BUSINESSWEEK ONLINE : SEPTEMBER 25, 2000 ISSUE
FINANCE

Q&A with Aaron Harris
Aaron Harris talks about the strategy that has made a star of his Gartmore Millennium Growth Fund

With mid-cap stocks trouncing the market -- Standard & Poor's 400 Mid-Cap Index is up 23% year-to-date, vs. the Standard & Poor's 500-stock index, up only 1.4% -- Aaron Harris, manager of the Gartmore Millennium Growth Fund (formerly the Nationwide Mid Cap Growth Fund) is one happy guy. According to Lipper Inc., the mutual-fund tracking company, his $21 million fund is this year's top-performing mid-cap. It is up 73% year-to-date through Aug. 31. And with five-year annualized returns of 27%, it ranks third in its category for that period.

The fund is 74% invested in technology with the remainder mostly in oil-and-gas exploration and service companies. Harris, who has been managing the fund since April, formerly ran the Nicholas-Applegate Global Technology fund, the top-performing global tech fund last year with returns of almost 500%. For the Gartmore Millennium Growth Fund, Harris looks for companies with strong upward revisions in sales, margins, and earnings. He recently spoke with Business Week's Marcia Vickers. Here are edited excerpts of their conversation:

Q: Why are mid-caps so hot right now?
A:
Mid-caps are where we're seeing the most acceleration in growth rate. They're growing twice as fast as large-caps. Unlike large-caps, which are mostly forced to grow through acquisitions, mid-caps can grow organically through innovation, diversification of revenue streams, and by branching into new markets. Also, since the Nasdaq correction, investors are looking for less risk. Mid-caps seem to fit that bill because they have proven earnings and higher visibility than small-cap companies.

Q: What about mid-cap valuations?
A:
Many are cheap in comparison to large-caps. But growth rate concerns me more than valuation. I look for four basic things that lead to growth: quality of management, innovation, execution, and revenue diversification -- meaning that they should have more than one or two products.

Q: Why is management important in a mid-cap company?
A:
Mid-caps are often companies in transition to becoming large-cap companies. If you know a company has innovative management and has continued to execute and make numbers, you can bet that company will be around in three years -- and will be a larger company to boot. I would much rather invest in a good mid-cap company with excellent management than one with excellent technology, because in three years that technology may become obsolete.

Q: Your focus is on technology, why is that?
A:
I'm finding the most opportunities in technology right now. That doesn't mean technology will always be the majority of the fund -- we're opportunistic in terms of sectors and industries. But the current demand for telecommunications equipment, semiconductors, and software that helps with e-business solutions is insatiable.

Q: What mid-cap names do you like?
A:
Ariba, the business-to-business software maker, is my largest holding. Ariba has the best procurement technology as well as the best partnerships and customers. Another big technology holding is Cobalt, which makes Internet servers for smaller companies. Another favorite, Juniper, plays into the insatiable demand for bandwidth. In five years, they've managed to take 16% of market share from Cisco.

I also like R&B Falcon Corp. It provides both domestic and international exploration rigs. Rig rates -- the charge per day to use an oil rig -- have doubled in the past year.

Q: Will mid-caps continue to do well?
A:
The mid-caps we invest in are more established companies that have a better ability to service clients, a bigger and more powerful sales force, multiple products, and much healthier balance sheets. And with stock prices rising in mid-caps, they have equity capital -- so they can make acquisitions. Finally, the ones we like are already industry leaders, or are emerging as such, so they'll continue to see growth.



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