Top Growth Manager Returns to Tech in a Big Way

Six years have passed since the start of the Nasdaq crash, and since then, there has been plenty of talk about how some growth stocks have eased into value territory and vice versa. Even so, it's still natural to associate growth funds with technology stocks. And it does make some sense given that, with innovation in that area as rapid as ever and new types of products liable to spread broadly throughout the population, there's a better chance that a tech firm might achieve high growth rates than companies making more-established products.

That's why it was somewhat surprising that an advisor as closely linked with growth investing as Friess Associates, manager of Brandywine Fund BRWIX and Brandywine Blue BLUEX, had such small investments in the tech area for long stretches of time after the tech crash. Yet the experienced investors at Friess had a straightforward reason: They have compact portfolios and they saw better opportunities elsewhere. Traditional growth area or not, few tech stocks were appealing enough to make it into their funds.

There was one exception, though: When tech took off in 2003, manager Bill D'Alonzo and his colleagues--who trade often and aren't afraid to make bold shifts--moved belatedly but decisively into the area. However, after a few quarters--and some nice profits--they moved out just as decisively, and again became deeply underweighted versus the typical rival from the mid-growth (Brandywine) and large-growth (Brandywine Blue) categories. At the end of 2004, each fund had only about 10% of its portfolio devoted to software and hardware firms combined, roughly half the amount the typical funds in their categories had in tech at the time.

Now, though, tech is back in both funds. The buying started in earnest in mid-2005; by now Brandywine has fully 32% of assets in tech and Blue has 24%. That's interesting not only for shareholders of those funds but for a broader audience, because these managers have one of the longest and more impressive records in the growth-investing field. What's more, their moves echo those of the global managers we highlighted in a previous column who were increasing their stakes in the United States after a long period of treading very lightly in this country. Several of the most prominent targets of those managers were in the technology area.PAGEBREAK

The Brandywine team emphasizes that even though broad appearances may imply they're making a call on the tech sector in general, the large increase in the tech weightings--a tripling in Brandywine Fund's case--results much more from individual company decisions. However, they did tell Morningstar analyst Karen Dolan recently that they see some positive industrywide trends that explain why so many companies look appealing now, such as the healthy effects of cost-cutting after the late 1990s tech bubble, and an expected upward trend for business spending. That said, they're not shouting "buy tech"--it's the particular companies they have strong feelings about, for specific reasons.

At Hewlett-Packard HPQ, for example, they like a number of actions taken by the new management. They're very keen on Cisco CSCO--at the end of the first quarter it was the top holding in Brandywine Fund and the second-biggest holding in Brandywine Blue, where it took up more than 5% of assets. With that firm, solid earnings and strong execution has impressed them. Another favorite is Oracle ORCL--they're encouraged by the way it has integrated the companies it has acquired in recent years. They're also enthusiastic about a less-well-known name, Avaya AV, noting its potential for growth in Internet-based telephone technology and its recovery from some setbacks in recent years.

Not all technology firms excite them, of course. Besides the ones they don't own, there's one in particular they soured on recently: They sold Juniper Networks JNPR after a disappointing earnings report combined with the company guiding future earnings expectations downward.

So how has all this buying in the tech arena influenced performance so far? Brandywine Fund is beating two thirds of its mid-growth peers over the 12 months through June 14, 2006. Brandywine Blue is beating 85% of its large-growth rivals. Of course, this performance owes to much more than just the tech stocks. Most notably, Brandywine Blue's top holding, Weatherford International WFT, which makes oil-drilling equipment and systems, is up 63% over the past 12 months as a result of stellar earnings reports. As for the wisdom of moving into its tech stock holdings--and moving out of one--the story continues. Stay tuned to see how the funds fare--and, given their rapid-trading habits, to see how long they stay in these stocks.

Gregg Wolper is a senior analyst with Morningstar.