When growth stocks are taking it on the chin, it's probably a good time to talk with a growth manager who is still standing.

Tim Miller runs the mid-cap growth

(FIDYX)

Invesco Dynamics fund. He's a tech fan who has managed to beat his average peer over the last one-, three- and five-year periods. More impressively he's only down 5% this year, which isn't too bad given his fund's big tech stake.

Miller's words may warm the hearts of many bloody but unbowed bulls. He doesn't think 1999's outrageous returns are necessarily something we'll never see again, and his outlook for 2001 is pretty positive. His favorite stock picks are

Brocade

(BRCD)

and a handful of hot names in the Internet buildout game, which he thinks won't be hurt by an economic slowdown.

Fund: Invesco Dynamics

Managed fund since: December 1993

Assets: $7.5 billion

YTD Return/Percentile Rank (1- Best, 100-Worst)-4.9%
/ 40%

Expense Ratio: 1.03%

Top Holdings:
Forest Laboratories
SDL
Brocade Communications Systems

1. It's obviously been a tough and shaky year, particularly in the second half. What do you think got us here and where do you think we're headed next year?

Miller:

Well, what got us here, primarily, is the liquidity jolt that was provided by the

Fed

late last year, which topped off a strong year with a fourth-quarter burst on the upside. Followed by the retrenchment that we've seen as a result of the tightening schedule that the Fed has been on over the past year and a half.

What I like to say is that we heard the

Greenspan

bark in the spring of this year and we felt the Greenspan bite in the fall of this year. The successive rate hikes have had a clear impact on the economy.

The market's driven by earnings growth and valuations shifts, so this year we had the perception, and then in some cases the reality, of slowing growth and reduced valuations. I think we've shaken out, given how far down the

Nasdaq

has come, the majority of the valuation risk. Now it's just an issue of the degree of earnings slowdown. Next year, I think earnings growth overall will continue to slow, but the comparisons will, I believe, improve over the course of the year next year, so that we're going to have kind of counterbalancing effects next year of slowing earnings growth, but probably improving valuations as rates go back in the other direction. Think it should lead to a double-digit gain next year and probably back-end loaded, back-end weighted.

2. Let's offer a little perspective on 1999. Even if people didn't think so during the year, they certainly think so now, it seemed like a once-in-a-generation market. Is that an accurate assessment?

Miller:

Well, I hope it's not once in a generation. I think it's ... it was an unusually strong situation. But I wouldn't go that far to say it's once in a generation, because so much of what happened last year also has the cumulative effect of more, of so much money invested in mutual funds throughout the country and just the increasing investor interest overall.

The fragmentation of the mutual fund industry, which has led to a lot of funds, like ourselves, staying pretty well disciplined with the portfolio that you're managing. You don't see too much market timing, I don't think, among large mutual fund managers.

So when things are going well and the economy's improving and, for the first part of the year, rates dropping, you can have an extraordinary year like we had last year. I think the Internet and the effect of the Internet on many different technology companies also fueled the gains. We're still in the early stages of that, so it's unlikely that we'll have a year like that in the next few years. But I wouldn't go as far as to say it's a once in a generation, I think there's a reasonable chance that something like that could happen again three, four, five years down the road.

3. What areas are looking good to you right now and, within those areas, what are your favorite stocks?

Miller:

We continue to like the technology and telecommunications sector, obviously. We don't run a closet tech fund, though -- technology is only about 35% to 40% of the fund. And within technology, I'd say in general, given the correction that we've seen in the Nasdaq, valuations are much more compelling right now and it's more an issue now of trying to determine which companies or industry groups are likely to come through this slowdown unscathed and continue to report strong and/or accelerating earnings growth.

So that's where our attention is focused, identifying those sectors where we think they're least likely to be impacted by a soft landing economy. And right now, we're finding that in the storage sector, with stocks like Brocade, which is one of our top-10 holdings in the fund.

But also, we're seeing it in Internet infrastructure spending, which we think will, based on a recent Gartner's survey, continue to grow next year. So there are companies like

Siebel

(SEBL)

, who we like, who should benefit from that.

i2 Technologies

(ITWO)

,

Ariba

(ARBA)

.

So the B2B folks.

