An Eye For Treasure

PBHG's Slattery has a way of netting the Net's true gems

Even in a time of extraordinary gains for high-tech stocks and the mutual funds that buy them, PBHG New Opportunities Fund is in a league of its own. The fund, piloted by 27-year-old Frank P. "Quint" Slattery, celebrated its first anniversary on Feb. 12. Its total return: 622%.

Sure, big gains in a few stocks can send the net asset value of a small fund rocketing--and New Opportunities was launched with only $8 million. But a sevenfold increase "is truly amazing," says Edward S. Rosenbaum, research director at Lipper Inc., a fund-data company. During the same period, the average U.S. diversified equity fund gained 31%, says Rosenbaum.

SORRY, TOO LATE. It's no secret how Slattery did it: Internet stocks, especially the companies that serve business-to-business markets or provide the Net's infrastructure. His biggest and most profitable holding is Inc., which now makes up about 6% of the $390 million fund. Other top names include JDS Uniphase, Brocade Communications Systems, and Exodus Communications. Yet, New Opportunities is not, by its prospectus, even a tech fund.

"We want to own the very best and fastest-growing companies," says Slattery. "At some time, those may be health-care or consumer companies, but right now they're tech." Slattery, a 1996 Princeton University graduate, joined Pilgrim Baxter & Associates, parent of PBHG Funds, as an analyst in 1998 after crunching numbers for investment bankers at Merrill Lynch & Co.

If you hadn't the foresight to invest in New Opportunities, you can't do it now: It closed to new investors in November at $100 million. Slattery also runs PBHG Select Equity Fund, now $1.2 billion and still open, and the 30 "core holdings" of both are largely the same. Since he took over Select Equity in the fall, both funds have performed similarly, though New Opportunities has had an edge of five percentage points. Slattery credits that to short-term, opportunistic trading with about 20% of the fund's assets.

Both funds have been resistant thus far to market downdrafts. On Feb. 18, when the Nasdaq lost 3%, Select Equity dropped 0.8%, and New Opportunities, just 0.5%. That surprises even Slattery. "I expected more volatility on the downside," he says. "Perhaps people are just reluctant to sell the leaders."

Slattery admits that by traditional valuation measures like the price-earnings ratio, his stocks seem way overpriced. But that's not the way to view them. "Every day, I ask, are the fundamentals for this company getting better or worse, and as long as they're getting better, I hold the stock," he explains.

MERE CHILD. Although InfoSpace climbed over 1,000% last year--and 81% so far this year--it is still in its infancy, Slattery says. InfoSpace provides information and services to 4,000 other Web sites and keeps a piece of the advertising, transaction, and distribution revenues. It's also positioned to serve wireless Internet and interactive TV. Slattery forecasts that InfoSpace, with $36 million in sales last year, will have revenues of $1 billion by 2004. Say Slattery: "InfoSpace will be to the Internet what Microsoft was to the desktop."

One could dismiss that forecast as youthful exuberance, but a 622% return says Slattery may be on to something.

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