), is once again on top of the heap, up 23% this year, while the average tech fund has lost 1.6%.
BusinessWeek personal finance writer Lewis Braham recently caught up with Vilar at his New York office. Edited excerpts of their conversation follow:
Q: Why has your fund performed so well this year when most tech funds have fallen?
A: We invest in emerging-technology companies, which are doing much better than mature technology companies this year. We like Internet stocks, networking, broadband, and biotechnology. So our big gains this year and last year have been in eBay (EBAY
), Yahoo! (YHOO
), and Expedia (IACI
) on the Internet side, and ImClone Systems (IMCL
) and Gilead Sciences (GILD
) on the biotech side.
Also, our portfolio tends to be much more concentrated than the average mutual fund. We average about 20 stocks, so any big gains in one of our holdings have a significant impact. By contrast, most other funds own too many stocks and invest in yesterday's technology. I was one of the first investors in Microsoft (MSFT
) and Cisco Systems (CSCO
) in the 1990s, but they're mature companies now and aren't performing as well.
Q: I don't usually think of Yahoo and eBay as emerging-technology companies.
A: We don't care about the market capitalization of a company. We're interested in the technology. Google [the Web search company] will come out with an enormous market cap when it has its initial public offering later this summer, but it's still an emerging-tech stock to us. That means its technology hasn't been commoditized yet. It means Google can produce substantial profit margins because its managers have a technological lead.
Q: Will you be buying Google?
A: It looks like it could be a core stock for us, but whether we buy it or not at its IPO depends on the price. If its market cap goes over $40 billion at the offering, I may hold off until the speculation ends and it gets cheaper.
Q: Given the threat Google presents to its business, why has Yahoo soared lately?
A: I think there is a legitimate paid-for search market out there, and Google isn't going to get 95% of the business. There's room for another one or two players. Both Yahoo and Google are benefiting from the general resurgence of the advertising market this year. Currently, the Internet only has 3% of the ad market, but it won't stay there. The big television networks, the direct-mailing companies, the publishers are all losing market share to the Web. People are spending more time online, so the advertisers are spending more of their money there. Yahoo and Google are major beneficiaries of this trend.
Q: What stocks have you bought lately?
A: I haven't been buying much. One company is Eyetech Pharmaceuticals, which has a product in clinical trials to treat macular degeneration, the leading cause of blindness in adults. Amazon.com had a big correction recently, and we added to our position. We also bought more of Juniper Networks (JNPR
) and XM Satellite Radio (XMSR
Q: XM Satellite Radio?
A: They have a new digital radio technology that could put commercial radio at risk. You subscribe to XM, pay so much per month, and you get whatever music you like beamed via satellite to your car or home, and it's commercial-free. Subscriptions have been rising rapidly as many listeners find commercial radio too clogged with advertising.
Q: Your fund fell precipitously in the bear market. What lessons did you learn from that?
A: One thing I learned is to pay more attention to the IPO market. Historically, one of the best indicators we've had that markets were getting frothy is the health of the IPO market. When a new offering is tripling on its opening day, it's a sign that the markets are getting too speculative. I also think that you've always got to be hedged a little bit now, either by shorting stocks or holding cash.
That said, I do think that this bear market was a very rare, once-in-a-lifetime event. Aside form all the scandals and 9/11, the tech sector had what we call a paradigm shift. Everybody had bought all the routers they needed for their desktops, so we started to see a decline in client-server sales and that most of the sector. But I don't think we'll have another paradigm shift like that for at least a decade. We're going to be in the Internet/networking cycle for a long time. Everything is going to be done online.
Q: What about valuations?
A: When you look at companies like eBay and Yahoo, they may seem long-in-the tooth valuation-wise, but a year ago everybody thought eBay would deliver $400 million in free cash flow over the next 12 months. They made $800 million. And for nine years after its IPO, Cisco grew cash flow 100% a year. Oracle (ORCL
) did too. All of which shows you that when you're dealing with emerging-technology companies, it's hard to put parameters on their upside. And the day you can, it's time to get out.