10 Questions With Vanguard Growth Equity's Bob Turner

Talking to Bob Turner and other growth investors is like talking to farmers during a long drought. They know their prayers will be answered -- they just can't say when.

Of course, Turner and his growth colleagues aren't waiting for rain. They're waiting for the economy to get well and for companies to resume buying PCs and servers.

Talking With: Bob Turner

Fund: (VGEQX Quote - Cramer on VGEQX - Stock Picks)Vanguard Growth Equity

Assets: $855.7million

1-Year Return: -46.6%/Trails 87% of Peers

5-Year Return: 13.6%/Beats 56% of Peers

Expenses: No-load/0.92% annual expenses

Top-Three Holdings: Pfizer(PFE Quote - Cramer on PFE - Stock Picks), Microsoft(MSFT Quote - Cramer on MSFT - Stock Picks), AOL Time Warner(AOL Quote - Cramer on AOL - Stock Picks)

Sources: Morningstar and Vanguard.com. Top holdings through May 31.

The founder of Turner Investment Partners and manager of the (VGEQX Quote - Cramer on VGEQX - Stock Picks)Vanguard Growth Equity fund, among others, saw his growth funds follow the Nasdaq into the red over the past 18 months. In the wake of the tech bubble's bursting, his Growth Equity and (TTECX Quote - Cramer on TTECX - Stock Picks)Technology funds are down 47% and 71%, respectively, over 12 months. His firm has also filed paperwork with regulators to merge the young and sputtering (TIWCX Quote - Cramer on TIWCX - Stock Picks)Turner Wireless & Communications and (TBTBX Quote - Cramer on TBTBX - Stock Picks)Turner B2B E-Commerce funds.

Before the Nasdaq's collapse last year, Turner's Growth Equity fund topped its peers for four straight years, so there's reason to check out what Turner is doing now. Today he's overweighting PC and chip stocks. He's also betting battered bellwethers like Cisco Systems (CSCO Quote - Cramer on CSCO - Stock Picks) and Sun Microsystems (SUNW Quote - Cramer on SUNW - Stock Picks) will emerge from the downturn with solid market positions. Of course, when this downturn will end is another question.

1. What's the argument for investing in the tech sector today?

Turner: Technology continues to be an area where corporations can enhance their productivity and profitability. There are a lot of applications that allow them to do so. As the economy stabilizes and people feel better about their outlook, they're definitely going to spend on some of these applications, and with the valuations where they are now, any pickup in demand certainly can drive these stocks higher.

2. How are you separating the wheat from the chaff in tech, and what's an example of each?

Turner: The thing to remember is that the companies that are able to survive this downturn are going to be much better positioned. I think a great example is [business-to-business software maker] Siebel Systems (SEBL Quote - Cramer on SEBL - Stock Picks). Customer resource management is an area that will continue to grow. Maybe not at 50% and above as it did historically, but 30% is still pretty nice growth.

Many of Siebel's competitors have gone away or merged with other companies. Certainly, any little private company that felt that they could compete probably ended up losing their funding during this downturn, so Siebel has emerged as the clear leader in an area that's growing fairly rapidly. I would say [data storage software maker] Veritas Software (VRTS Quote - Cramer on VRTS - Stock Picks) kind of fits that bill, too.

What's an example of a well-known company that might stagger out of this downturn?

Turner: Oh, look in telecom. I don't really like to take shots at companies we don't own because I don't have a strong opinion on them and don't watch them as closely. But because of the severe downturn in telecom [equipment] spending and the move toward next generation equipment, some of the big telecom equipment companies may not be as well-positioned as they were previously.

Cooling Off Turner's big-cap growth fund rode tech up and followed it down

Source: Morningstar. Returns through June 29.

3. Today some value managers are shopping for bargains in the Nasdaq. To a growth investor, what companies have been oversold?

