Fund Spy
Don't have the stomach for technology stocks?
That may be what a lot of people are thinking after last week's tech rout. At one point, the Nasdaq Composite index had fallen nearly 10% from its high, though it has since rebounded strongly.
Sure, technology firms face enormous market opportunities, but the sell-off was a sharp reminder that they also carry significant risks. A recent article in Barron's put the trailing P/E of the Nasdaq at 200--about 13 times the historical norm for the stock market. With that sort of valuation, even slight fundamental weakness could cause tech shares to tumble.
Of course, in 1999 investors avoided technology at their peril. While tech funds posted triple-digit gains last year, other major sectors, such as health care and financials, posted weak results.
What's an investor to do?
One solution is to focus on funds that have continued to deliver strong returns, despite staying light on tech. The following three valuation-conscious managers are such good stock-pickers that they have been able to beat the S&P 500, even though they have underweighted its hottest sector.
Beth Terrana, Fidelity FundFFIDX
Terrana is known as one of the best stock-pickers in the business, and in 1999, it was easy to see why.
Concerned about the risk posed by lofty technology valuations, she underweighted the sector throughout the year, sometimes by more than five percentage points. Nevertheless, last year Fidelity Fund topped the S&P 500 by more than three percentage points.
Terrana made a number of good calls. She executed a highly successful bet on wireless stocks such as Vodafone Airtouch VOD, and her modest wager on Japanese equities also boosted returns. Because wireless stocks have run up so much, Terrana is not putting more money to work in that area right now, but she thinks the Japanese rally has a way to go.
Finally, Terrana bought the right stocks even within areas that performed poorly. For example, she bet heavily on financials such as Citigroup C and American Express AXP, which both registered terrific gains, while entirely avoiding dogs like First Union FTU.
Terrana's success is no recent phenomenon; the fund beat the S&P 500 in 1998, too. Her fund has also topped more than 90% of its large-cap blend peers over the past three years while taking on less risk (as measured by standard deviation).
Wally Weitz, Weitz ValueWVALX
Weitz has prospered by being a contrarian who is several years ahead of the market.
It is hard to believe now, but a few years ago, cable, media, and telecom stocks were down and out. Weitz bought shares in AT&T Liberty Media LMG.A, Media One UMG, and Centennial Cellular CYCL at a fraction of their current values. Indeed, despite a nearly nonexistent tech stake, the fund has beaten the S&P 500 over the past three years.
Always going against the grain, Weitz is now loading up on Washington Mutual WM and other beaten-down financials, as well as a number of sagging real-estate stocks, including Catellus Development CDX.
Bill Nygren, Oakmark SelectOAKLX
In its three full calendar years of existence, this fund's smallest margin of victory over its mid-cap value peers has been eight percentage points. Since its November 1996 inception, the fund's cumulative return tops the S&P 500's--no mean feat for a value fund with modest technology exposure.
Like Terrana and Weitz, Nygren is a superb stock-picker. He'd better be: The fund is highly concentrated, holding only 15 to 20 names at a time.
Nygren looks for stocks that are trading at discounts to what a rational business person would pay for the entire company, and in that regard, he has been successful. Significant holdings such as McDonnell Douglas and First USA were acquired, giving a big boost to the fund.
Nygren's other big winners over the years have been quite varied. Among them are Amgen AMGN, Cablevision Systems CBC, and AT&T Liberty Media LMG.A. All those stocks show up in growth funds now, but they were definitely in value territory when Nygren bought them.
Like Weitz, Nygren has made a large commitment to mega-thrift Washington Mutual WM, and he has also established a large position in building-materials maker USG USG.
Of course, all funds take on risk of some sort, but these have delivered at least solid returns even when the market trends were not in their favor. That suggests that when growth stocks in general--and tech issues in particular--take a breather, these funds have the potential to put up some exceptional numbers.
That may be what a lot of people are thinking after last week's tech rout. At one point, the Nasdaq Composite index had fallen nearly 10% from its high, though it has since rebounded strongly.
Sure, technology firms face enormous market opportunities, but the sell-off was a sharp reminder that they also carry significant risks. A recent article in Barron's put the trailing P/E of the Nasdaq at 200--about 13 times the historical norm for the stock market. With that sort of valuation, even slight fundamental weakness could cause tech shares to tumble.
Of course, in 1999 investors avoided technology at their peril. While tech funds posted triple-digit gains last year, other major sectors, such as health care and financials, posted weak results.
What's an investor to do?
One solution is to focus on funds that have continued to deliver strong returns, despite staying light on tech. The following three valuation-conscious managers are such good stock-pickers that they have been able to beat the S&P 500, even though they have underweighted its hottest sector.
Beth Terrana, Fidelity FundFFIDX
Terrana is known as one of the best stock-pickers in the business, and in 1999, it was easy to see why.
Concerned about the risk posed by lofty technology valuations, she underweighted the sector throughout the year, sometimes by more than five percentage points. Nevertheless, last year Fidelity Fund topped the S&P 500 by more than three percentage points.
Terrana made a number of good calls. She executed a highly successful bet on wireless stocks such as Vodafone Airtouch VOD, and her modest wager on Japanese equities also boosted returns. Because wireless stocks have run up so much, Terrana is not putting more money to work in that area right now, but she thinks the Japanese rally has a way to go.
Finally, Terrana bought the right stocks even within areas that performed poorly. For example, she bet heavily on financials such as Citigroup C and American Express AXP, which both registered terrific gains, while entirely avoiding dogs like First Union FTU.
Terrana's success is no recent phenomenon; the fund beat the S&P 500 in 1998, too. Her fund has also topped more than 90% of its large-cap blend peers over the past three years while taking on less risk (as measured by standard deviation).
Wally Weitz, Weitz ValueWVALX
Weitz has prospered by being a contrarian who is several years ahead of the market.
It is hard to believe now, but a few years ago, cable, media, and telecom stocks were down and out. Weitz bought shares in AT&T Liberty Media LMG.A, Media One UMG, and Centennial Cellular CYCL at a fraction of their current values. Indeed, despite a nearly nonexistent tech stake, the fund has beaten the S&P 500 over the past three years.
Always going against the grain, Weitz is now loading up on Washington Mutual WM and other beaten-down financials, as well as a number of sagging real-estate stocks, including Catellus Development CDX.
Bill Nygren, Oakmark SelectOAKLX
In its three full calendar years of existence, this fund's smallest margin of victory over its mid-cap value peers has been eight percentage points. Since its November 1996 inception, the fund's cumulative return tops the S&P 500's--no mean feat for a value fund with modest technology exposure.
Like Terrana and Weitz, Nygren is a superb stock-picker. He'd better be: The fund is highly concentrated, holding only 15 to 20 names at a time.
Nygren looks for stocks that are trading at discounts to what a rational business person would pay for the entire company, and in that regard, he has been successful. Significant holdings such as McDonnell Douglas and First USA were acquired, giving a big boost to the fund.
Nygren's other big winners over the years have been quite varied. Among them are Amgen AMGN, Cablevision Systems CBC, and AT&T Liberty Media LMG.A. All those stocks show up in growth funds now, but they were definitely in value territory when Nygren bought them.
Like Weitz, Nygren has made a large commitment to mega-thrift Washington Mutual WM, and he has also established a large position in building-materials maker USG USG.
Of course, all funds take on risk of some sort, but these have delivered at least solid returns even when the market trends were not in their favor. That suggests that when growth stocks in general--and tech issues in particular--take a breather, these funds have the potential to put up some exceptional numbers.
Scott Cooley is the guest columnist for today's Fund Spy.