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10 Questions With Aim Funds' Abel Garcia

A longtime tech warrior is optimistic.

Whether you own a lot of tech or you're looking to go bargain-hunting in the sagging sector, now is probably a good time to hear what Abel Garcia has to say. He's been through rough waters before.

Garcia is one of the tech-fund category's few graybeards. In April, he


AIM Funds

where he co-manages the broker-sold


AIM Global Telecommunications and Technology fund and the young

AIM New Technology

fund, but before that he ran the


Waddell & Reed Advisor Science & Technology fund for 16 years with solid results. For a little perspective, consider that the average tech-fund manager has a two-year tenure and 70% of the 115 tech funds out there don't have three-year records yet.

Despite the current bleeding in the tech sector -- the average tech fund lost more than 27% in November -- he still likes networking stocks like


(CIEN) - Get Ciena Corporation Report

and he's bullish on business-to-business software shops that help businesses transact on the Web, like


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Fund: AIM Global Telecommunications and Technology

Co-Managed fund since: April 2000*

Assets: $2.4 billion

YTD Return/Percentile Rank (1-Best, 100-Worst):

Load/Expense Ratio (Class A shares)

Top Holdings:
Brocade Communications
Juniper Networks

*Previously managed Waddell & Reed Advisor Science & Technology fund from 1984 to 2000.

1. It's kind of a messy market out there, coming off last year's eye-popping returns. Would you briefly compare 1999 with 2000 and offer what you think caused the differences?


It's been a very volatile year. Here's my take: The market had its usual January/February rally, first-quarter rally after the holiday season; then March came along and took the market down big-time.

And this year, Ian, it's been very company specific.


(NOK) - Get Nokia Oyj Report

disappointed at one time and took all of the stocks down that were wireless related.



disappointed, software company biz, mainframe software took




Computer Associates

(CA) - Get CA, Inc. Report

all down.



disappointed on the top line, not the bottom line, took early optics stuff down.

So it's been one year where --



, we don't have to go into that in detail -- it seems like it's very company-specific, and anything related around that company just gets destroyed. It's been a market where, even in our case, we have a tendency to hide -- hide's a bad word -- but we were in the fastest-growing part of the market where there weren't earnings disappointments and where we thought the growth was intact.

Let's take optics, for instance, where I think the growth still exists. But the valuations got so high that when the market got through selling everything else, they decided to focus on selling the remaining good companies that were out there. So the difference from this year vs. last year is that. Then you compound the problem with the euro, the elections, it's just hammered stocks, especially here towards the latter part of the year.

In there too, you had the whole B2C thing, just crashed.

It just seemed like valuations had gotten so high that it didn't take much to make people skittish, right, and the selling was, at some points, indiscriminate.


I hate to get macro on you, but a lot of it, traditionally when you have an inverted yield curve, short rates here, long rates, it traditionally has been an awful time period for growth managers. That's playing out in spades here, too.

2. There are a lot of factors discussed when we talked about the problems with the market and tech and telecom stocks in particular these days. The slowing economy, slowing capital expenditures on telecom companies which tends to trickle down. Also, the weakness of the euro hurting multinationals, then we have the questionable results of the election. If you had to pick among these issues, which one is the most paramount and which, if any, are negligible?


Most paramount in my mind is the big-picture question. Many people assume we are going in for a soft landing. What if this is a profitless recession like '83-'84 -- where you have earnings that were way too high, valuations too high and anticipatory earnings were too high and they disappointed big-time.

That forced a recession, a hard landing later on. It almost feels like '83-'84. I think that's the biggest question right now that people think. If we are in a recession, then we've got more pain to suffer and when we come out of this thing the


has to capitulate and lower rates and get the economy going again, especially what's going on in U.S. manufacturing. They're kind of going through -- everyone talks about the New Economy, but they forget the Old Economy is in a severe slump. So that I think is one of the most important things on my mind.

The most hyped area, in my opinion, is this whole "who's holding the inventory bag" on optics theory.

The reality is when you dissect the capital spending budgets of telecom-service providers, whether it's





(T) - Get AT&T Inc. Report

, you realize their spending on optics is going up, it's not going down. They may spend less on buildings, they may spend less on old Class Five voice switches, but they are spending more on optics because they realize it's a bet-your-business kind of thing.

It's gotten to a point where if they don't, they're not going to be able to be competitive the next cycle. So it's kind of a Catch-22: Their voice business is going away and they don't have these new data services up, but if they don't spend the money they're not going to be able to deliver new services. They have to spend -- compound that with the balance sheets don't look very good, especially they can't pay a lot of short-term debt, they're selling a part of this to get cash to pay the debt.

Blah-blah-blah. That, I think, is the most hyped because, in my mind, it will all get done.