Turner: Well, almost every tech company has missed their [earnings] numbers or at least had numbers not go up. A company like Siebel [down 53% over the past year], which hasn't missed numbers but has been brought down. Siebel and Veritas are trading at around 40 times next year's earnings, which is still high relative to the market. But, with growth rates that could be 30% or 40%, assuming a normal economic recovery, they trade at valuations that over time may be perceived to be fairly reasonable.

4. When you and I last spoke, you said that when a company's earnings miss expectations, you're not inclined to hang around because worse news is often around the bend. Now that just about every tech company has warned at one time or another, have you changed your view?

Turner: Oh, I mean, the answer is yes. Going back to Siebel and Veritas, they've not missed and they probably make expectations. But do they have to bring expectations down? They may. At this point I think people are focusing on a turn in the economy, so lowering expectations might not matter that much.

On the other hand, we're very overweighted in some semiconductors and PC-related stocks because that's the first group to turn as the economy turns.

10 Questions Archive

Amerindo Technology's Matthew Fitzmaurice RT

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Berger Information Technology's Bill Schaaf

Hancock Focused Relative Value's Tim Quinlisk

Gabelli Growth's Howard Ward

Flag Investors Communications' Bruce Behrens and Liam Burke

Dreyfus Technology Growth's Mark Herskovitz

5. When do you see a pickup in demand for chips and PCs?

Turner: I think one thing that is pretty recognizable in the PC area now is that inventory levels are very, very low. So even if there isn't any pickup in demand these stocks should do reasonably well.

Now, in terms of when will we see a pickup in demand, there are several positive factors. I mean we're all holding to the theory that [Federal Reserve Chairman Alan] Greenspan's aggressive [interest rate cuts] and the tax cut should have an impact. And then you have the back-to-school demand and the need to upgrade corporate PCs installed in 1999 pre-Y2K.

And we are getting some pieces of information that say maybe production is improving. Motherboards are the base-building blocks for PCs and their production is up 20% per week over the last two weeks at a couple of Taiwan companies. Some of the companies that package semiconductors have begun to see a pickup in demand, too.

But it's still a waiting game, right? We know the economy should be picking up, but we don't know when it will be back on its feet.

Turner: That's it at this stage. You are beginning to see hopeful signs of the economic pickup with [data from the] National Association of Purchasing Managers and housing starts and auto sales figures. But at the same time, unemployment continues to go up too.

6. Who do you see as the strongest players in the PC and chip areas?

Turner: In the PC area Dell(DELL Quote - Cramer on DELL - Stock Picks) is one of our favorites. Right now they still buy low-cost parts, and when demand improves they sell them at higher prices, so margins could improve.

We like Apple(AAPL Quote - Cramer on AAPL - Stock Picks) too. Apple's kind of different because they're just product-cycle driven.

In the semiconductor area, Micron Technology (MU Quote - Cramer on MU - Stock Picks) is our largest semiconductor position. We like and own Texas Instruments (TXN Quote - Cramer on TXN - Stock Picks) and Analog Devices (ADI Quote - Cramer on ADI - Stock Picks), and you know they all benefit from a pickup in PC demand and general economic demand, too.

Are Those Your Teeth? Turner's techier portfolios have absorbed a thrashing over the past year
	1-Year Return	Percentile Rank vs. Peers (1=Best, 100=Worst)
(TTECX Quote - Cramer on TTECX - Stock Picks)Turner Technology	-71%	84%
(TIWCX Quote - Cramer on TIWCX - Stock Picks)Turner Wireless and Communications	-63	62
(TTOPX Quote - Cramer on TTOPX - Stock Picks)Turner Top 20	-61.7	98
(TBTBX Quote - Cramer on TBTBX - Stock Picks)Turner B2B e- Commerce	-49	14
Nasdaq Composite	-47.5	N/A
Source: Morningstar. Returns and rankings through July 13.

7. Where are you seeing opportunities beyond tech?

Turner: As the economy picks up, there are always a group of stocks that are perceived to be early cycle stocks that tend to perform best.

