As tech fund managers go, Warren Lammert's a relative old hand, having steered

Janus

(JAMRX) - Get Report

Mercury Fund since 1993. In that time the fund has established a name for itself as one of the top large-cap growth offerings, ranking in the top 3% of its category over three- and five-year periods.

The Janus File

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Janus Makes Big Bet on Telecom Sector

Planned Spinoff Causes Much Grumbling, but Little Fumbling at Janus

Nokia Is Falling, and Janus Feels Its Pain

Janus CIO Steps Down

Janus Closes Doors on $50 Billion Flagship Fund

Janus Funds See Outflows for First Time in Years

Janus Denies Rumors of Dumping Tech Stocks

The Janus Question: To Hold or Sell?

Though it's been around a while, Mercury isn't easy to pin down: Lammert has leeway to scoop up small- and mid-cap names (though that's gotten harder, with $13.6 billion in assets). He can venture overseas as well. At the end of the third quarter, only about 75% of the fund's noncash investments were in the U.S., with the bulk of international holdings, 17%, in Europe. Lammert's not shy about making big bets, either: As of last spring, the most recent data available, he had over 9% of the fund's assets wrapped up in

Nokia

(NOK) - Get Report

. (Nokia remains his top holding.)

Despite its super-aggressive bent, Mercury has a pretty good track record for taxes compared with its peers. This year it's estimated it will make a capital gains distribution of about 12% of its

net asset value, but that comes on the heels of a 96.2% gain last year.

The question on investors' minds now is whether such a growth-hound fund can sustain its winning streak amid the rout in technology. Though it's never before finished in the red, this year could be a first: As of Dec. 11, the fund was down 10.61% year to date.

TSC:

I was looking at some fund background that you'd written last April where you were describing some investment themes of your fund. At the time you were writing about how corporations were still investing a lot in computers and the Internet. Could you talk about how that's changed? What are some new themes you're looking at?

Lammert:

I still think that Internet infrastructure is an important area of investment for companies across the world, and I think the wireless revolution continues. There's been healthy subscriber growth this year, and we're optimistic about next year. I do think it's probably fair to say that the world broadly, ourselves included, may have been too enthusiastic about the rates of adoption of Internet and wireless technology, looking back to the early part of this year. A number of observers started to predict that we could see 70% growth in subscribers in 2000. Things have been growing at roughly 50% over the last three years. And I think the promise of wireless data led people to get carried away. In fact the growth rate has held steady at an extremely robust 50%. But the correction of those expectations has caused significant pain in the stock market.

I think underneath the slowdown in growth and demand, there's a very strong secular demand for technology, and probably especially in the areas of Internet infrastructure, wireless equipment and storage.

TSC:

It looks like you still have a really big weighting in technology and communications combined, around 60% of your overall portfolio, as of the end of the third quarter. Has that come down at all this year?

Lammert:

I've not shifted gears significantly. Earlier in the year I cut positions in some tech names.

TSC:

Before the big slide last spring?

Lammert:

In the first three, four months of the year. I wasn't smart enough to get more aggressive

about that. I had a reasonably healthy cash position at that point

10.7% as of the end of the first quarter.

TSC:

Right, you had close to 20% in cash at the end of the third quarter, too.

Lammert:

A significant part of which I've put back to work over the last three to four weeks. So now cash is down to about 7%.

TSC:

Are you putting that into tech-related stocks, or more defensive stuff?

Lammert:

I have bought a range of stuff. I have bought some tech stocks that have been hard hit. I can't tell you what they are, because I could be adding to some of those positions. But it's fair to say, I feel like there's a lot of life in the themes we've discussed, I think selectively, even in semiconductors, which have been hit very hard with clear signs we have excess inventories in the system.

TSC:

With things slowing down, does that change what you look for in a stock? Have you had to revise down your standards for growth?

Lammert:

The slowdown we've seen has led us to cut back on our earnings expectations for companies at the margin, but it doesn't represent a fundamental change in what we're looking for. We're still looking for companies we think can generate exceptional earnings growth, looking out over the next three to five years.

TSC:

Do you often own stocks for that long? I had noticed that your turnover was less than I would have expected for such an aggressive fund.

Annual turnover is 89% according to

Morningstar

, compared to an average of 130% for domestic large-cap growth funds.

Lammert:

Some stocks I'll own three to five years. It could be a stock like

Cisco

(CSCO) - Get Report

. If it becomes too expensive to me, I might cut it -- not sell it all -- and buy it back if valuations come down. Probably among aggressive funds, I do have a holding period somewhat longer than

some.

TSC:

I was reading something else about your investing philosophy, and you said Mercury will own companies with high growth rates "only if the valuations justify" it. That kind of surprised me. I wouldn't have thought valuation would be a big concern for you.

