Like most tech-fund managers, Marc Klee has taken his lumps over the last year. Unlike most, though, he's willing to talk it over and shed some light on the situation.
Fund: John Hancock Technology
Co-Managed Since: January 13, 1983 (inception), with Barry Gordon
Assets: $1 billion
5-Year Return/Ranking: 9%/Trails 75% of Peers
Sales Charge/Annual Expense Ratio: 5%*/1.28%
*Class A shares' maximum sales charge used for example.
Klee and co-manager Barry Gordon tend to focus on higher-quality tech shops with clean balance sheets and steady, smart managers, which typically leads to a diversified portfolio. Translation: Lower returns, but less risk than his highflying peers.
We spoke to Marc because he's run his fund for almost 20 years and doesn't mince words about his own missteps and what he's doing now. He's also a part-owner of a couple of minor-league baseball teams. How cool is that?
Where does he see tech traps? What's his take on the bellwethers and what catalysts could send tech stocks up? Read on to find out.
1. Let's talk about the Nasdaq and the tech sector. Where are we today and how did we get here?
The Nasdaq has had a very severe decline, which began on March 10 of last year. But the story actually goes back a little bit before that. It goes back to October 1998.
What we have seen in the past 2 1/2 years has been nothing short of a roller coaster. From October 98 to March 2000, tech stocks, which began the period being very inexpensive relative to other stocks, had an enormous move. We went through a period of time where there became an undying belief in technology and the promises that it could provide, with the ultimate being dot-com fever, and on March 10, that all came to an end.
Now, like other times, both tops and bottoms, nobody comes out and rings a bell and says that this is the top or this is the bottom. And valuation itself is rarely the cause of a change in direction for markets, but rather it's very important in terms of magnitude of changes. And I don't think what we saw last March was any different.
I think the cause or the catalyst, if you will, for the decline that began on March 10 in the Nasdaq was the market's ability to look ahead and see the changing economic conditions; historically, the stock market has an excellent record of forecasting economic activity. Probably the best example of that is the
as one of the 10 components of the Index of Leading Economic Indicators.
In retrospect, it appears that the market got it right on once again. That it saw an economy that was going to slow the traditional 6-9 months in advance.
GDP growth in the fourth quarter of 99 was 8.3%. Two quarters later, second quarter of '00, it was 5.6%, still humming. By the fourth quarter of 2000, two more quarters, the latest revision says it was 1.0%. So we saw a dramatic slowing in the economy, which appears to have begun in the October/November time frame. Time it backwards to that March 10 top, and that's seven to eight months that the market preceded the decline in economic activity.
Now the second half of the question -- what else happened? Since March 10, we have seen an unprecedented decline in the Nasdaq. Unprecedented in that the decline in the Nasdaq has been from in excess of 5100 back in March 2000 to below 1700 today. As we speak, we're a little below 1700, the second most severe decline by a major stock market index in U.S. history.
In my 24 years in the business, I have never seen anything like this. Neither have most people, because it was only 1929-1932 in the Dow that was more severe than what we have seen in the past 13 months. And even that was from 1929-1932, this was, as I said, 13 months.
So, in terms of rapidity, this is unprecedented. In terms of magnitude, it has only one other instance that was even close and that being the Great Depression.
What's the catalyst that's going to turn things around?
This is just one man's theory, because like anything else, you're only going to know this in retrospect. I believe it's going to be the market's ability to see ahead that does it again.
The market's going to look out, it's going to see economic activity improving, and it's going to discount that in advance, and "a mirror image" of what happened in 2000 is going to be the impetus for 2001, when we get the turn.
Short-Term Pain, Long- Term Gain
Source: Morningstar. Returns through April 6.
2. Earlier this year, a lot of folks were saying there's going to be a second-half economic recovery, and that the market will anticipate that. What do you see as a time frame?
I do think we're going to have an improvement in the fourth quarter. Some people were obviously calling for it a little earlier than that. I do think it starts to happen in the fourth quarter for a variety of reasons. Just to quickly go through them, I think one of them is the impetus of the Fed, the fact that we've had Fed fund rate cuts; historically, changes in Federal funds rates take a minimum of six months to have any impact on economic activity.
First cut came Jan. 3. That would suggest that we're unlikely to have much of an impact before the third quarter. I think we will see a tax cut. What form it will take, Lord knows. You think predicting the market is hard? Try predicting what Washington's going to do.