Within the consumer area that is the broadcasting companies. So we own Clear Channel Communications(CCU Quote - Cramer on CCU - Stock Picks) and Viacom (VIA.B Quote - Cramer on VIA.B - Stock Picks). Clear Channel is in the radio business, and the first advertising that picks up after a downturn is typically radio.

Another big position is AOL (AOL Quote - Cramer on AOL - Stock Picks). People are still using the Internet, and AOL certainly has established itself as the market leader. It's just a great business model, and it's really functioning at a pretty high level. We also own Home Depot (HD Quote - Cramer on HD - Stock Picks) because it's a good business and it's also an early cycle stock.

Let's play word association with a few tech bellwethers. I'll name a company, and you can let us know what you think and if you own shares. I'll start with Microsoft(MSFT Quote - Cramer on MSFT - Stock Picks).

Turner: We're neutral on Microsoft right now. The only issue is that the stock has gone up 65%, year to date. Compare that to similar tech companies whose valuations are down because their stocks are down 50% and it's not too favorable. We prefer other tech companies just based on the fact that they've been such laggards relative to Microsoft.

But you have a position?

Turner: Yes.

Sun Microsystems.

Turner: I'm favorable on Sun. In fact, I was just using Sun counter to Microsoft because it's down about 44% year to date. Again, you know, we've got to have an economic pickup to make things look better here, but they are introducing their new UltraSparc3 workstation and their inventories are fairly cleaned out, so any modest pickup in demand will translate to a nice earnings turnaround here.

Cisco.

Turner: I'm positive here for pretty much the same reasons. We just bought Sun and Cisco at prices not too far from where we are today. When -- I shouldn't say if -- we see an economic pickup, companies leading that pickup will need to spend on some of their infrastructure. So companies like Cisco and Sun will both benefit.

And in each situation, the expectations are realistic. I don't think Cisco's going to go back to $75 a share any time soon, but from $18 to go back to $23 or $24 is a very positive percentage change.

8. Professional and amateur investors kick themselves for overestimating some trends or companies that falter, while underestimating some that take off. What are we missing now?

Turner: I'd say generally people are underinvested in growth stocks, underinvested in technology. Most mutual fund money has gone into money markets, and from talking with people in the marketplace, I would say that institutional investors are underweighted in technology.

Our viewpoint is that when the economy does improve, technology spending will resume and a lot of these companies that are down 70% will go up. The companies and money managers that were able to weather this will come out much, much better. So we want to be positioned in those companies, as the economy improves.

9. You're going to merge your young Wireless and B2B Net funds together, and other industry-focused funds are going away. Did fund companies get too aggressive, making funds that are too focused on a corner of the market that's hot?

Turner: Well, we continue to roll out sector funds; we launched our energy fund, brought a financial services fund into the fold, and we started a health care fund, too. So we're very comfortable with offering them.

I think, certainly, to divide tech down further than we did, in hindsight, narrowed things a little bit too much. The reason we are merging the two together is just there aren't that many stocks out there to buy. If you're looking to somewhat diversify your portfolio, you've got to have a certain number of stocks. We're not backing away from sector funds at all, because we started several new ones, but we're keeping them broader.

10. What three companies would you feel most confident holding for the next five years, given their products, management and valuation today?

Turner: I would say Cisco first. Cisco will continue to be a leader in the data networking area, and that's still probably growing above 20% per year. With the fallout from the telecommunications area, I think Cisco actually has a chance to gain a greater foothold than they once had in that area. So I think that's the one, within technology, that really stands out.

If there is one business model that has worked in the Internet it's the auctions, and eBay(EBAY Quote - Cramer on EBAY - Stock Picks) has established themselves as just a huge force in that area. You know, they're moving into other areas too, where you just list items and people buy and sell them, and then they've moved into other product categories, too. So the Internet is very useful in a lot of fashions, and that's an area that seems to be doing well.

Finally, I would also say AOL. They are just the dominant media player on the Net. Their key advantage is that they have 30 million subscribers who pay $20 a month to use their service. It's just phenomenal to have that.