Running a tech fund can be a thankless job these days, with the Nasdaq down about 11% since the beginning of the year and about 26% off of its 52-week high. But Walter Price Jr.'s Pimco RCM Global Technology fund which he co-manages with Huachen Chen has stood out among its peers.
On a three-year annualized basis, the fund's
institutional share class , which was started in December of 1995 and is geared toward large investors such as pension plans and endowments, beats 88% of its peers in the specialty-technology category, according to Morningstar. Its
D class fund , which was launched in January of 1999 and is targeted toward the individual investor, beats 87% of its peers on a three-year annualized basis, according to Morningstar.
More recently, however, Price's global technology fund has been hard hit. The institutional and the D class funds registered a 20% decline from the beginning of the year to April 30, the latest measurement by Morningstar.
How is Price coping with the topsy-turvy tech market these days? Read on.
1. Tech has been pretty battered lately. What have you been doing to avoid all of the carnage?
Our strategy is to carry a higher level of cash than we typically have during this period of time and also to try to position into companies that are doing reasonably well in this environment and are not necessarily dependent on a strong economy for continued success.
Generally we're looking for companies that are benefiting from their own use of technology. So we've used some of the service companies. For example, one of our largest holdings is
Affiliated Computer Services
, which does business outsourcing. It's got a good value proposition. It's basically been able to grow its earnings steadily in this environment.
Sales charge: none
Top Holdings: UTStarcom, Veritas, Taiwan Semiconductor, Affiliated Computer Services, Tyco
Assets: $177 million
We've also looked at some of the Internet companies. Two of our large holdings are
One of the things we liked about Expedia is they had focused on this merchant model. The promise of Internet travel is if you get enough volume going to a site like Expedia, they can offer you a packaged vacation or packaged trip that's going to be cheaper than a la carte. So by basically signing agreements with airlines that give them low fares, signing agreements with hotels that give them low room rates, in exchange for some guaranteed volume -- same thing for rental cars and cruises and so forth -- Expedia is promising in certain markets a cheaper vacation than if you put the vacation together yourself. That's the potential. That merchant model is something they invested in, whereas
, for example, until recently, was outsourcing the hotel part of the merchant strategy through their relationship with Hotels.com. So they were much more focused on just the airline side, and that was the least attractive part of the business.
2. What do you look for in a company before you buy shares?
We want a reasonable valuation. Generally, we would like to be paying in this environment one times the growth rate or less. Then we look for a strong industry position. We generally like to buy the industry leaders because we think when you're investing in technology, you're getting the benefit of the secular growth rate of the industry. You don't want to give that up by making too many mistakes. So by buying the industry leader, you generally make fewer mistakes. And then finally we look for an industry that we think is secularly attractive.
3. Is it hard to find an industry leader that has a reasonable valuation?
Not these days. I would say with exception of some of the semiconductor equipment companies, valuations for the whole sector are less than that of the market as whole for the first time since 1990.
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4. Do you believe the tech industry has hit its bottom then?
We're in the ninth inning of this adjustment process. We're very close. That comment is based on the fact that we believe the economic recovery will continue. If we go back into another recession, all valuations have to come down. If we have an economic recovery, we've just about washed out any expectations. We're getting very close to a period of time when earnings collapsed last year, so the comparisons should look quite good for the next year relative to a year ago and relative to other sectors of the economy. And, with a continuing economic recovery, we're getting to the point where corporate cash flow and corporate need for growth is going to cause them to once again invest in technology.
5. Tech stocks have been hit by their share of accounting scandals since Enron. Are there any stocks you regret buying as a result of all these scandals?
Two stocks that we had issues with have been
. In the case of Computer Associates, we thought it was a solid company with improving customer relations and, based on normalized earnings, we thought it was quite a cheap stock with good positive cash flow. There's no question the company was aggressive before they changed their accounting and how they booked deals. And, if the
is focusing on that, I suspect the company is probably going to have some issues.
Eventually, as we did more work on the history, we decided just to step aside because there are, as I mentioned, lots of cheap stocks these days without accounting issues.