Miller:

We're weighting B2B companies, yes. And where we're not adding much ... you know, we have some semiconductor exposure and that group has come under a lot of pressure because of inventory issues in many different semiconductor markets. And we're not abandoning the group, but we're not aggressively adding to that sector yet. We want to get a better sense of how extended this inventory correction will be and where the bottom is for some stocks. I think we've had some signs that we're near bottom in particular companies, but we're not being too aggressive there.

Other areas we like are the PDA companies in this fund:

Palm

(PALM)

,

Handspring

(HAND)

. That market is probably one of the hotter markets right now. So those are some of the things we're doing in technology.

In the telecommunication services area, we've always had success owning the leading CLECs and I think that nothing changes there. So

Time Warner Telecom

(TWT)

is our biggest position there; we still like that company.

4. When you're looking for companies that are not necessarily going to be hit too hard by the economy, what are one or two hallmarks that make them stick out to you?

Miller:

Well, it's more, on a near-term basis, they tend to situations driven more by very strong product cycles and are capital spending-driven cycles. That may not necessarily last over a five- or 10-year period, but will last over a one- to three-year period. So the storage market just happens to be in a very strong product cycle and demand environment right now that is not likely to be impacted much by a slowdown -- vs. the semiconductor industry, which will see some impact. But as I said, we aren't abandoning that group, we're just not overweighting it.

It's generally driven by the fact that this industry or this trend is at the early stages of growth, such as storage networking or the Internet infrastructure buildout, the e-enabling, the enterprise. I mean, all those dollars, even if overall capital spending slows a bit, we're still going to see growth in those high return, quick-payback projects that the Internet provides. So we don't think in this cycle that spending for those projects will be impacted. It's more a function of each cycle, there are certain segments of the economy and the growth sectors that are in the early stages of rapid growth and generally do not see much impact from a slowdown. That's where we're focused.

There are certain mid-cap pharmaceutical companies we like. Obviously,

Forest

(FRX)

being our largest position. We think certain segments of the financial-services sector will do well in a declining rate environment. So there are insurance companies, like

John Hancock

(JHF)

, and asset managers, like

Northern Trust

(NTRS) - Get Report

, that we like.

5. On the flip side, what areas are you steering clear of in this kind of an environment?

Milller:

Hmm. I think we've been steering clear of the consumer-oriented companies and some of the advertising-driven sectors -- like radio and retail, two sectors that are clearly seeing the impact of a slowdown. We haven't seen the worst of it yet. The earnings adjustments have been downward adjustments. I'd say those are two fairly large sectors that we have some exposure to, but we're not adding to it. We're certainly underweighted in those two sectors.

The other thing that we're very conscious of, not in any particular sector, but any companies that have capital needs that are unable to fund their growth through internal cash flow. That's a dangerous group right now, because the funding windows are, for the most part, closed.

6. Everywhere you look, particularly in the tech sector, but also in the telecom sector, there are a lot of companies that are just an awful lot cheaper than they were just six months ago. And that spurs a lot of interest, obviously, but do you see anything out there that stands out to you as just being grossly oversold?

Miller:

Some of the e-service companies have just been obliterated.

Proxicom

(PXCM)

and

Sapient

(SAPE)

are two that I'd highlight. Given their primarily enterprise customer base and their capability to provide all kinds of services for enabling your business to operate on the Internet, not just developing a Web site, I think those two stocks are down 80%, 90% from their highs and they've taken them all apart. And some of them were worthy of the destruction, but I think in general, that's a group that I would characterize as being way oversold. And the stocks, the stronger companies like Sapient and Proxicom could double in a week. And I'm serious. In a good environment. In a turnaround environment.

Is there a market in the past that seems to remind you of where we are today?

Miller:

Well, there's the recent experience of 1998, where we see that the Fed can and will react quickly to a global economic crisis. And I think there's still some concern in the Fed's mind about the impact of a hard landing on some of these global economies. And the snowballing, spiraling downward impact that that could have.

So I don't think we have to go much further back than that period to see that if the Fed gets more concerned about a slowdown and a hard landing, you begin to see easing. I mean, that led to '99. I don't think we're going to have another year like '99, but we could see a pretty nice bounce.

