BUSINESSWEEK ONLINE : FEBRUARY 14, 2000 ISSUE
COVER STORY "This Just May Be the Second or Third Inning" Transamerica Premier Equity manager Jeff Van Harte reflects on what the longest-running bull means for investors This is a particularly tough time for investors to grapple with economic trends. While it's great to know that the U.S. has now experienced the longest expansion in its history, that kind of milestone inevitably makes you start to wonder when it will all end. For now few signs say the economy will flag. In fact, the Federal Reserve raised short-term rates a quarter point on Feb. 2, its fourth hike since June, to keep the economy from growing so fast that inflation takes off. But rising rates are normally bearish for stocks (even though the market's reaction has been to shrug off the latest rate rise) and many economists think a downturn in the markets could lead the U.S. into recession, just as it did in the late 1920s. With financial news both pushing and pulling at investors, we checked in with a prominent mutual-fund manager to find out what he makes of the economy. He isn't too worried. Jeffrey S. Van Harte manages Transamerica Premier Equity (TEQUX), a no-load fund that invests mainly in big-name large-cap growth stocks such as EMC (EMC), Cisco (CSCO), and Schwab (SCH). The fund returned 33% in 1999 but has even more impressive results over time. Its annualized return since its inception four-and-a-half years ago is 33%. A variable annuity Van Harte manages in the same style has a 10-year return of 27% (the S&P 500 gained 18% a year over that time). While Van Harte thinks the economy inevitably will slow one day, he expects technology advances to fuel continued productivity gains at U.S. businesses for several more years. His plan is to continue to buy and hold leading companies in growing industries. "We try to own the best of breed and try to catch them early on when they're beginning to develop a business model that can dominate an industry," he says. Van Harte discussed some of his long-time holdings as well as new favorites with Business Week Online Associate Editor Amey Stone. Here are edited excerpts of their conversation: Q: March marks the longest expansion in U.S. history. Should investors care? A: I think it's significant only in the sense that it shows that we're in a period of almost unprecedented technological innovation. We're developing a new medium to communicate, and the economy thrives on information. The more information companies have, the better they can manage their businesses. I actually think it cuts down on the cyclicality of the overall economy and produces huge productivity gains, which we've also been seeing for a long time. Q: So you don't think the expansion is due to reverse sometime soon? A: Not at all. There's no reason for the economy to really significantly slow down. You'd have to have an event that we couldn't anticipate right now. Fundamentally, we believe inflation is going to remain low for a long time because of the productivity gains we're seeing. Another thing to keep in mind: The companies that are winning and are sustaining the expansion are the ones that are producing goods and services at lower costs. So the benefits of productivity are being passed through to the consumers who are in better shape too. Q: So it sounds like you're pretty bullish for rest of the year. A: We for a long time have felt that technology was really going to drive the economy, and those trends are just getting better and as far as we're concerned. We think this may be just the second or third inning, and we still have a very big cycle ahead of us. So we're very bullish long-term. Q: There must be some risks to the market that you worry about. A: The laws of physics would say that the current expansion can continue for years and years. But you can have disruptions like exogenous economic events. Or, if at some point, if these Internet businesses don't pay off like investors are expecting, you could have periods where capital flows are interrupted either to the stock market or to specific sectors, like the Internet. That could stall the recovery, and investors need to be aware of that. Plus, I think a lot of businesses that have come public around the Internet are not going to be around five years from now. On an individual company basis, I think investors should be wary. Q: Are you worried about any parallels with that 1920s? That was also a period of low inflation and high productivity where technological advances fueled stock market gains. A: Then we were moving oranges from California to New York, and now we're moving digits. It was completely different. Today, the economy is more diversified and less vulnerable. That doesn't mean that business cycles have gone away, it just makes it possible to have a longer economic cycle. Q: If it is inevitable that the economy will slow someday, how will you