11/10/97 WINNING BIG BY THINKING SMALL (int'l edition)

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WINNING BIG BY THINKING SMALL (int'l edition)

What does it take to be a top technology fund manager? An iron stomach, for one thing. Roland W. Gillis, manager of Putnam Emerging Information Sciences Trust, watched his fund's returns slide 15% in the first quarter of 1997 following a broad decline in U.S. high-tech stocks. Fearing more tech-stock turmoil, two European pension funds then pulled out, taking 40% of Gillis' fund's assets along with them. To Gillis, a 21-year veteran of small-cap investing, it was all in a day's work. ''Big swings like that are nothing unusual in my business,'' he says.
Despite the gyrations, Putnam Emerging Information Sciences has been a winner. For the 60 months ended Sept. 30, the cutoff date for BUSINESS WEEK's annual survey, it recorded an average annual gain of 38%, making it the top performer among the offshore equity funds we rated highest for their risk-adjusted returns. This year, the fund has done less well--up 14% through Sept. 30--and Wall Street's abrupt sell-off of tech stocks in October may further cut its gains.
CAP SIZE. But Gillis still figures conditions for his $70 million fund could hardly be better going into 1998. ''We're talking about a two- to three-year swing in small-cap stocks that could lead to extreme valuations in the tech sector,'' predicts Gillis.
If the forecast holds, Gillis' shareholders will be in the right place. The fund invests only in tech stocks with market caps under $500 million, primarily in the U.S. Gillis, who took control of the fund in June, 1996, says he buys companies that are also owned by two of Putnam's largest U.S. funds, Voyager and Voyager II. In addition to running his $70 million offshore fund, Gillis is a member of Putnam's 14-person specialty growth group and manages $9 billion in assets.
The bulk of Putnam Emerging Information Sciences' 70 holdings are in software, telecommunications, and semiconductor companies that are on the cutting edge of new technologies. ''The smaller the better,'' Gillis says, because he likes to buy a company before it is discovered and then hold it until it grows large. Some of the fund's big gains came from investments early on in America Online, EMC, and Tellabs, which have all grown dramatically in the past few years.
His top holding is The Registry Inc., a network consulting company whose profits, Gillis predicts, will grow 40% in 1998. In software, he's also high on Citrix Inc., which has an exclusive relationship with Microsoft Corp. to sell programs that allow Windows 95 to operate on networks. Another favorite is Small World PLC, which makes computer-assisted design software for mapping such things as utility lines. And he likes Sipex Technology, whose backlighting technology for miniature liquid-crystal display screens could catch on among makers of mobile phones and pagers.
The allure of the companies in Gillis' portfolio is easy to see. Their average annual earnings growth rate is 30%, about three times that of the overall market. And if there is a slowdown, small companies like these ''are less affected by the economy than big ones,'' he notes. If he's right, his fund may well rank high in next year's list.
By Geoffrey Smith in Boston

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