You've had a lot of experience focusing in these areas -- more than most, certainly. How is the market compared with others you've been through? Do you see a hard landing?


Oh, gee, I am not an economist but I think the odds have been increased simply because the Fed has not come to our rescue. Rates, although not at very high levels, are still high enough to warrant some kind of action. The Fed seems to be fighting this inflation fear. Actually, I guess the price of oil is a big component still of that and is overly emphasized, but I think the price of oil will come down. So I've kind of searched my memory banks to see what it feels like. It's not 1973-1974 where the price of oil was astronomical, rates were 18%; it really does feel like 1983-1984.

Now, you know, we came out of that and the '80s and the '90s were great periods for stocks, so I'm hoping that we fall into that same pattern.

It was far from the worst-case scenario.


Yeah. The other thing is it could be like, Ian, is in 1990-1991, where you had that extraneous force of the Iraqi war. I wonder if in a way the elections are kind of like the Iraqi war of 2000. It's funny how it happens at the end of decades you get these things outside of your control.

Maybe it's a question of who's going to be able to govern, regardless of who's president. Maybe that's not all bad, though.

Do you think one candidate is better or worse for tech stocks and telecom stocks?


Well, I think Bush is actually better for the markets and I think the markets will rally if in fact he's allowed to get in Dec. 12 or whatever. Because Gore has, in my opinion, socialist tendencies. I've always thought that the Democrats were into splitting the pie and the Republicans were into expanding the pie for everyone.

Now I know in reality it doesn't work that way, there's good and bad sides to both, but I think Gore's made that awful tough for Bush to govern if in fact he does get in.

3. In surveying the stocks that are on your radar screen, what areas and what stocks in particular look like they might be oversold? And what areas might be a value trap, if we look at things from a valuation perspective?


Gosh, good questions. In terms of what can I think can be a very good value? Anything B2B related. I think



, Ariba, although they have had high valuations, they've come down a lot.

I think what's happening is that the Old Economy companies are actually waking up.

Home Depot

(HD) - Get Home Depot, Inc. Report


Procter & Gamble

(PG) - Get Procter & Gamble Company Report



(WMT) - Get Walmart Inc. Report

, it's not that they all pooh-poohed the Internet, but they didn't sell as aggressively through there, nor did they try to connect their suppliers and customers together, and that's all changing. So they're spending a lot of money for front-end applications at Ariba, for middleware applications with

BEA Systems


and for tying the whole thing together with i2, all that is happening.

There are two other areas that still I think are going to be very good. Storage, as these applications grow, and the Internet, in my opinion is not dead, it's just pausing. But the storage requirements will go up really big into


(VRTS) - Get Virtus Investment Partners, Inc. Report




and things like that.

What about EMC (EMC) ?


EMC. Yes, EMC's a large holding, too. We were spending more money in the genomics and biotech area because all those business models are changing and we're trying to change our stripes, too. We have to rely less on PCs and more on handhelds.

That's sort of an old-tech to new-tech progression, right?


Yeah. We're gravitating to doing more in the life sciences because the tools to generate new drugs have gotten so much better. So we've got investments in

Insight Pharmaceuticals

, in

Idec Pharmaceuticals


that you wouldn't ordinarily see maybe in a tech fund.

This whole genomics area is going to explode in the next three-to-five years.

About what percentage of the fund would you say is in the biotech/healthcare areas?


In the Global Telecom it's about 12% in biotech and genomics. And in the smaller fund, we call the new tech fund

AIM New Tech

, it's roughly 18% going to 20%-25%.

Just to swing back: What about the value traps?


I forgot about that part of the question. I think Lucent, AT&T kind of fall into that trap. I did a


interview where someone asked me whether I liked AT&T or parts of AT&T. My answer was, if I didn't like the whole, why would I like the parts that they're trying to spin off?

To me it's just financial manipulation and maneuvering -- it's not actually running your businesses any better. So I think there's value traps there. There may be a value trap in the wireless phone market, still. I mean, I think Nokia can come back and do better, but it's going to, but the highway's going to be littered with the likes of



and I think


will do really well because they've got some really cool phones. But that is still a scary area to invest in.

What about 1999's hottest stock, Qualcomm (QCOM) - Get Qualcomm Inc Report?


Qualcomm. They seem to be better because more people are adopting the CDMA standard worldwide. My fear is that China reverses and walks away from it and adopts wideband CDMA and Qualcomm's left out of the major growth market. So I wrestle with Qualcomm.

You know, these intellectual property stocks were great in 1998 and 1999 maybe. But where it's


(RMBS) - Get Rambus Inc. Report

or Qualcomm, the people that they license their technology to will only pay you so much if they're not doing very well, and I think you can fall into that trap and that's why we kind of avoided those.