protect your shareholders? A: We don't really ever change our style too much because of the overall economic outlook. What we will do at the margin, if we feel the stock market is riskier, is stay more conservative in our new purchases. Or we may trim positions a little bit. Q: Let's talk a bit about your current portfolio. Obviously you're emphasizing technology stocks. A: Yes, and we tend to like the emerging leaders. We're seeing some in wireless now. One name we like has become everybody's favorite stock -- Qualcomm (QCOM). We bought it before it really took off. Its CDMA [code division multiple access, an advanced technology for digital wireless phones] technology is very elegant and lends itself to data communications. The other wireless stock we like quite a bit on the service-provider side is Vodafone AirTouch (VOD), which will have a national CDMA platform and worldwide markets and economies of scale. Q: What other technology areas do you like? A: We're positioned across almost every big technology market. Some of our old favorites are Microsoft, Intel, Applied Materials, and Cisco. They are all still in the fund, although I have reduced them a little bit just because we've had three great years for big-cap tech, and you've got to refresh the portfolio at some point with new ideas. They are still very significant positions for the fund, like 5% of assets. Q: What's another new idea? A: EMC is one we added about a year ago, and we're still very bullish on the storage sector. We think it's still a little underappreciated by most investors. EMC is the fund's top holding. Q: What about Dell, a long-term favorite of yours? It has a tough 2000 so far. A: The stock has kind of been a laggard for about a year. Dell got ahead of itself a little on valuation. They are a little more vulnerable to some supply shortages since they build to order and run their supply chains pretty tight. But I would never bet against the management and their business model. Supply shortages have a tendency of working themselves out pretty quickly. Dell may kind of rest for a little while, but it's a great business model, has one of the best management teams on the face of the earth, and we continue to be a long-term holder of the stock. Q: What are your latest thoughts on Schwab, another pick you've been holding onto for years? A: I think Schwab is a really misunderstood company. It's one of my favorite stocks -- it's No. 2 or 3 in my portfolio, and we've owned it for a long time. Schwab is really getting to be a complete financial services company, and people should not look at it as just an online discount brokerage firm. The acquisition of U.S. Trust really has got to change the way you look at the company. They are really serving a very broad range of investors now. Q: How long do you typically hold a stock? A: Our time horizon on an investment is always forever. But what happens is that there's constant pressure on the portfolio for new ideas and some of them don't work out. So you end up holding some ideas for five years and some that don't work out you kick out after a year or two. Q: Can you give us an example of one that didn't work out in 1999? A: Probably the biggest disappointment was McKesson (MCK). We thought we had a company that was the leader in pharmaceutical distribution. When they acquired HBO & Co., our first reaction was very negative. But we made the mistake of trying to be a good long-term fundamental investor and go see the company. We had the same issues that ultimately surfaced. We didn't like some of HBOC's accounting, but the company reassured us that everything was O.K. We sold it the day they announced that HBOC had to restate its earnings because it wasn't accounting for some of its sales properly. I think the lesson on that one is to be careful when you have a company that's acquiring a fundamentally different business. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS The Boom COVER IMAGE: The Boom How Prosperity Is Reshaping the American Economy CHART: The Longest Boom Is Going Strong... CHART: ...Thanks to Higher Productivity CHART: The Market Soars... CHART: ...Americans Are Wealthier... CHART: ...And So Is Uncle Sam CHART: The Mood Is Upbeat CHART: Society Benefits... CHART: ...Though Not All Is Well TABLE: Origins of the Boom Clinton: Why the Good Times Keep On Rolling (extended) ONLINE ORIGINAL: "This Just May Be the Second or Third Inning" Why the Productivity Revolution Will Spread CHART: The Investment Leaders TABLE: Working the Web ONLINE ORIGINAL: "The Real Killer Legacy Is the Cultural Legacy" Commentary: The Risk That Boom Will Turn to Bust CHART: Unbalanced Growth...Rising Debt... CHART: ...Increased Reliance on Temp Workers...And a Bulging Trade Deficit CHART: Market Values Are Sky-High...And Margin Debt Is Soaring INTERACT E-Mail to Business Week Online

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