When Mister Softee takes a beating, a lot of investors wind up black and blue.
If you have stake in
-- and if you're a growth investor, it's hard not to -- you may be feeling the same as a small, but growing number of money managers who believe the stock's best days could be behind it.
"I presume if you're a growth fund manager, de facto you owned Microsoft, but do you buy shares now? The business plan is good, but why go with something where you have real doubts?" asks Amy Domini, who owns shares in private accounts she manages for Boston's
Domini Social Investments
"I think if you have it in your portfolio now, you've got to explain why," says Bob Turner, manager of
Turner Large Cap Growth Equity fund, who reduced his fund's 7.1% Microsoft position at year-end to zero by Feb. 17. Turner says he dumped his shares mainly because of the company's looming legal problems, which came home to roost Monday.
Microsoft's shares dropped 15% Monday in anticipation of U.S. District Judge Thomas Penfield Jackson's late-day ruling that the software titan violated antitrust laws. (See our
index page for a full roundup of Microsoft antitrust coverage and for a history of the Microsoft case, see
Microsoft Trial Timeline.)
The fact that some managers, like Turner, have been reducing their stakes recently indicates a major shift in attitude toward the company that was once a staple of any growth portfolio.
Though Microsoft still is a big favorite -- nearly 70% of large-cap-growth funds own shares, according to
-- many managers have adopted a wait-and-see attitude toward the stock.
"The stock will get stuck in a trading range. Now at about 90 it could be a buying opportunity, but we'll have to see what comes out of this later on," says Alan Loewenstein, co-manager of
John Hancock Technology, where Microsoft makes up about 1.4% of holdings. He thinks that without the legal issues, the stock would be trading at 120.
The stock will continue to play a major role in many mutual fund portfolios, though, because many managers own it out of necessity. Index-fund managers have to buy it since it's part of the
indices, and managers of non-index funds have felt compelled to own it because their performance is measured against those indices.
Index funds can't reduce their Microsoft positions beyond its weighting in the indices they track. That's good news for Microsoft -- and for
active fund managers. If the stock keeps falling, they can outperform the index by reducing their stakes.
"This is an opportunity for active managers. Stocks like Microsoft that have driven these indices for years now might slow down," says Tom Stevens, chief investment officer at
Wilshire Asset Management
in Santa Monica, Calif. The
Wilshire Target Large Company Growth fund, which tracks growth stocks in the broad Wilshire 5000 index, had 9.2% of its assets bet on Microsoft at year-end.
But the company's sheer size and its tenacious reputation could keep it in many fund portfolios for a long time. Even if Microsoft shares keep going down, it's a gutty bet to ignore the company since so many competitors and indices will continue to own it.
"Unless you're absolutely certain it's going to suck, you better keep 2% or 3% in Microsoft to keep from getting fired," says
analyst Russ Kinnel.
Over the past five years, not including today's blood bath, the stock is up 1,072%, compared with 194% for the S&P 500, according to
. The stock is the top-holding in $98.6 billion
Vanguard 500 index at just under 4% of assets.
Even those who are selling Microsoft agree the company might be running as well today as it ever has and could end up being a great investment even if it's broken up. The company's latest version of its Windows operating system assaults
leadership in the valuable Web server market. Many think that's a big step for a company that's been heading in the right direction for quite a while.