Thriving On Panic
Market panics don't bother Timothy Keefe, manager of John Hancock Large Cap Value Fund. A contrarian, Keefe looks for stocks that are being dumped, including software, which he believes was unfairly pounded when Y2K jitters caused customers to postpone purchases. His approach has given his load fund a solid record, while others have suffered. Hancock Large Cap was the best-performing large-cap value fund last year--vaulting 37.9% vs. 6.3% for its peer group. It has Select Fund status from Standard & Poor's, which, like BUSINESS WEEK, is a unit of The McGraw-Hill Companies. Keefe spoke with Bill Gerdes, a reporter with S&P's Fund Services. A longer version of this interview is available at www.personalwealth.com.
Q: What do you look for in a stock?
Q: What do you look for in a stock?A: I try to identify stocks where panicky sellers are acting irrationally, and the underlying company is beginning to improve. I like to see positive momentum in revenues and cash flows. Our bottom-up process [also] focuses closely on management. Good management gravitates toward good opportunities.
Q: How does your fund differ from other large-cap value funds?
Q: How does your fund differ from other large-cap value funds?A: We probably own smaller companies and more technology companies. I don't see enough returns in the companies of the S&P 500.
Q: What are your latest themes?
Q: What are your latest themes?A: In early 1999, I decided to focus on semiconductors used to make communications hardware, which were beginning to boom. Qualcomm was one holding in this area. On the manufacturing side, we purchased Oak Industries and ANTEC, both producers of broadband components. Toward the end of last year, we bought some attractive software stocks that were hit by a Y2K meltdown, such as Computer Associates, J.D. Edwards, and Parametric Technology. Software is a phenomenal business that generates a huge amount of cash flow and normally has high barriers to entry. Y2K created hiccups in the industry and led to tremendous buying opportunities.
Q: What do you like about Parametric?
Q: What do you like about Parametric?A: It's my favorite stock, and I've recently bought more of it. It has great technology. Its new Windchill product, which puts its software online, will increase its market penetration tenfold.
Q: What are the fund's largest sectors?
Q: What are the fund's largest sectors?A: Technology, finance, and software. I haven't done well yet with some municipal insurance companies, but I think I'm early and will get paid back in the next five years. Attractive opportunities in this area include Financial Security Assurance and Ambac Financial. The Bermuda reinsurance area, meanwhile, has some fantastic management teams, and it's probably at the bottom of its business cycle. My favorites [there] are ACE and XL Capital.
Q: What are your five largest holdings?
Q: What are your five largest holdings?A: Oak Industries, ANTEC, Parametric, Level 3 Communications, and ACE. I'm planning to scale back on Oak Industries, which has grown to 10% of the fund, largely through appreciation.
Q: What leads you to sell a holding?
Q: What leads you to sell a holding?A: We'll sell when other opportunities have higher potential returns. Sometimes you go elsewhere because price appreciation drives the expected returns down to, say, 12% from 20%.