I believe that there's a psychological aspect to the market. The decline that we witnessed last year definitely took its toll on the American consumer, and continues to. And, I think at some point, when it stops going down, as the selling exhausts itself, it will stop being a negative.
One other thing that I think is critical is inventory. There's only one thing that cures inventory as far as I can tell, and that's time.
I think at some point you do start to work your way through it. I don't know when it is, but I think in some areas we've already started to see that, particularly in the personal computer sector.
, in their last conference call, for example, said that the PC industry seemed to know this already in September/October, and started to cut back and you're seeing less of an imbalance now. Well that's about six months later. I think it's going to be a rolling improvement.
3. When you look at the valuations on the Nasdaq, everything is certainly a lot cheaper than a year ago. The price is lower, but the valuations in many cases are still pretty high. Do you think there's value in the Nasdaq, and if so, where is it?
Absolutely. I think there's a lot of value in the Nasdaq, but I think it's still somewhat spotty. There are a lot of stocks that probably will never recover to the highs that they saw a year ago this time, and I think that's an important distinction. There is a big difference between price and value. And the fact that the stock gets cut in half does not mean it's cheaper today than it was then. It depends upon the reason for the decline and what that implies.
Now, where are there values? I think, as always, it's more individual stocks than sectors. But if you're looking at sectors, I think the PC sector is one to look at. While I expect a shakeout there and I think it's going to be a continued difficult environment, I do believe that fundamentally, the worst is behind them and that this will be a permanently slower-growth business than it had been in the past, and that's a function of maturation.
As people start to have PCs, you lose one of the two driving forces which is new penetration, and you're more reliant on the other driving force, which is replacement. That's also true if they're in the handset business, same kind of thing. Handsets still have -- they're not as mature as PCs, they still have growth in terms of penetration, but more and more, you become reliant in terms of replacement. And people always talk about the automobile industry as an analogous area, and to a certain extent, it is for the PCs, in that many car purchases are made to replace one with another. Not all.
People buy, their kids become of driving age and they buy them a car. Obviously that would be a new purchase, but a lot of them are replacement. Same thing in the PC sector. While a household may own one PC and eventually go to two, a lot of the purchases are to replace one that's in the household or in a business setting.
Therefore, it's a slower growth business, but I think the companies there recognize that, and have altered their business models accordingly. They're not more focused on the same thing that the auto dealers are, add-ons. Just like an auto dealer tries to sell you an extended service contract or rustproofing and things like that, same thing in the PC business where they try to sell you Internet service, peripherals, software, financing and extended service contracts.
4. Who stands out to you in this area?
is going to expand its lead over its competition. I think that in this kind of an environment, cost structure is critical because
it helps companies pick up market share ... The big companies,
(CPQ:NYSE - news),
(GTW:NYSE - news), Dell,
(HWP:NYSE - news),
(IBM:NYSE - news), they've already gained a lot of the easy market share; now it's going to be a battle among themselves. And I think Dell is going to be the big winner, but I would add other areas in this general sector in terms of valuation.
I think the disk-drive companies get interesting. The
-- which are very commoditized, and by commodity, what we mean is, supply/demand driven, pricing is everything -- and similar companies could do well. I think a company like
in the semiconductor space that produces memory, which is another commodity product, will be a big winner from that, as well.
So, it's not just a straightforward PC company, but it's an industry call, sort of.
5. Let's play tech-stock word association. I'm going to name some bellwethers and you tell me if you own them, what your take is on them and on the company. First one: Cisco.
we do own, I think down here in the low teens. It's very attractive, because I think long-term it will have reasonably good growth, not as robust as it has had, but the valuation is so much more reasonable now.
How about Microsoft?
is our third-largest holding. That's a relatively recent addition for us. We added significantly to the position to this calendar year. We think the worst is behind them, and while it's not the fastest-growing technology company, we think the valuation reflects that, and we think you're getting reasonable growth at a very good price.
A key point with that company in this environment is the reliability of that growth, right?
And the cash balances, too. And it also fits in the PC theme that we were just talking about. The other thing of course is, the Justice situation which we can't ignore, and I think that there's a reasonably good chance that Microsoft will come out OK on that.
Want to hear Klee's take on Intel, Oracle and the three stocks he'd recommend buying and holding for five years? Read on.
Fund Junkie runs every Monday, Wednesday and Friday, 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
email@example.com, but he cannot give specific financial advice.