Chip Morris manages the largest technology-stock fund in the country, and lately he has the scars to show for it.
Although the tech-stock sector still is red hot, Morris' $12.2-billion-asset T. Rowe Price Science & Technology fund is lagging many of its smaller tech-fund competitors.
That is in part a function of Morris' rising concern about technology-stock prices relative to the companies' growth prospects.
And Morris, 37, has seen many tech stocks boom, and bust, in his nine years at the helm of the T. Rowe Price fund.
We spoke with him recently by phone.
Question: A number of technology-fund managers have been predicting a major pullback in tech stocks. Yet in recent weeks, what we've seen is a pullback in almost everything but tech. What's your take on the sector's outlook?
Answer: There are a couple of things to keep in mind. If you look back at the historical declines and recoveries in the tech sector going all the way back to September 1983--and we're using the Pacific Stock Exchange [technology index], the PSE, as the proxy because that's the oldest one--there have been 13 declines of 15% or more from the then-peak to the ensuing trough.
The most significant recovery, during the Gulf War, lasted about 16 months, and we were up 107%. To give you an idea [of where we are now], the PSE, if we go back to the bottom in October 1998, was up 267% as of the end of December 1999. That's more than double the most significant recovery we've had going back over the last 17 years.
Obviously, that's one yellow flag--that we've had an off-the-chart move, just a stunning move off the bottom.
Then you look at where valuations are, to the extent that anybody is even calculating them anymore. You could give up about 30% on valuations. That is, if fundamentals didn't change, [tech] stocks could go down by 30%, and they still would be at the high end of the historic norms.
Everyone like myself has a vested interest in saying things are great, just relax, the stocks will grow into these valuations. But you cannot honestly look yourself in the [mirror] and go, "There's no problem here." There is a problem here. It could manifest itself in two years, two months or two hours. It's hard to say.
Q: But couldn't those same arguments about price-to-earnings valuations and share-price gains have been made six, nine or 12 months ago? And look at how well tech stocks have done over the last six, nine and 12 months.
A: Valuations really didn't start getting out of control until the second half of '99. Now, they were always high, but you had some room.
The bigger statement is that most people aren't even looking at valuations anymore. The right strategy with respect to technology-stock valuations [in 1999] was to take the batteries out of your calculator.
Q: It seems clear that we're in a momentum-driven market, and smaller tech stocks, in particular, now have that momentum.
A: The market has indeed gotten much more momentum-driven. And the fact that that has worked so well for the last 18 months is sucking everyone else into playing that game.
Q: But where does that leave your fund? With assets of $12 billion plus, aren't you at a competitive disadvantage in a market like this, compared with smaller funds whose performance can be boosted dramatically by a few hot stocks?
A: Oh, for sure. We historically were a small- and mid-cap fund, but the asset growth has really pushed us into the mid- to large-cap stock arena.
Right now, we're trying to hold a less risky basket of stocks and have a little bit more cash on hand. And the way we've done that is not by selling, but we've just been dragging our feet putting the money to work that we've received.
Q: What does a "less risky" basket of stocks mean when it comes to tech?
A: What it means is that, for instance, in the software space, in Internet infrastructure, we can own Oracle or we can own a handful of smaller, much more richly valued [stocks]. If we didn't own Oracle, we might own E.piphany, Vignette, Commerce One, Akamai. . . . But we don't.
We own Oracle. We know that Oracle could fall on hard times if the industry slows down, but no one is going to come out and put them completely out of business. If anything, they're going to put somebody else out of business.
In the semiconductor arena, instead of owning lots of PMC-Sierra or Applied Micro Circuits--which are fine companies by the way, and we've owned both of those in the past--or, say, ARM Holdings out of the [United Kingdom], all trading at 200 times calendar 2000 earnings, plus or minus, we'll own things like Xilinx, Analog Devices and Maxim Integrated Products. They are plays basically on the same things: communications components. But we can play at one-third the [valuation] multiple.
Now, we don't kid ourselves. If the environment turns down, we're going to get halved in many of those names. But we probably won't lose 80%.
Q: That's not to say you wouldn't like to own some of these smaller "dot-coms" some day, right?