SAN FRANCISCO -- While the markets gyrated Tuesday and Wednesday, showing their customary loopiness when the
Federal Open Market Committee
was keeping a level head -- and matching it with a hot hand.
It's a concept that Treick, manager of
Premier Small Company fund, knows well. While his fund returned 80.3% in 1998, he kept his feet on the ground and his eyes on just 23 companies -- the 23 stocks in his portfolio.
Though he has enjoyed a great ride on
, Treick says his portfolio is not grossly overweighted in technology. Instead, it shows a healthy diversity. For instance, when was the last time you saw
Speedway Motor Sports
Alternative Living Services
Eco Soil Systems
In a year in which the
index of small-cap stocks lost 2.6%, the performance of the Premier Small Company fund, boasting a median market cap of just over $1 billion, is all the more impressive. What's going on here? And more importantly, what's the plan for the year ahead?
caught up with Treick as he was sipping club soda in the lobby lounge of the Ritz Carlton, after checking out some of the companies at the
NationsBanc Montgomery Securities Tech Conference
: How did a small-cap fund like yours post the numbers it did in 1998?
: The single largest factor was that Amazon had a huge year. And
the medical software provider and the fund's top holding had a huge year. I had some big winners in the portfolio. Business services was a big winner. Hollywood Entertainment, I bought that at 10 or 11.
It now trades around 32.
: What's ahead for 1999? Any changes planned for the portfolio? Are you planning on a heavier weighting toward tech?
: I would like to add about five names, because it is a diversified fund, and it's fairly concentrated compared to other small-caps in the industry. I think health care is really interesting, and it's an area where you can still find good small-cap stuff.
Now, I do own technology, but the reason I don't own a lot of tech is because that's generally a scale game. You find that the winners in technology are the big companies because they have that virtuous circle going. The bigger they are, the faster they grow; the faster they grow, the more money they get; and the more money they get, the bigger they can become.
I don't think technology is going to play that big a part in the portfolio. I try to stray away from companies that create technology for small companies and find companies that benefit from it. Business services is another one that I'll be looking at.
: When you bought Amazon.com in June 1997, it was trading around 9. But now it's at 125 (following a 2-for-1 split in June 1998) and is a $20 billion company. Do you have any plans to sell it?
: What I'd like to do is manage the process of pushing it down in the portfolio
it's now the third-largest holding instead of taking it out while it's a top position just because it's no longer a small-cap company. I don't think that benefits my shareholders in any respect.
Some people say there's incredible risk in Amazon at these price levels, and valuation is a risk. But it's also a company that's defining an industry. I weigh that factor, and I think as one holding out of 23, be it the third-largest holding or whatever, it's a risk that I think is a good risk.
: Since you bring it up, how much risk is associated with your style of small-cap investing -- that is, investing in just 23 or so companies?
: I think small companies is a very dangerous sector.
If we could construct an
average company out of the Russell 2000 index, what would that company look like? It would be a company with very little barrier to entry, a company that doesn't produce cash flow and for the most part consumes capital as it grows. It's a company that's probably at a disadvantage to larger companies in terms that it's not a low-cost producer, it's not a low-cost marketer, it's not a low-cost distributor.
So having said all that, why would I want to invest in that company?
So that's the backdrop behind the small-company fund. The reason there are so few companies in there is I want to own the antithesis of that index company. And they're really hard to find.
: Premier Small Company has very low turnover -- so low that the number registered as zero on
last year. Are you going to keep the same companies in 1999?
: To me, I hate selling something. You know, that's a painful process for me to do that. When you see things that have come down in the portfolio, trust me, it was a painful thing for me to do.
Look at the average turnover in a traditional mutual fund. If it's in excess of 100%, and they have, say, a hundred names, then that's kind of ridiculous. Say I have 200 names and I have a 100% turnover. That's 200 ideas a year. How many days a year do we work?
That mindset requires new stocks all the time. They need that incremental piece of information to trade on. I don't practice incrementalism at all, which is where an incremental piece of information is worth as much as the body of evidence behind it. And that's just another reason to underperform the index, practicing that.
: So you're going to stick with the stocks you've got, plus maybe adding a few names?
: This is the kind of fund that requires patience. It is concentrated on a relative basis compared to the industry of small-cap funds. And I'm not gonna turn it over to try to sell valuation, unless it's so out of control that it's no longer a small-cap fund, which isn't the case. Just look at the names we own and if you can't be comfortable with those, you know, see what else is out there.
: So a lot of the same stocks, plus four or five new names. Do you think then, that you'll be able to have a more-than-80% return in 1999?
: Certainly not. It's not that it can't go up 80%, because it could. If the market were to go up a lot, then I would probably go up a lot, too. But to go up that much in two years, that's hard. It's really hard to have that kind of delta.
And to be honest, it's not something that I would really plan for, or even really want to do, because when you have that kind of outperformance, it implies that you're taking undue risk. Now I look at this portfolio and I don't believe that's the case. Each one of these companies stands on its own merits. So I feel really good about it, but I don't even pretend to try to do that
return 80% again. I don't think my shareholders want me to do that. I hope they don't.