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By Robert Barker Conventional wisdom holds that you should put your money only in mutual funds with solid long-term records. In my book, that's a formula for missing some of the best opportunities. Now, I've got fresh evidence.
Hatched only at the start of last year, American Eagle Capital Appreciation Fund (AECAX
) nonetheless soared 85%, to the No. 2 spot among diversified U.S. stock funds. (Schroder Micro Cap (SMCFX
), with a 148% gain, took first place, but it is closed to new investors.) Sibling fund American Eagle Twenty (AETWX
) also performed smartly, returning 50%.
How might you have picked an American Eagle fund in advance, since it had no history? By noting that it's run by managers with solid long-term records. This happens repeatedly: New funds, which can be traded nimbly because they're small, often outperform the averages when they're in the hands of experienced managers.
The old hand in this case was Jim Jundt, a 36-year Wall Street veteran whose team of growth-stock pickers have been running Jundt Funds since 1991. Like many tech-heavy portfolios, Jundt's older funds, which invested in many of the same stocks as American Eagle, finished 2000 way down, with losses averaging 18.5%, according to Morningstar. That's one more indication of how new, small funds are easier to run.
To get the details on all this, and to see where Jundt is now putting clients' money and what stocks he's avoiding, I reached him by phone in his Minneapolis office on Jan. 3, just after the Federal Reserve eased credit. Edited excerpts of our conversation follow:
Q: Quite a day, with the Fed cutting rates. Were you surprised?
A: I think this move has been fairly well telegraphed. It was a matter of when, not if.
Q: Does this change your investment thinking?
A: That's the real question. The change in interest rates isn't going to take Microsoft (MSFT
) back to 120 or Cisco (CSCO
) back to 80 -- or [boost] a lot of the Internet stocks that are down anywhere from 70% to 95%. They're not going to go back to new highs, or even recover 50% of their losses, just because an interest rate was cut.
Will it stimulate the economy as a whole? Is it a positive? Yes. But I think what we had [the last two years] was a speculative bubble on the Nasdaq -- and that bubble has been burst. A change in monetary policy isn't going to let people recover their losses 100%.
Q: Why did your new no-load American Eagle funds do so much better than your older Jundt funds?
A: Well, they started the year with cash, they were new funds, very small funds, so there was a lot of flexibility. When you start a new fund, you don't have any [stock] positions, so you're not worried about turnover [and realizing taxable gains].
Q: So serendipity, plus the ability to take opportunities with funds that, even now, together hold less than $25 million?
A: Right. You buy [just] 9,000 shares [of a stock] and you make 250% on it. You buy Palm (PALM
) and it jumps big. And Pixelworks (PXLW
). Siebel (SEBL
) was a big one -- and these are volatile stocks -- and Immersion (IMMR
) doubled in the portfolio [as did] Macrovision (MVSN
). A lot of these names were already in the other portfolios. It was just a matter of purchasing them appropriately. And we hedged our gains.
Q: So what looks good to you now?
A: Corning (GLW
), Gemstar (GMST
), Pixelworks, Pharmacia (PHA
) (our largest holding), Texas Instruments (TXN
), VoiceStream (VSTR
) -- companies of that ilk. AT&T Wireless (AWE
) is one of the bigger holdings. General Motors-Hughes Electronics (GMH
), which is DirecTV, is the second-biggest holding. America Online (AOL
) is one we recently purchased.
Q: Let's talk about AT&T Wireless, which has been a disappointment for a lot of people. But it's a lot cheaper now since it came public at $29. What do you like about it here?
A: Fortunately, it hasn't been a disappointment for us because we only purchased the position in the last 60 days. So we actually, believe it or not, have a profit in it.
A: AT&T, as you are probably aware, has indicated that they're going to spin off the various parts of their business because they want to enhance shareholder value, and I think this was one of the first parts they spun off. I think it was on the premise that it was one of the most valuable pieces they had. NTT DoCoMo (NTDMY
) recently invested $10 billion in this operation, and DoCoMo is one of the leaders in the wireless Internet access in Japan. We think wireless Internet is inevitable. AT&T Wireless' stock is cut in half, and it [has very attractive] growth prospects on a long-term basis.
Q: AT&T has made an exchange offer as well. Would holders of AT&T shares be well advised to exchange their shares for shares in AT&T Wireless?
A: I can't comment. I think that depends on each person's specific interests. We think AWE is a very attractive property.
Q: AOL is another that has come way down.
A: I think at least 80% and probably 90% of the companies that were Internet-involved...will never be heard from again. But AOL is one of the one to five that will turn out to be a consolidator. Just as there were 50 automobile companies and it came down to the Big Three in America, AOL is going to be one of those companies. The reality is that AOL has a very dominant position. The stock hasn't done well recently because there are concerns about government approval, but they've been in negotiations and I think it's highly probable that they'll get approval. It's a matter of what kind of concessions they have to make to satisfy the government.
Q: What is it about Pharmacia that you like?
A: One, we like their product line. As you probably know, they've merged with the Searle division of Monsanto, and they have one of the hottest new products on the market, Celebrex.
Q: That's for rheumatoid arthritis?
A: Yes, [and Celebrex] is growing very rapidly in a very large market. Second, we think their product position, coupled with the efficiencies stemming from the merger, assure them 20% to 30% growth for the next three years or so, if not longer. Third, their operations have been negatively impacted by a strong dollar, or weak euro, depending on how you want to look at it. We are of the opinion that the euro has probably bottomed vs. the dollar.
Q: You also have some smaller names, such as Pixelworks. What's the story there?
A: They're involved in chips for flat-screen monitors and TVs, and we just think that that's an inevitable development. It's somewhat embryonic, but if you just look around your office, everything is going flat-screen to save space.
Q: Are they making any money now?
A: No. They should make a modest amount of money this year, though. They're growing revenues at about 75% to 100% a year.
Q: How about competition?
A: Well, it's a very competitive market, but I think it's growing so rapidly that the competitive situation is not the most critical factor right now.
Q: What areas of the market are you staying away from?
A: We're still very leery of companies, no matter how great they are, that are selling at 75 times to 150 times earnings. Regardless of how well-positioned you are, you're discounting a lot of prosperity at those multiples.
Q: Are you thinking of a stock like Cisco?
A: Even more than Cisco, I'm thinking of the names like Juniper (JNPR
), Brocade (BRCD
), Broadcom (BRCM
), WebMethods (WEBM
) -- companies of that ilk. In the aggregate, those names are vulnerable. Could any one of them do well? Sure, but...the economy is slowing down, and [with] companies that are selling at 75 times to 100 times earnings, there's no margin for error. Barker covers personal finance in his Barker Portfolio column for Business Week. His barker.online column appears every Friday, only on BW Online.
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