4. Drawing on your experience in seeing unsettled markets like this in the past, what do you think is maybe the biggest mistake a tech investor could make today?


It's going to sound self-serving, but I think the biggest mistake is selling right now. I really think that once some of these problems are resolved or there appears to be a solution, the market will rally big time because there's a lot of cash on the sidelines, ourselves included. Our cash flow must have gone up ...

It's roughly 7% of the large fund, which isn't that much, and anywhere from 17%-20% of the smaller fund. So I think the biggest mistake a tech person -- I mean an individual investor -- could do is trying to time this market and get out at the bottom, which we seem to be approaching. Let's say we do finalize a president, he takes steps to restore confidence in the market, all that money rushes back in either late December or first quarter and the market just roars back.

Now then we'll have to deal with the issues of, is there truly a recession out there that we can't help avoid? I don't know the answer to that. I'm kind of struggling with that right now. But at least I think we'll get through -- the first derivative is I think they'll go up before they go down any more.

5. A pretty prevalent refrain in techland these days is Old Tech vs. New Tech -- Old Tech being companies that are more reliant on maturing PC sales for their growth vs. companies that are more reliant on the Internet and networking for their growth. Can we talk over a couple of bellwethers in the Old Tech area and just get your take on them? Let's say Microsoft (MSFT) - Get Microsoft Corporation Report and PC makers Dell (DELL) - Get Dell Technologies Inc Class C Report, Compaq (CPQ) , Hewlett-Packard (HWP) and Apple (AAPL) - Get Apple Inc. Report, what do you make of that pack?


I think Microsoft has the best shot of actually coming back. We hear that the new Windows 2000 is finally starting to take hold.

Admittedly it's slow installation, so I think Microsoft's got another life of growth. It's such a monster it's not going to go away. Apple has this sort of install base and a lot of cash, and it might be able to come back or be acquired by someone.

Compaq, they don't have enough sales with these new Internet appliances or other assorted devices to offset that huge install base of PCs that's more competitive so the margins will continue to be under pressure. I don't see that coming to fruition very quickly.

On Hewlett-Packard, I see


(SUNW) - Get Sunworks, Inc. Report

still kicking their butt in servers. They've come out with some new products, but they just aren't taking hold, they're not selling. And Sun seems to be the server of choice for enterprise and Internet applications, so I don't see anybody stopping Sun. I just see them kind of keep growing. And Hewlett's trying to keep up.

Where does Intel (INTC) - Get Intel Corporation Report fit in? Is Intel Old Tech, is Intel New Tech, or are they a 'tweener?


Intel has a bit of a problem because they're so tied to the PCs. That's why they've changed their stripes, in my opinion, moving away from the microprocessor to more the analog world.

They bought, I think Level One, they bought a whole host of home networking companies. They're really trying to provide more circuits for home networking and low end, local area networking. So far, they haven't been a failure, but it hasn't become a big part of their business.

I think what they ought to do is buy someone like

Analog Devices

(ADI) - Get Analog Devices, Inc. Report

, frankly, which has a presence in a lot of major markets. The stock's way down and they want a good analog company. And I know they've nosed around before. It's kind of industry rumors, though it's public knowledge that they're sort of interested. So I think Intel's got to make a major acquisition to stay in the growth areas. Intel's trying to provide higher value-added chips for high-end servers and I think that's doing OK, but it's not great.

6. Can we discuss some new tech bellwethers? First, the networking crowd. Let's talk about Cisco Systems (CSCO) - Get Cisco Systems, Inc. Report and then JDS Uniphase (JDSU) and SDL (SDLI) -- since JDS agreed to buy SDL -- and Juniper Networks.


Cisco continues to amaze me. They keep changing their stripes and they acquire someone to keep growing -- they're the only company I've noticed who continues to do that. But even Cisco has lost market share to


(JNPR) - Get Juniper Networks, Inc. Report

. The last quarter Juniper exceeded sales and earnings estimates by a big margin, but the stock's way down, and Juniper just needs another leg of growth. They have a great router, but they need switches. It has to be more than a one-product company. And it might become that, or it might merge with somebody else to that effect. So I'm really pretty high on Juniper. And that's why it's one of our top three holdings. And really, valuation-wise, I think it's within reason on a price-to-earnings-growth model, the PEG ratio.

When we think about valuations with these stocks, how do you go about doing it? Do you just use the same yardsticks on valuation and get used to a different scale?


How can I put this? We pay attention to valuations but we're more interested in just building the portfolio from the bottom up. If we think the earnings are for real, and we've done our homework on a quarter-to-quarter basis, we let the numbers do the work and not worry about the macro and just sock these stocks away for the long term.

If we made one mistake, we probably should have raised more cash when valuations got so high. But we don't run a money market fund, we run a tech fund, so we more or less have to stay fully invested, although it's been awfully bloody hard to run the portfolio and to do that.