The average

price-to-earnings ratio for stocks in the fund was 54.08, as of the end of the third quarter.

Lammert:

Our emphasis is on finding great companies that can execute and deliver on earnings growth. That's not to say we throw valuation out the window by any means. When P/E multiples outstrip what I think are reasonable expectations of growth, I will take money off the table. I did that with Cisco earlier in the year. I have done it with

EMC

(EMC)

and others. So our basic focus is on fundamentals and great franchises and trying to stay with them.

Laughs I wish we'd been more valuation-sensitive

earlier this year.

TSC:

So it seems like you're not necessarily adding a lot to tech names that are cheap right now? It sounds like you're doing some investing there, but it's pretty selective.

Lammert:

My belief at this point is that the down cycle will be muted, but I recognize that I don't have a crystal ball. It's clear things are slowing, so it's a difficult environment to invest in with confidence. I think it creates opportunities in individual stocks, and opportunities where the kind of detailed research our analysts and portfolio managers do can really pay off, but it's uncertain. It's not an

environment in which I would necessarily invest

with a complete focus on tech.

TSC:

Managers at Janus are known for holding a lot of the same stocks. Since it seems like there are fewer overall market themes these days, would you say there are fewer cross-holdings among the Janus funds?

Lammert:

I think Janus has a very collegial environment, in which there' s a very open and free exchange of ideas. The result is that some of the strongest ideas do wind up being held by

several funds. There may be a few positions that are large and common. But often with cross-holdings, the position sizes vary a lot. So overall you can see that reflected in the performances. They still wind up being fairly different funds.

TSC:

In terms of your holdings right now, I noticed that you still owned

Amazon

(AMZN) - Get Report

as of the end of the third quarter. What do you think about it at this point?

Lammert:

I would say that the Internet's rate of growth has been a disappointment to us, and to the market, this year. And that's true in terms of top-line growth at Amazon. It has been executing effectively in improving its efficiency and delivering the goods. It's been bringing the losses down, moving towards profitability. But there's no question that top-line growth has been a disappointment. I think they have built what will be a lasting franchise within the Internet, and will be a very important worldwide company, and that they're getting their arms around profitability issues. But at the same time, the near-term scope of opportunity is not what I believed it to be two years ago, around when we began to get involved in it.

TSC:

What do you think about Nokia?

Lammert:

Nokia, I've owned a number of years. It's currently the largest position in the fund. I think it's true that expectations, as I mentioned before, did get carried away early this year for the overall cellular market. At the same time, Nokia's probably done a better job than anybody expected in gaining market share, both in the handset and infrastructure market, positioning itself for the next generation of cellular technology.

TSC:

What are some other stocks you like, holdings that have held up well this year?

Lammert:

Enron

(ENE)

has been a real champ over the last year. It started life as a natural gas pipeline, but it's evolved into becoming the largest wholesale buyer and seller of natural gas; it's really been an important force in creating the wholesale market for natural gas. Now they' re

also the global wholesale player in power, and they've gone on beyond that to develop wholesale markets in other commodities, more recently with telecom bandwidth.

They're in very high return-on-capital businesses with extremely attractive growth prospects over the next five, 10 years.

TSC:

What are some upstarts you like now?

Lammert:

I still have great respect for Cisco, and own it, and I still own

Juniper

(JNPR) - Get Report

in the high-end router area. And

Analog Devices

(ADI) - Get Report

in the semiconductor area; they're taking a significant share both in the analog mixed signal and digital signal processing businesses.

TSC:

But what about some smaller names?

Lammert:

: Outside technology, there's

Sepracor

(SEPR)

. They make purified versions of many successful drug compounds.

Their products have the efficacy of mainline drugs but without the side effects.

Often companies we own are sort of creating new markets, like

i2

(ITWO)

and

Ariba

(ARBA)

. I2 held up really well this year. Both have been reasonably good stocks.

TSC:

What are some other sectors you like, outside of the technology areas you talked about?

Lammert:

In the power area, there's Enron. We also own

Duke

(DUK) - Get Report

, which we added in the course of this year.

And cable stocks were terrible performers last year but have been performing better recently:

Comcast

(CMCSK)

,

Cablevision

(CVC)

,

Cox

(COX)

and

Charter

(CHTR) - Get Report

.

TSC:

So you like them based on their long-term prospects?

Lammert:

There's been an evolution from analog to digital cable, which supports both a greatly enhanced offering of television channels and also supports the offering of two-way, high-speed Internet services. Through the last twelve months, cable has made a lot of progress on offering a self-installable cable modem product, Cablevision in particular. They're also making progress on video on demand, and over the next two to three years, there will be progress in offering telephony services. It's a story that's been evolving over the past several years. And much of the upgrade is behind us, so capital spending is leveling off at the same time revenues are ramping up.