networks(JNPR Quote) or Sycamore.
But then we also use companies that allow for some of these technologies to develop, such as semiconductors firms that sell chips to a lot of the communications-equipment companies. Or
Amdocs(DOX Quote), which does the billing for the communications companies. We also will include some of the service companies in here:
Metromedia Fiber(MFNX Quote),
Nextel(NXTL Quote),
VoiceStream(VSTR Quote).
6. Everyone who likes wireless has an opinion on Qualcomm. Last year it shot up 2600% and it's been a rougher road this year. What's your take on that company and where it's going? Turner: We no longer own the company because this is just always our style: If there are issues that develop that are controversial, or we feel like the earnings can come under pressure, we'll sell the stock.
So, we're never a manager that tries to step in and buy these things based on valuation levels. At 50, though, probably the stock was oversold, it wasn't going down any more. At 70, it probably fairly reflects that CDMA will ultimately be the accepted standard throughout the world, but it also reflects that Qualcomm is not going to be the only one setting that standard. Nokia would very much like to be part of that. China has announced capabilities on its own.
So our investment viewpoint on Qualcomm is favorable over the long term, but near term they have to work through a few of these issues going from being the sole provider of CDMA to one of many.
7. You and I spoke earlier in the year on the Microsoft vs. the Department of Justice saga. In the past you'd been a Microsoft bull, but earlier in the year you said you had sold your shares, and that you wanted to be as far away from it as you could get. What's your take on the Microsoft situation now? Turner: I think we had sold it at a price of around 100, say in February when they did the Windows announcement. We came back in on June 21; our price was in the mid-70s. We came back in for two reasons:
This was the day that Judge Jackson agreed to stay the findings, which means that Microsoft doesn't have to follow the remedies that he initially set down. Also, prior to that, it had been announced by the appellate court that they were going to hear the case in block, which means in total, compared with just three judges selected out. So those two issues improved the prospects that Microsoft would do well within an appeals court process.
Saying that, this thing's going to take some time, and we've always felt comfortable with the fundamentals but as the legal prospects began to favor Microsoft more we decided to get back in.
A breakup of the company is not a done deal at all now. In fact, I think the feeling is that what's happening now in the appellate court process is more favorable to Microsoft, which means they probably would not be broken up. In the meantime, they're a traditional business with the operating system, it's not growing nearly as fast as it once did, as we have all these alternatives to PCs, the wireless devices, the handheld devices, things of that nature. But they have a large presence on the Internet. Overall, things are going pretty well and certainly the legal problems seem to be getting better here now, too.
8. Your fund group is one of the few that set asset targets for your funds when they launch, promising to close them before they get too big to be nimble. Do fund families routinely allow top-selling funds to get too big? What asset targets make sense? Turner: Oh, it seems that way. We're the only ones we're aware of that actually have a stated policy when we close things down we put together a capacity study, it's on our Web site, and we update it on a regular basis. That shows how many assets we'll take within each asset class. So we don't try to create multiple funds around, I'd say the small-cap area, and even though we say we closed our small-cap fund, we're starting other things similar to that so, I mean there are certain groups that do close it down, but probably more don't than do.
Regarding targets that make sense: For micro-caps, these stocks are extremely, extremely liquid. Therefore, $250 million is an appropriate level for that.
With small-cap, we closed ours at $500 million to allow for appreciation, but saying that, probably about a $1 billion to $1.5 billion is an appropriate level to close them. The reason I use a close level, so for example, our small-cap now is about a billion and a half, we closed at a half a billion, but just through appreciation we've gone to where we are.
The mid-cap area is a little more tricky, because mid-cap is a newer asset class. We define that area as $2 billion to $10 billion but it seems like approximately $5 billion is an appropriate area to close that down. And then, over $10 billion liquidity isn't a big issue there.
9. If you had to buy three stocks and hold them for five years, what would they be? Turner: Cisco would be my first choice. It is the leader in one of the fastest-growing areas and the company has shown the ability to continue to adjust to the new areas. For example, a couple years ago, Cisco really was not involved in optical to any great degree, and all of a sudden has a big presence in that marketplace.
Within the pharmaceutical area,
Amgen(AMGN Quote) would be my pick. Amgen has just shown an ability to continually develop new drugs and new applications for existing drugs to kind of keep them at the forefronts of what's happening in the health care area. And health care is an area that is growing fairly nicely, too, next to technology.
My last pick would be
Broadcom(BRCM Quote), which is involved in the semiconductor area. Unlike some companies that just have a point solution where they just make a chip and hope somebody buys the chip for some application, they're actually putting together semiconductor solutions. So they'll go to some of the new equipment companies like a Sycamore or Juniper and provide the entire semiconductor solution for them. They've somewhat revolutionized the industry: Instead of hoping the OEM, or original equipment manufacturer, picks its part and integrates it, they actually go to the OEM and tell them that they have a complete solution for them if they wish to use it.
10. What's the last stock you bought for the fund and the last for your personal portfolio? Turner: Personally, we don't do any trading. That's been something I've had in place since the inception of the firm. We just feel like if it's good enough for us, it's good enough for our clients, so that's where we are there.
The last stock in the fund is
Schering-Plough(SGP Quote) and we do like the large-cap pharmaceutical area all these stocks came under a lot of pressure that last couple of days, Schering-Plough has gone from 52 down to about 43. We stepped in July 17 and bought it and our feeling is that the new product pipeline is very full, the stock is reasonably priced relative to some of the others, so just real solid risk reward at this point.
