I had Huachen Chen on the phone the other day and was astonished to find that even he was astonished. E-TEK Dynamics, a stock in the Dresdner RCM Global Technology Fund he co-manages with Walter Price Jr., had just jumped 66 points on word of a merger with fiber-optics leader JDS Uniphase. "E-TEK is actually the third time we've owned something that Uniphase bought," he said, stifling a laugh. Last year, such picks helped send the $480 million fund up 183%.
Pure luck? I don't think so. Chen and Price opened the no-load fund just four years ago, so you may not know them. But over the fund's life, it has returned more than any other mutual fund--an annual average of 64.5%. And it did so without flipping a single initial public offering. Even more impressive is how the similar institutional portfolio they've run since 1985 has never seen a losing year.
Chen and Price, each of whom has both an engineering and a business degree, run a total of $3.1 billion. Their recipe: Focus on leading companies in the most rapidly advancing technologies. Then, temper risk by spreading bets across 75 stocks in many industries and countries. If they see danger, the fund flees to cash or defensive plays.
What do Chen and Price see now? They aren't ignoring the risk inherent in tech stocks' unprecedented valuations. "It's a potential problem that we all have to ponder," Chen says. But they also see unprecedented opportunities, so the fund remains heavily invested, especially in optics, wireless telecom, chips, and the Internet (table). I pressed Chen for names of companies they're still keen on, even at lofty prices, and the reasons why:
Optics. No technology in memory, Chen and Price believe, offers as much potential. "Optics is going to make integrated circuits look tame," Chen said. The fund's top stake remains JDS Uniphase, even though it has risen more than fourteenfold in the past year. A more controversial pick is Tyco International, which is benefiting from fiber-optic growth via its undersea-cable unit. The stock, lately around 38, got creamed last year as questions about its accounting prompted a Securities & Exchange Commission inquiry that is still going on. The fund's own close look at Tyco's last 16 cash flow statements tells Chen fraud is unlikely. He sees profit growing at 25% for the next three years--much faster than its price-earnings ratio of 18 would suggest. So far, Tyco has been a big loser for the fund.
Wireless. The fund enjoyed a huge December run in shares of Qualcomm, a big holding last fall. But it's hedging with a basket of top names, including Nokia, Motorola, and Ericsson, added in October. Chen thinks Nokia's management is outstanding but warns: "I'm just not smart enough to know which stock is going to be best."
Chips. After deciding that Y2K anxiety didn't lead to overstockpiling of semiconductors, Chen and Price recently rebuilt the fund's holdings in chip-equipment makers, including ASM Lithography. Chen thinks the Netherlands company could double sales this year. He estimates ASM's earnings, which the Street sees near $3 a share next year, at closer to $3.50 or $4.
The Internet. After a debate Chen describes as "fierce," the fund this year dumped Amazon.com. Chen thinks investors are growing impatient for profits. The fund kept a sizable stake in Yahoo! Japan, but mostly it is focused on Net software makers and service companies. A big gainer with lots of upside: Check Point Software Technologies, a U.S.-Israeli maker of firewall and security programs. Chen sees sales rising 50% annually over the next three years, with profits nearing $5 a share in 2001, more than double those over the past 12 months.
Might some of these picks not pan out? Sure. As investors send Chen and Price more and more money, the team's performance could suffer. Or the market might devalue all technology. But if you're still eager to bet on tech, these guys know a lower-risk way to play.
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