If your mutual fund is lagging the Standard & Poor's 500 Index, it may be because your portfolio man...
If your mutual fund is lagging the Standard & Poor's 500 Index, it may be because your portfolio manager has shunned high-technology companies such as America Online, up 88% this year, and Cisco Systems, up 71%. About 10% of the US domestic stock funds that beat the S&P in the first nine months held less than 5% of their assets in software, hardware and internet-related companies, according to Morningstar, the fund-tracking company. Those industries account for 13.3% of the index.
"It takes a lot of particular expertise to understand technology well, an expertise that when I look at myself in the mirror, I don't have,'' said Cliff Greenberg, manager of the Baron Small Cap Fund, which returned 26.85% for the first three quarters with just 0.2% of assets in tech stocks.
Fountainhead Special Value Fund was first on Morningstar's list of 98 funds that beat the S&P with little or no technology exposure. It returned 53.4% to 30 September. Fidelity Select Energy Service ranked second, returning 50.3%. Global Natural Resources Fund was third, gaining 49.53%.
Take out funds that focus on natural resources stocks which got a boost as the price of oil soared and the number drops to 70 out of the 958 US domestic stock funds that beat the S&P, according to Morningstar, which tracks 2,589 such funds. The S&P returned 5.36% to 30 September.
Morningstar's technology sector includes companies in software, semiconductors, equipment makers, and measuring devices, among other things. The S&P indexes that track software companies gained 30% through three quarters, while computer systems makers rose 28%.
Greenberg's focus on communications and media companies helped him almost match those gains. One of his biggest holdings, Century Communications, rose 40% this year before being taken over by Adelphia Communications last month.
His biggest holding now is UnitedGlobalCom, which owns cable-television networks overseas. His top 10 holdings represent half his portfolio, which comprises 40 stocks. Communications companies account for one quarter of his holdings while media companies such as SFX Entertainment account for 15%. His fund has gained about 50% since it was started in 1997, though it's more than doubled since October 1998, when global markets sank. Between inflows and market gains, the fund has grown to $850m since opening at $100m.
Richard F Lawson is another of the few who have overcome the self-imposed handicap of avoiding shares such as AOL up almost 10,000% the past five years and Cisco, up 1,965% in the same period.
"I like to think about at least a five- or 10-year time horizon, and I find that it's difficult to predict the success of most tech companies over that kind of time horizon,'' he said. "It's hard for me to value those companies, but, when I try and look them, it seems as if they are certainly expensive.''
AOL trades at more than 200 times forecast earnings and Cisco trades at 81 times. The S&P trades at about 30. "The way we manage money here is kind of to find small growing enterprises and own them for a while,'' said Greenberg. "The opportunity for cable companies outside the US is better than here in the States.''
Lawson's $800m Weitz Hickory Fund, closed to new investors, returned 19% for the first three quarters of this year, beating the S&P 500 without a single technology stock. While Weitz Hickory has the only five-star Morningstar rating in the small-blend category, Lawson thinks of himself as a value manager. "I happen to have found a lot of companies that I like that are small companies, but our prospectus doesn't limit us to any one size," he said. "We'll buy what ever makes sense."
Financial services companies make the most sense now, accounting for about 27% of Weitz Hickory's holdings, he said. That includes mortgage banks, such as Countrywide Credit Industries.
"They make money when people originate mortgages, when you go and say I want a mortgage for my home," he said. "And clearly that's cyclical business, and this isn't the best environment they could have, but I think the stock more than reflects that environment, it's just too cheap relative to what it's long-term prospects are."
It trades at about 8 times forecast earnings, while its earnings rose 12% each of the past two quarters. Telecommunications stocks account for his second-largest holding at about 11%, followed by media and entertainment.
Kathie O'Donnell is a Bloomberg reporter
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress