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Oak Associates' Founder Relying on Power of Concentration

Q&A: He has succeeded by focusing on a few stocks, with tech emphasis. But some analysts sound warnings.


It's no wonder the investing Web site has dubbed Oak Associates founder James D. Oelschlager "Goldschlager."

In this year's struggling stock market, Oelschlager's three mutual funds--White Oak Growth, Pin Oak Aggressive Stock and Red Oak Technology Select--have been gleaming. Through last week, the funds had produced year-to-date total returns of 31.6%, 47.5% and 63.2%, respectively.

Those results were trouncing the blue-chip Standard & Poor's 500 index, which was up less than 1%.

Beating the S&P has been a seemingly easy task for Oelschlager since 1998. His strategy: Focus on a relative few stocks, and emphasize technology.

But amid Oak funds' continuing winning streak, independent fund researchers such as Maxfunds and Morningstar Inc.--while lauding Oelschlager's performance--have raised some warning flags.

For one, they note that the Oak funds' overlapping and highly concentrated portfolios, while paying off spectacularly so far, also raise the funds' risk levels.

Also, many of the stocks Oak favors sell for extremely high price-to-earnings ratios, which means there's little room for error by the companies.

What's more, Oelschlager's performance could suffer if too much "hot money" pours into the funds--only to exit quickly if they turn south.

Oelschlager, a former corporate pension fund manager who founded Oak in 1985 in Akron, Ohio, met with The Times on a business trip to Los Angeles last week, and discussed Oak's strategy and whether the firm can keep its streak going.

Question: Clearly, you believe that the way to beat the market is to manage concentrated portfolios. How do you focus them?

Answer: We concentrate two ways: by investing only in the industries we think are attractive, and by having a relatively small number of names in our portfolios. The funds each have about 24 names and, were it not for the rules of the Securities and Exchange Commission, we would probably have fewer. In fact, for our individual accounts, which is the bulk of our business, we intend to have fewer names than are in the funds.

You can overdo diversification and it waters things down. We think a lot of managers out there--probably 80% of them--are really closet indexers. But, obviously, nobody has ever called us an indexer.

Q: With White Oak strictly in technology, health-care and financial stocks, and Red Oak and Pin Oak all or virtually all tech, you're plainly not worried about matching the S&P's sector weightings.

A: I think a lot of our peers recognize that they can't beat the market so they tend to act like indexers because if they don't under-perform by too much, they don't get fired and they can justify their fee. It's what I call defensive ball. We don't play defensive ball.

We think we're still in the early stages of this tech revolution. People will be surprised at how high productivity stays, how good corporate profits are and how improved the standard of living is going to be. We're now able to double our economic pie in 15 years, which is terrific. It used to take us multiple centuries [before the Industrial Revolution] to double our economic pie.

Q: Within tech, where are you shopping?

A: Two areas we have focused on in the recent past are data storage and fiber optics. EMC [ticker symbol: EMC], Brocade Communications Systems [BRCD] and companies like that in data storage; JDS Uniphase [JDSU] and Ciena [CIEN], for example, in fiber optics. There's been a staggering increase in traffic going over the Net and every time you send some stuff, you've got to store some stuff. The Internet is still pretty much U.S.-centric, but there's a whole world out there that has to be networked together.

Q: What have you been buying most recently?

A: One of the newer names we've been adding is Juniper Networks [JNPR], which produces high-end routers, the really big things for serious Internet volume.

Q: You own a lot of the same stocks in all three funds. Is there a danger in that sort of overlap?

A: Fortunately, we've been in the right areas so far. And those haven't been the areas we've been in for my 30-year career. At one time, energy and utilities were our biggest areas. But, given the overview we see, I don't expect to be going back there any time soon. You do have risk if you run concentrated portfolios, but you also have the rewards if you're right.

Q: Now that you've mushroomed to nearly $10 billion in assets for the three funds combined, with a total of $30 million pouring in on a typical day, are you concerned about being able to put all the new cash to good use?

A: Well, $10 billion is a nice number but that's not a Janus-type number or a Fidelity-type number, so we think we still have room to work with. Our names are basically large-cap, and if it's a mid-cap stock, it generally has good trading volume.

We have a lot of names like American International Group [AIG] and Citigroup [C], Merck [MRK] and Pfizer [PFE], Cisco [CSCO] and Intel [INTC]. Those are pretty big market-cap stocks, not a problem to trade.

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