A star manager can shine with a sector fund, too

October 19, 2003|By Christopher Davis | Christopher Davis,MORNINGSTAR.COM

Managing a sector fund isn't quite as limiting as one might assume.

While tech-fund managers are obviously restricted to tech stocks, they still have a wide range of industries from which to choose. In fact, they can buy software, semiconductor, storage, networking and Internet stocks, to name just a few areas. And within each of those industries, managers can choose from scores of companies that fill just about every niche imaginable. Just as a diversified-fund manager decides which segments of the market are undervalued, sector-fund managers determine where the most attractive values are in the sector they follow.

From the looks of it, many managers are increasingly venturing overseas, particularly to Europe, to find good stock ideas. Here's a sampling of what we've been hearing.

Veteran Vanguard Health Care (VGHCX) manager Ed Owens has compiled one of the fund world's best records with well-timed moves into undervalued areas of the health-care sector. While acknowledging there are few "landscape-changing" drugs from big pharmaceutical companies on the horizon, Owens still likes the prospects of European drugmakers. As a group, they trade more cheaply than their U.S. counterparts, he argues, while their growth prospects are better.

Owens' favorite is France-based Aventis (AVE), which has grown to become the fund's third-largest holding. He says the company has good growth prospects, a strong product lineup with few near-term patent expirations and a good drug pipeline. Owens further reports scooping up Sanofi-Synthealbo (SNY), also with headquarters in France, and adding to the fund's existing stake in Swiss drug firm Novartis (NVS).

T. Rowe Price Media & Telecom (PRMTX) manager Rob Gensler has demonstrated a keen eye for identifying broad trends affecting the telecom sector.

Because Gensler views the telecom sector as an integrated global market, he searches across regions for attractive picks. He tends to prefer foreign wireless carriers, such as Vodafone (VOD), which he says face less competition than their U.S. rivals. Gensler says Vodafone is growing revenues and free cash flows at a 10 percent annualized rate while expanding its profit margins. He believes that the company is well-poised to benefit from the emergence of third-generation wireless technologies, which will give it a boost in 2005.

In contrast to Owens and Gensler, Red Oak Technology Select (ROGSX) manager Doug MacKay has been focusing his efforts here at home.

He recently trimmed the fund's weightings in economically sensitive tech stocks such as semiconductor-equipment manufacturer Applied Materials (AMAT) and Juniper Networks (JNPR). Those names have enjoyed big runs in 2003, and MacKay believes their valuations have become stretched.

Instead, he likes University of Phoenix (UOPX), a for-profit higher-education provider.

Education is one of the few areas of the economy where prices have risen consistently over the past 20 years, and MacKay views the company as one way to benefit from that trend. More than 100,000 students participate in University of Phoenix's programs, mainly online, and MacKay points out its coursework is more demanding than many private colleges, which he expects will erode the public perception that it offers an inferior education relative to private institutions.

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