You might say James K. Renck has a green thumb. Not just because he has successfully transplanted close to 450 pine and maple trees onto the farmland surrounding his house in New Hope, Pa. But also because he has made investors a ton of the green stuff.
In the past six months, Renck's $525 million Merrill Lynch Technology Fund--up from $70 million two years ago--returned close to 22%. That's in stark contrast to the average tech fund, which dipped 0.87% when Renck's fund is included in the average and fell 3% when it isn't, according to Morningstar Inc. Such success isn't a flash in the pan: In 1993, Renck's fund returned 21%. In 1992, it racked up a 46% return.
The 37-year-old fund manager gets such eye-popping results by taking an unconventional approach. Many sector-fund managers feel obliged to stay close to fully invested and don't hold big cash positions. But Renck has no qualms about having large cash holdings. At one point in 1993, he had 92% of assets in cash. "I like to have cash, because people panic," he says, noting that it's more a desire to have purchasing power than to time the market. "I'm more concerned about product cycles than economic cycles," he says.
Renck made one request when he was given the fund to manage: Change its status to nondiversified. That would remove the requirements to have 75% of assets diversified and not to hold more than 5% of assets in one stock. Renck has put as much as 25% of assets into one stock--Micron Technology Inc. He has held as few as five stocks and doesn't like to hold more than 25. That leads to volatility: "With concentrated positions and huge swings in and out of the market, this is not a mild fund," says Morningstar analyst Jennifer Newport.
Like Renck's trees, the fund is a transplant. Until mid-1992, it was part of Sci/Tech Holdings Inc., a Merrill-sponsored fund Renck says was "a huge marketing success but didn't have great performance"--being too broadly diversified and involving too many fund managers. Renck keeps his operation small, using one research analyst.
A willingness to sell stocks for short-term gains also makes Renck's fund stand out in a crowd. "You only make money when you sell," he states. "We want a positive return at the end of the year." He says that can keep investors from being burned: "If you manage a fully invested portfolio with a top-down approach, you're up big one quarter--and down big another quarter. We work at trying to avoid that." But taxes take a big bite out of short-term capital gains, shrinking the fund's 20.9% return in 1993 to 12.4% for investors in the 31% tax bracket. Investors in higher tax brackets may want to use the fund in a tax-sheltered account, such as a Keogh.
"PRINTING MONEY." Renck is now reinvesting cash, which is down to about 20% of assets. "We see strong and improving demand for a lot of companies," he says. "There are company-specific problems that people say are indicative of slowing demand. My research says that is not the case." His favorite pick: still Micron Technology. He says the company, the low-cost producer of dynamic random-access memory (DRAM) chips, is "printing money," has price increases booked through 1994's third quarter, and could be the leader in the next generation of its product.
Renck doesn't always wind up on the winning side of a bet. Take Iwerks Entertainment Inc., a high-tech movie and entertainment company. It is one of the rare instances when the fund bought an initial public offering. After nearly doubling from its offering price of 18, the stock has fallen to 61/4. "It's a good example of a company with a lot of promise that did not execute its plan," says Renck. "We blew it."
For the manager of such a high-octane fund, Renck has a remarkably calm demeanor. But frustration starts to show when he talks about short-sellers bad-mouthing some of his holdings, such as Creative Technology Ltd., the maker of Sound Blaster audio cards for personal computers and one of his top 10 holdings. "I use these opportunities to add to positions," he says, massaging his temples. After accumulating the stock at prices ranging from about 10 to 14, Renck watched it drop to 101/2 and then climb to 18. "We have substantial dollar profits," he says.
With two years of performance to brag about, Merrill will soon launch the fund's first advertising campaign. Renck, who doesn't get paid on the amount of assets in the fund, nevertheless says he wants more purchasing power for the fund. Given his record, investors will likely grant his wish.
RENCK'S TOP PICKS Stock Price-earnings price* ratio MICRON TECHNOLOGY 34 1/4 11.0 CREATIVE TECHNOLOGY LTD. 18 15.5 ACCLAIM ENTERTAINMENT 151 1/16 17.0 APPLIED MATERIALS 42 3/4 23.0 SEGA ENTERPRISES LTD.** 79 3/4 35.0 *As of July 5 **Traded on Tokyo exchange DATA: MERRILL LYNCH & CO., NOMURA RESEARCH INSTITUTE