Portrait Of The Techie As A Fund ManagerJeffrey M. Laderman
Roger B. McNamee prowls New York's cavernous Jacob K. Javits Convention Center, where PC Expo, a computer trade show, draws hundreds of exhibitors and thousands of visitors. Like many, he's weighed down with a bag of promotional literature. But he isn't shopping for notebook-size computers, laser printers, or Windows software. Instead, McNamee, who runs the top-rated T. Rowe Price Science & Technology Fund Inc., is carefully watching the shoppers.
"Look at WordPerfect," he says, pointing to the crowd gathered for a demonstration. "And some in the industry say that program is dead." He takes a pass at Santa Cruz Operation, which sells UNIX software for PCs. "That's the third time today I've gone by, and there's still no one there. If people were unhappy with Windows, they'd be looking at UNIX." He stops at NCR Corp. to see its new notebook computer that's operated by a pen rather than a keyboard. "Pen-based computing," he proclaims, "is the next wave."
McNamee also engages exhibitors in conversation, asking for demonstrations of their products and for opinions of others. "Roger's outgoing and charismatic, and people open up to him," says Bill Grubb, president of The Complete PC Inc., a privately held company that makes computer peripherals. "He gets more information than most analysts."
And most of that information is grist for McNamee's approach to high-tech investing. He's trying to identify important trends and the companies with products that will capitalize on them. The 35-year-old fund manager doesn't worry about forecasting quarter-to-quarter earnings. If you're right on the product cycles, he says, the profits will follow.
McNamee attends about 15 trade shows a year. Throw in industry meetings, brokerage-firm conferences, and on-site visits to companies, both public and private, and McNamee logs about 140 days a year on the road. Three associates also spend much time out of the office. "The mission is to penetrate the industry and develop a network of contacts similar to that of an industry executive or consultant," he says. "It's `participative' research."
FIVE STARS. Whatever it's called, it works. Since he took over the portfolio in September, 1988, the Science & Technology Fund, through June 30, has delivered a total return of 74% vs. 50% for the Standard & Poor's 500-stock index. More important, Morningstar Inc., which takes risk into account, gives the fund five stars--the only one of 18 technology funds to earn the top grade. As of June 30, the fund had assets of $143 million.
Make no mistake: This fund is not for the squeamish. In the first quarter, it was sensational--up 43%, the best technology fund and fourth best of all equity mutual funds. In the second quarter, when many tech stocks were mauled, the fund lost 12% of its net asset value. It was the second-worst technology fund and the fifth-worst of all funds.
"Am I disappointed?" asks McNamee. "Yes. Am I surprised? No." Big swings, he says, go with the territory, and it has happened before. Without the 28% cash cushion he built after the first quarter runup, the fund might have fared even worse. Still, for the first half of 1991, the fund gained 25.5% vs. a 17.8% average for technology funds.
"Roger has strong convictions and takes big positions in companies he believes in," says Edward J. Mathias, a managing director at T. Rowe Price. "And he also admits his mistakes quickly." One such wrong turn was Compaq Computer Corp. After two tumbles this spring that took the price from the low 70s to about 50, McNamee loaded up on the stock. "Those sell-offs were usually good buying opportunities," he says. "I thought the second shoe had dropped."
Then, within days, the company dropped another bomb, and the stock plunged 20%. He sold out. Says McNamee: "Compaq had three shoes." In retrospect, the portfolio manager violated one of his own rules. "The stock was cheap, but the new-product pipeline was dry," he says. "And product cycles are what drives high-tech earnings."
Still, dismal second-quarter results haven't changed McNamee's plans. The trends for industry growth are still the same. One is "portability"--smaller, lighter, more powerful PCs. "Desktop PCs are a mature business," he says. "Everyone who wants one has one." Networking groups of PCs together is another growth area. A third is the graphical user interface (GUI), systems such as Microsoft Corp.'s Windows that let a user point to a symbol on a screen instead of typing computer commands.
For McNamee to invest heavily in a company, it must be operating in one or more of those fields. Adobe Systems Inc. is the major provider of software for electronic printing and publishing. He says it fits the GUI theme. Apple Computer Inc. hits GUI, networking, and, later this year, portability, too. Novell Inc. is the premier provider of networking software. Cirrus Logic Inc. and Phoenix Technologies Ltd. both work in portability and GUI. Phoenix, which the fund started buying last year at $3, provides software that makes different PCs compatible. The stock, now at 8 7/8, is one of the few to escape getting clobbered during the second quarter.
BIT OF LEVITY. Although he can carry on about bits and bytes, McNamee is not a tech-weenie. In fact, he's a lively speaker who injects a little levity to make his points about the perils of his trade. "Science fiction," he explains, "is the stuff between covers of the prospectus for an initial public offering." Says Helen Johnstone, who follows technology funds for Morningstar: "He really gets excited about technology. He's not just waiting for something better to come along."
McNamee graduated with a history degree from Yale University in 1980 and earned an MBA from Dartmouth College's Amos Tuck School in 1982. He went to T. Rowe Price as a research analyst--first in aerospace, then telecommunications, and later office products. In 1986, McNamee switched over to the fast-changing technology beat. "It fit my personality," he says. "High energy level, short attention span."
With technology stocks beaten up, is this the time to buy? Indeed, as the stocks tumbled, McNamee spent most of his cash adding to positions and establishing new ones, such as Dell Computer Corp. and AST Research Inc. Although the fund is up more than 5% since July 1, McNamee could be setting himself up for a fall. But that's the way he plays. And his record shows he usually wins.
McNAMEE'S TOP TEN HOLDINGS Company Percent of fund assets ADOBE SYSTEMS 7.0% APPLE COMPUTER 6.0 CIRRUS LOGIC 4.0 PHOENIX TECHNOLOGIES 3.5 MICROSOFT 3.0 NOVELL 3.0 DELL COMPUTER 3.0 SUN MICROSYSTEMS 3.0 INTERGRAPH 2.5 REUTERS HOLDINGS 2.5 DATA: T. ROWE PRICE SCIENCE & TECHNOLOGY FUND