| BUSINESSWEEK ONLINE : NOVEMBER 8, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- FINANCE
To This Champ, Small High Tech Is Beautiful (int'l edition) You could call Roland W. Gillis focused. He invests only in technology stocks. But you won't find Microsoft Corp. or Intel Corp. in his portfolio--only young companies with high growth rates and small market capitalizations. Gillis, who manages Putnam Emerging Information Sciences Trust, has been investing in small-cap tech stocks for more than a decade. It's a volatile business. ''Some months we have pretty good corrections,'' he says. ''But the long-term growth of technology has served us well.'' Indeed. His fund has posted annual gains averaging nearly 43% for the past five years and was the top performer among the offshore funds that BUSINESS WEEK rated highest for their risk-adjusted returns. He won in 1997, too. Gillis has never been more optimistic about the potential of small-cap tech stocks. First, though, a word of explanation: In today's hyped-up market, small is a relative term. Three years ago, it meant about $500 million; now, small is anything less than $1 billion. That said, Gillis believes that such companies are on the cutting edge of the New Economy. ''The U.S. market is in a transition from large-cap stocks to small-cap stocks,'' he says. ''When the Dow Jones goes down, the smaller-cap stocks always come back more quickly. This is establishing a new market leader.'' The dot.coms might be the most celebrated technology companies these days, but Gillis is more excited about businesses that take advantage of faster, cheaper networks. Digital television and interactive video, for example, were long-awaited products that have finally arrived. Gillis hopes to benefit from the huge rollout of digital cable and fiber optics. BACK TO BASICS. The bulk of his fund's 100 holdings are now in software and software service providers, telecoms, and semiconductors. Although Gillis invested in such companies as America Online Inc. and Lycos Inc. when these outfits were just starting out--and still holds Lycos--he shifted his emphasis this year from content providers to infrastructure. These businesses may be less glamorous, but he says they're less risky, too. ''There are a lot of new [companies] vying for space on the Internet. It's unclear who the winners will be. But you know everybody will spend on software and equipment,'' he explains. Gillis, 50, a devoted golfer, now runs the fund with Paul McHugh, a former tech analyst at Putnam Investments. Gillis also helps manage two of Putnam's largest domestic funds, the $30 billion Voyager and the $2 billion Voyager II. At present, Gillis has three favorite companies, all based in California, each of which makes up about 4% of his high-tech fund's portfolio: Harmonic, Emulex, and VeriSign. Gillis spotted VeriSign, which went public in March, 1998, early on. The Mountain View company provides digital certificates that act as identification for e-commerce transactions. Already, it is working with 400 leading companies and 25 top e-commerce Web sites, says Gillis. Harmonic is an outfit in Sunnyvale that develops technology to deliver voice, video, and data over cable, satellite, and wireless networks. Its third-quarter earnings were up 500% from a year ago. And Emulex, in Costa Mesa, once a hard-disk storage company, now provides fiber-optic components for networks. The draw of such companies is easy to understand. Their average annual earnings growth rate is about 40%. And as for their sometimes spectacular prices? Well, says Gillis, ''the price-earnings ratio [in these cases, upwards of 100] that one pays for 40% to 50% growth is not that high.'' Even so, there are some stocks he won't touch: Sycamore Networks Inc., for instance. That's a communications-software outfit founded by Gururaj Deshpande. It appeared on the market on Oct. 22 at $270 a share; four days later, it was down to $203. ''No matter how good the stories are, sometimes you have to push back and wait,'' says Gillis. Of course, he also has to face the everyday dangers of investing in tech stocks that are young, aggressive, and small. ''These companies are highly valued on expectation,'' says Gillis. ''The risk is that a company fails to meet expectations.'' His only other worry right now is that inflation might pick up and slow down growth everywhere. But then, we would all be in trouble. By Susan Berfield in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS The Best Offshore Funds (int'l edition) TABLE: The Top Performers TABLE: The Best of 1999...and the Worst TABLE: The Largest Funds To This Champ, Small High Tech Is Beautiful (int'l edition) TABLE: Top Picks Equity Funds: Offshore Fund Scoreboard (.pdf) (int'l edition) INTERACT E-Mail to Business Week Online | |||