7. To finish up this bellwether swing, can we talk about some Internet bellwethers? That's obviously a moving target, but a year ago, people probably would have said, AOL (AOL) , Yahoo! (YHOO) and eBay (EBAY) - Get eBay Inc. Report. Would we take anybody out of that list, or would we just add the likes of, let's say, Verisign (VRSN) - Get VeriSign, Inc. Report and Exodus Communications (EXDS) , what's your take there?


We like the B2B space . We think you would replace those B2C names with i2, Ariba, Veritas, Brocade and possibly Verisign.

That doesn't mean we actually own them. AOL, Yahoo and eBay -- we fortunately sold them before they got killed. But at some point I'd actually like to return to those names because I think in the long term, they'd become kind of the media companies of the new era.

My problem is that you've got to make sure the








all literally go away where the funding no longer exists, and then you've got these big gorillas where the valuations are way down and their business will accelerate. People will come back to that. So, I think they'll get bigger and better. I'd like to go back to some of those names and I'm not in a big hurry, because I think the IPO market has shut down big-time. But I haven't seen, I need to see more -- I hate to say this -- but more bankruptcies, more layoffs. And then we'll go back into those.

Things have to get more dire for you.


Yeah. Especially with eBay, because I think eBay actually has a real good business model. I actually sold a Beanie Baby on eBay for 150 bucks, just to test the system, and it worked. I'm just not ready to go back to those things.

8. Right. Shall we turn to health care just a bit? When you look at the biotechs, a lot of individual investors tend to gravitate toward the bigger end, more liquid names -- Amgen (AMGN) - Get Amgen Inc. Report, Biogenundefined, Genentech (DNA) . Are those names that you like, or do you think that biotech is basically a completely different animal and you're focusing on the obscure stories?


We're actually focusing on more mid-cap and away from the big-cap bios.

Have you missed a lot of the growth by the time they get big?


I think so, yeah. One name we like that's a tremendous amount is

Incyte Pharmaceuticals

(INCY) - Get Incyte Corporation Report

, because to me it's more of a software model.

It's really a great story. Incyte has the largest sequence database of anyone in the world. And that means that they've sequenced amino acids and proteins and other things. It's a software-licensing model in a way. They license out a gene to a


scientist or a


. In fact, they have 14 of the 15 top drug companies in the world.

Scientists will take a sequenced gene and work with it to see how a drug interacts with it and pay Incyte a fee. After he's through using it, he sends it back to the database. But if he or she changes that gene sequence, it goes back to Insight as a new entity, and Insight has the property to resell it.

It's almost like your clients are also your R&D, in a way.


Yeah. And they get to resell it; it's great. So the database keeps growing. Now here's the real kicker, Ian. If Merck develops a blockbuster drug and they used one of Insight's sequenced genes or proteins, they pay a trailer to Incyte.

So if it becomes a blockbuster, Incyte gets all the benefit without taking a lot of the risk and it's virtually all margin because it's already been paid for, it's already in the database. So Incyte could become the -- I hate to use this term -- but it could become the


of the genomics world. So it's names like that that we're trying to put in the fund.

Idec Pharmaceuticals

is another, guys that are selling tools to improve drug development, kind of software and services.

Kind of like infrastructure plays in the biotech area.


Yeah, yeah, that's a good way of putting it, actually. I might use that, thanks.

9. If you had to pick three stocks today that you'd buy and hold for at least five years, what three would give you the most confidence and why?


Wow that's a great question. Brocade, Veritas would be two.

Brocade because the fibre-channel networking storage thing is just exploding and I think it's going to explode for the next three-to-five years. Veritas is another storage name, but big enterprise storage. they've sold to

British Telecom


British Aerospace

and all those guys so I think that's going to do real well.

The third one -- it's kind of dicey, but I would hope i2 Technologies.

That's sort of your B2B play?


Yeah. If I had a fourth it would



. I would put those four and just not worry about 'em. Everything else I've got I'll worry about, I think.

10. Last question: What was the most recent new name added to your fund and what was the most recent addition to your personal portfolio?


For the fund, it would probably be



. They do Pap smear testing. It's a biotech company that has a better testing method for Pap smears that's replacing the old method and it's gaining because it's more accurate.

The woman doesn't have to keep coming back three or four times to find out if she has cervical cancer. So that would be the new name, I'd say, in the fund.

And personal portfolio, actually, I'm putting a whole lot of my money into the new AIM Technology Fund. We're so compliant-heavy here so we're very careful. It's good diversification for me, too, so there's no conflict. I've actually been buying my own fund quite a bit.

Fund Junkie runs every Monday and Wednesday, as well as occasional dispatches. Ian McDonald writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to, but he cannot give specific financial advice.