With tech stocks about as even-keeled as
, it's time to huddle with a pro.
Steve Kirson, co-manager of the tech-heavy $10 billion
Putnam OTC & Emerging Company fund with Michael Mufson, has felt the brunt of this year's tech volatility. After posting a 127% return in 1999, his fund has dropped 33.7% over the last three months, even though it's up 35% in the last 30 days. He and Mufson stay fully invested in the market, so they're essentially working without a net. Where does he see strength? The same places he saw it last year: tech and telecom. Read on to see where he's putting money today.
Managing Fund Since
YTD Return/Rank in Category
1-Year Return/Rank in Category
Source: Lipper. Returns as of June 23. Holdings as of March 31.
1. We had a white-hot 1999, especially for tech stocks, then ran into very choppy water since March. Where do you see the market heading?
We're set up to have a pretty decent second half here, because I think we're closer to the end of the rate increases than we are to the beginning. I think that's a fairly common theme right now. The fundamentals are very strong. You saw that in the first quarter. I think we had a record low in terms of numbers of companies missing their numbers. Most companies are hitting or exceeding expectations across the board.
I think there's a lot of cash waiting to get into the market. I've talked to a lot of sales people or different brokers and they say, "Gee, I know three or four hedge funds around Boston are 90% cash, they're confused, they don't know when they should get in." So there's all of this cash that's sitting on the sidelines and they're waiting for the starter's gun to go off to tell them exactly when they should be getting into the market.
We cannot afford to be out of the market when the gun goes off because, as you saw last year, a lot of the big gains happened within a very short period of time.
2. What sectors look most promising to you?
Technology is big for us; it's about 55% to 60%. Telecom-services stocks are in the 10% to 12% range.
Metromedia Fiber Network
fits into that category, as does
Business services stocks are in the low teens as well. A big component of that is computer services stocks -- companies that help other companies build their IT systems or e-businesses. We don't classify that as technology but instead as a business service. That in particular is about 8% to 10% by itself.
3. Specifically, which stocks look good?
A big theme that runs throughout our portfolio is broadband. The optical guys are
. There are a bunch of smaller, newer ones that we have smaller positions in and may get bigger over time. We were big in
all the way through when it was $30 billion in market cap and then we had to start to sell because it just got out of our capitalization range.
A big play on the equipment side is DSL (digital subscriber line). We're looking at the guys who produced the chips to go into the boxes, as well as the box guys themselves. The chip guys on the DSL side are
and a new company that just went public called
. And then on the box side, you have guys like
that make subscriber management systems, as well, as they're now getting into the optical switching area.
Another pick is
, which makes it possible for existing copper telecom wires to offer digital subscriber line access. We also like
, which makes the DSL equipment that sits at your PC or on the consumer side of the connection. And
Advance Fiber Communication
, which makes digital loop carriers because DSL can only extend out to 18,000 feet or so from the central office, which takes care of a large portion of the market but not the total market, so in order to hit the more suburban areas, they need to be able to provision DSL out beyond the 18,000-foot barrier, and Advance Fiber helps to facilitate that. Digital loop carrier -- it's like a box you might see sitting in some corner somewhere and the digital carriers go inside that box and it helps extend DSL beyond the barrier.
In the software area, we focus on companies that do e-business infrastructure. There are a bunch of different areas that we're playing within that theme. Within consumer relationship management, we like
4. What are some sectors that you are staying away from?
Contract manufacturing. That in my mind is a growth commodity business because there's a big wave of outsourcing going on. I think there's definitely this wave towards outsourcing by the big telecom companies and so there are probably big chunks of revenue that are flowing through these companies. But I think one of the reasons why these telecom companies are outsourcing this business is it's a low-margin, crappy business. These guys are getting 20% gross margins at best. They can grow in an organic basis 15% at best. They're financing the rest of their growth through share offerings. And they're not beating the numbers. They're all hyped and they have huge multiples. I don't like that area at all.
Elsewhere, I know that semiconductor equipment is a very a hot area right now, but I also think that that stuff all moves together. There's not a lot of differentiation among them. I just think people are too optimistic. Now, I don't see any reason why in the near future those things are going to come down, but I just feel they're overheated. They're all going up together and they're all going to come down together.
5. How have your cash flows been relative to market performance?
We were having huge inflows all the way from the beginning of March through the first couple of weeks in April. So, clearly, the flows were following performance. And then the market started to fall apart and the fund flows just dried up. In a couple of days, we had a couple of outflows but we didn't see anything meaningful on the outflow.
I'm very surprised that people didn't panic like crazy considering the hit that we took. But actually, money's been coming in over the last month. We've been getting very positive flows over the last three or four weeks.
6. Your fund is now in the $10 billion in assets range, pretty large for your fund category. The most recent Morningstar data says there are about 135-137 holdings and the portfolio turnover is about 140%. Clearly, the fund does a lot of trading, it moves quickly and it's in a fast part of the market. Does the size of your fund pose a challenge to your investing strategy?
One thing you've seen out of the fund is that it used to be a small-cap aggressive growth fund and now it's a mid-cap aggressive growth fund. So the average market cap is in the $6 billion or $7 billion range. I don't really see it as a possibility that we're going to be able to reposition the fund back into the small-cap area, which would be roughly under $1.7 billion. The good part is that ... we really went up as the market went up and our holdings in our fund were successful. That has been the sacrifice, we're more mid-cap now than we are small-cap. But we're finding plenty of ideas in the $2 billion-$7 billion cap range.
7. How long do you hold a stock typically?
On average, we invest with the 18-month to 24-month time horizon.
8. Has the explosion in momentum trading forced you to change your investment strategy?
I just think there's more money now in the area investing in small- and mid-cap companies from day one. You have to identify companies earlier, you have to look out and be able to see great market opportunities and great companies and all of that developing probably earlier than you had to before and make your bets a little bit earlier. On the contrary, you have to be more sensitive and see where these things are not going according to plan and you have to give yourself more time to get out of these names if you need to.
9. What three stocks would you buy today and hold on to for five years, if you had to?
One caveat is that I don't think I'd feel comfortable with any stock, especially a technology stock, for five years. That said, I'd buy JDS Uniphase,
. Those are larger caps. It's easier to pick larger-cap companies that are going to be around, compared with the mid-cap guys. That's why we have 140% turnover.
10. Lastly, what is the last stock you bought for your fund, and what is the most recent addition to your personal portfolio?
For the fund,
is probably the last one. We like that one a lot.
Personally, I generally buy things that are too big for my fund. Because the problem that I have is if I buy the little speculative stuff that's small, a couple of times it's moved into my range. Then it becomes an ethical question and I don't want to do anything that looks even remotely bad. It's just not worth it. So when I buy stuff, it's bigger stuff, and Broadcom was the last stock that I bought.