Sometimes the best opportunities are in the periods of most uncertainty and, between the election and the economy, we've had a lot of uncertainty recently.

7. A lot has been made in the past just two or three weeks about cash levels rising among mutual funds. On a percentage basis, it's not that high, but in absolute dollars, it's an awful lot of money. Cash levels rising in money market funds, as well, as they typically do toward the end of the year, where people don't want to buy into a capital gain. What do you think it's going to take for that money to come back into the market and can it play a role in ...

Miller:

In the rally? Yes, I think it definitely can. I mean, that's not the situation we're in. Generally, our cash levels are not that high, we don't really try to time the market.

But, I'd say for the industry overall, yes, we've seen, I think, over the past two to three weeks what can happen when the general environment becomes more optimistic. We've had two or three huge Nasdaq days. And I think managers who have a lot of cash are going to start scratching their head, thinking how many of these 10% or 12% days can I leave on the table before I start putting this cash to work?

So I think we see some changing direction by the Fed. That can trigger the process that will start getting these cash levels invested and that would, I think, magnify a turnaround in the market.

Is that more of the catalyst you were looking toward, rather than the election or are you looking for either one?

Miller:

I think they'll both help, but I think the Fed action is much more relevant over the next 12 months.

There are certain segments and certain companies that would be impacted by the election going one way or the other and those companies will, they'll rally. The companies that would be negatively impacted by one candidate might not rally as much as the rest of the market. So it's something that you have to consider on an individual stock basis. As far as the overall market, though, I think getting this resolved will help, but it's the Fed action that'll be more relevant.

8. One area that's done quite well this year as lots of folks look for defensive growth plays is health care. What do you like in that area?

MILLER:

We've had good exposure to the biotech sector all year and it's helped us. And I think because the valuations are still pretty high there, we're not aggressively adding to that sector. Most of our additions recently have more in the mid-cap pharmaceutical companies, like Forest Labs and

Alva

would be two examples or

King Pharmaceuticals

.

So I think that sector -- and the services stocks have done very well this year, too. With a Bush victory, the services stocks I think will continue to perform well.

So our position right now on health care is to focus mainly on the pharmaceutical companies and, potentially, the device companies, although there's not much for us to choose from there.

9. If you have to pick three stocks today to buy and hold for five years, what three would they be and why?

Miller:

I think they'd be Brocade, which I mentioned, the leading company in the storage equipment market or switches for the storage market.

Exodus Communications

(EXDS)

would be the second, because they also are the dominant factor in Web hosting and managed services, which is a market that will also, over the next five years, be one of the most attractive growth markets and, over the past few years, they have solidified their leadership position in that market. And they have a financial model that we think works successfully. Let's see. I think the third would probably be

Paychex

(PAYX) - Get Report

, which is a nice, steady growth company that we'd buy and hold for five years. If you look at the last five years and the previous five years to that, you'd want to hold this stock for the next five years.

10. What's the most recent name that you've added to the fund and to your personal portfolio?

Miller:

I don't have a personal portfolio. The most recent name that we've been adding to the fund would be

ONI Systems

(ONIS)

.

What's your take on ONI and the networking sector? A lot of folks have concerns about the stocks this year, between the dipping capex spending and the looming specter of vendor financing, the way these companies are loaning money to their customers to buy their own equipment. What's your take on that group?

Miller:

Generally, I think we're more positively disposed to the group. The large carriers have the funding, the leading CLECs will have the funding as well. And the overseas phone companies also have the funding to continue to build out these networks.

So, again, it's the leading companies that we generally are focused on and the ones that we're buying in these corrections. So companies like

Sycamore

(SCMR)

,

Juniper

(JNPR) - Get Report

, ONI and

Extreme Networks

(EXTR) - Get Report

, would be four names that we like in that space. Again, we think that even if overall capex flattens out or even declines a bit for the industry in aggregate, they're still going to see strong growth in the markets that these companies serve.

Fund Junkie runs every Monday and Wednesday, as well as occasional dispatches. Ian McDonald writes daily for TheStreet.com. 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

imcdonald@thestreet.com, but he cannot give specific financial advice. Editorial Assistant Dan Bernstein contributed to this article.