Tyco is a company we've known for a long time and we like the management of the company. In this case, it's not so much an accounting scandal but the fact that the environment changed for the corporate commercial paper market. The company levered itself up with the idea that they were going to be a mini-
and they bought a financing company, and to own a financing company, you need to have very high debt ratings to make the economics work. With issues about their cash flow and just whether this was a good business or a bad business, the debt rating and the commercial paper rating came under pressure and that basically changed the economics of the business.
We think they're in the process of divesting this financing business CIT, and, once they do that, people will look at the remaining business. It's not an expensive stock: less than 10 times earnings. And there's potential for a reasonable recovery in those earnings because they're basically a connectors and printed circuit board manufacturer, and those are cyclical industries that should show some positive industry growth in 2003.
6. What about software?
The software industry is a place where we've been kind of picking and choosing. When we took our weighting in technology and put our cash to work in October, one of the sectors we bought a lot of was the software industry because we said this industry has a lot of leverage, great business models and the stocks had been hit very hard because they all had disappointing September quarters. The stocks performed wonderfully in the fourth quarter and then as we got into the first quarter, we started hearing comments about, "Hey, this recovery isn't tracking as a normal recovery and it's not just first-quarter seasonality. There seems to be something else going on." We actually started selling. We're probably underweighted in software, but we still like selected companies a lot.
7. Which ones do you like?
is a company we like a lot for this environment. We like
too. I also like
. We have a small position in
because their business is lousy right now. But I like the company a lot conceptually.
We're looking for companies that aren't dependent on an economic recovery and are coping with the economic situation well and UTStarcom came up on our screen as a company that was executing well. And, as we looked at it, we realized this was a company that offers an alternative to wireline connectivity for emerging countries and most of their business right now is in China. What they offer is growth. Only about 20% of their
China's population has telephones. So they offer the ability for China Telecom to grow its subscriber base with much less capital investment than if they dropped a copper wire to everybody's house.
China Telecom has signed contracts with UTStarcom to deploy the company's wireless access network in several provinces. So China Telecom can basically bring a hub into a neighborhood and give everybody a wireless phone that connects into this hub and has their own telephone number and offer many of the conveniences of wireless -- individual phone numbers, features and so forth -- without expensive infrastructure investment. China Telecom is adding something like 30 million phone lines a year, and UTStarcom initially was getting 1 million of those, and last year they got a couple million of those, and this year they'll get 4 or 5 million of those. So it's still a good growth story.
9. What is your strategy these days for investing outside the U.S.?
Since 1990, before we even had a public fund, we were doing global investing. Our philosophy on foreign investments is to look for the best companies in an industry or a sector and we don't care if they're in the U.S. or outside the U.S. Then we focus on valuation. We prefer the best company with the best valuation. As I look at our largest holdings, four -- and if you count UTStarcom five -- of our top 10 are focused outside the U.S., primarily in Asia. In the components area, Asia has got some of the most interesting companies and they're at reasonable valuations. The foundries - TSMC
Taiwan Semiconductor Manufacturing
-- that industry is moving to more of a fab-less model with only a few companies that can afford the several billions of dollars that it takes to build a new world-class fab. Those are companies that are growing their share of the semiconductor industry at a rapid rate.
Samsung is a company we like a lot because it's got a valuation under 20 times earnings and it's the leader in D-RAMS
dynamic random access memory and one of the leaders in cell-phone and display technology. So we think it's worth a lot more than 14 times earnings.
10. What is your sell discipline? What drives your decision to sell?
I would say a change in our perception of the company's positioning or ability to deal with the environment. So if we think that they're coping well with the environment and they're not, then that would be changes in the fundamentals that would raise a sell issue.
The second one would be valuation. If the stock gets over two times the growth rate, we generally are less enthusiastic about owning it. And then the third thing would be percentage of the portfolio. If it starts getting over 5% of the portfolio, we start trimming it. We have kind of a philosophic requirement that we don't like a position to be more than 6% of the portfolio.