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One of the best ways to make money in mutual funds is to find a new fund run by an old manager -- one who knows how to pick stocks, that is. Two perfect examples of this rule are Kobrick Capital (KFCFX) and Kobrick Emerging Growth (KFEGX).
Both little more than two years old, the funds are managed by veteran Fred Kobrick. In 1998 and last year, the funds crushed competitors and the indexes. This year, Kobrick is at it again, with his Capital fund returning 25.4% through Mar. 1, and Emerging Growth 20.4%.
What's not to like? Only the funds' hefty 5.75% sales charge. But if you're already paying a broker or adviser to pick your funds, you might be able to stomach the load. Kobrick got his start running money in 1971 with Wellington Management, where he spent 14 years before moving on to State Street Research. There, he compiled one of the best long-term mutual-fund records around before going out on his own in 1997. How does Kobrick size up today's market? What's he buying? What's he selling? Kobrick shared some picks, from EMC to Exodus, plus a few choice pans when he spoke with me recently by phone from his Boston office.
Here, in the first of a special, two-part Q&A, are edited excerpts of our conversation:
Q: Have you been buying or selling?
A: Some of each.... Do you want my market outlook and strategy?
Q: Shoot.
A: I have a very sanguine view of the market here. I do think that the bear market we've had in the average stock for the past 22 months is coming to an end. And the bear market we had was a stealth bear market. Most people didn't realize it because they concentrate on what's visible and above the water line.
Q: O.K. So what makes you think things are different now?
A: What's happened has several dimensions to it. The first is that people found that it was very easy to build on momentum and buy the blue chips and the large-cap stocks because it worked. And the valuation disparity got stretched further and further and further, and people rationalized the reasons that it would continue, until it didn't. This went on until it stopped.
So the blue chips got picked off one at a time, and then institutions started to look for some other areas to put their money. And every time you sell 5% of a Microsoft (MSFT) or 5% of a group of blue chips, it's just an enormous amount of money that equals the entire market cap of many, many stocks. So there is an accumulation going on in the Russell [2000 index of small-cap stocks] and in a lot of the other Nasdaq stocks.
Q: Go on.
A: Secondly, I do think that this is just the beginning. This is going to feed on itself, just the way it did on the way up. Not that we're going to have decimation in the blue chips -- they will always be core -- but it won't take that much money coming out of the blue chips to create a bull market in a broader sector of the market. But it will take [the] economy to support that.
Q: Yes. Will it?
A: There really is a New Economy. And it really means that many companies that hardly have earnings today even though they live in dangerous spaces, where most companies will fail, the winners in fact will have a call on this New Economy and have enormous earnings down the road. More than people think, because they don't realize the profound changes coming.
Q: You're talking Internet companies?
A: It doesn't have to be an Internet company. It really can be a telecommunications company. It can be an Internet-infrastructure company. It can be a manufacturer of specialized communications chips for wireless telephony.
Q: Go on.
A: The productivity revolution is not cyclical. It's secular. The economy now is being able to approach its theoretical growth rate, where, for almost all its history, its practical growth rate and its limits were way below its theoretical growth rate. Its theoretical growth rate was never reached because of the friction in the economy of difficulties in moving the labor force from industry to industry, retraining, difficulty in moving materials. Bottlenecks. Inventories.
Q: That's over?
A: I liken it to a plane that operates in the heavy layers of the atmosphere. It cannot go above a certain speed, without either breaking up or burning up. And what we're doing to the economy is we're removing the friction. So we've taken the economy up into the stratosphere, where there's very little friction. Because right now, 35% of our incremental growth is coming from 8% of the work force, and we're now being able to approach our theoretical limit.
Q: Which is what, 5%?
A: Probably 5% to 6%. We don't really know because you have to find new yardsticks of measurement. I know when I was talking to Michael Dell recently, he was telling me about meeting with [Treasury Secretary] Larry Summers and talking about trying to find real good yardsticks. Get rid of the old yardsticks of measuring the economy and find ways to really understand what's going on.
Q: What else?
A: Very importantly, the Fed doesn't want the economy to get out of their control, because then it would be their fault. And the wealth effect is creating more spending than ever before in history. And so what the Fed is trying to do right now is create a mentality and a psychology out there that rationalizes spending, so that the economy simply doesn't lose control on the upside. If they do this appropriately, and we get a little slowing, interest rates will be lower in the second half of this year, and the market broadening will continue and actually accelerate around midyear.
Q: Do you see the yield curve returning to its usual slope, with credit more costly the longer it's extended?
A: Yes, I do. I think there have been a lot of distortions in that yield curve. The danger, which I consider to be a 30% risk factor, is that rates go too high or the economy decelerates too quickly, which is really bad for high-growth stocks. So I don't want to take maximum risk in my portfolios given that we're going to have volatility. And given that right now, we don't know exactly how much the economy needs to decelerate.
Q: How much of your funds are in cash?
A: All my funds are running between 2% and 4% cash.
Q: If you're feeling a little cautious, why so little cash?
A: I am a bottom's up stock picker, and I'm very management-centric about who can run their companies and win the game. So therefore, I don't want to believe in market timing. And I think that having an extra 10% or 15% cash, for the most part, isn't anywhere near as important in changing the returns on funds as changing the complexion of what you own. So when I say I'm not being as aggressive, I mean that I'm not going to have as much Internet as I had late last year. I'm going to probably have a slightly lower growth rate and price-earnings ratio to my portfolio and look for a little bit higher quality in companies.
Q: So what have you been swapping?
A: One of the things I have to be a little bit careful about is when it appears in print that I'm selling someone's company. It can hurt my access to their management. And, you know, it's one thing if I sell a stock. It's another thing if they say, "Why did you pick me to talk to Business Week about?"
Q: You can give me your entire sell list if that would ease that concern.
A: Well, let's just say that there are 600, public and private, dot-com companies in the base of my mental pyramid, my Internet pyramid. I've got four layers to the pyramid. I don't want any of those 600. I only want the high-quality ones.
Q: Why don't we start there: What have you been adding to the portfolio in the last week or two?
A: I've added things that have to do with Internet infrastructure, like EMC (EMC), the storage company and also Veritas (VRTS).
Q: Are those new positions?
A: No, just additions. Veritas and EMC and some of the companies that I'm trying to build the biggest positions in, I'm building because of not only what they do but also because of who runs them.
Q: Hmm.
A: I talk to Mike Ruettgers at EMC, the chief executive officer. We talk about his strategy for not only storage today but Internet storage, as that unfolds. So there are certain themes where I try to find outstanding companies, and [data] storage with Veritas and EMC is one.
Q: What's another?
A: Communications, and Web hosting, which is exploding. It's another way ,without being in dot-coms, that you can be in the Internet. And I talk to Ellen Hancock, the CEO of Exodus Communications (EXDS), and we've enlarged our position there. I think a lot of Bill Schrader, the chief executive officer of PSINet (PSIX). And we've enlarged our position in PSINet.
Next Friday: More of Kobrick's stock picks and pans.
Robert Barker covers personal finance for Business Week EDITED BY DOUGLAS HARBRECHT
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