Extreme valuations don't always bother John Leo, co-manager of Northern Technology fund. He likes highfliers--as long as they're market leaders with earnings growth and strong management. For the three years ended May 31, his no-load fund rose an annualized 43.3%, vs. 22.5% for the average tech fund. This year, the fund has returned 27.4% through June 18. S&P and Morningstar have each given the fund five stars out of a possible five. Leo spoke with Bill Gerdes, fund reporter with S&P Fund Advisor (www.personalwealth.com).
Q: What's ahead for tech?
Q: How do you invest in technology?A: We look for market leaders within technology subsectors. We want companies that operate in expanding markets, produce earnings growth, and have dynamic management teams. We like companies led by technologists, not hired guns.
Q: What trends are you following?A: We've recently focused on communications. Our holdings include network chip providers, such as Texas Instruments, Altera, and Vitesse Semiconductor. Copper Mountain Networks provides technology used to convert copper phone lines into high-speed transmission lines.
Q: Why has the fund beaten its peers?A: We increased our Internet exposure in late 1997 and early 1998, earlier than many of our peers. Also, we're probably more focused on market leaders and large-caps than the average tech fund.
Q: Some say Net stocks have peaked. What's your view?A: It would be imprudent to ignore the Internet as an investment opportunity. While rising interest rates have led to profit-taking, the Net is the most rapidly growing area of technology. We're exposed to some of the few profitable Internet companies, such as America Online and Yahoo!
Q: How are initial public offerings changing the Net investment landscape?A: Too many Internet companies are going public. The best have probably already made their debuts, but the increased number of Internet companies may hurt their share prices.
Q: What are the fund's largest holdings?A: Tellabs, Ascend Communications, AOL, Xilinx, and STMicroelectronics.
Q: What are your favorite stocks?A: We have high hopes for Uniphase, which has more than 50% of the market for components for fiber-optic networks. It should gain a stronger position after it acquires JDS Fitel, a component supplier.
Q: When do you sell?A: We usually sell because of a failure to meet objectives, a slowdown in growth, or competitive disadvantages. Because technology valuations can be so extreme, sell decisions based on valuations can be bad ones.