Technology
Investing: Taking A Long-term Approach
The following is an interview with John Carey, Portfolio Manager of Pioneer Fund:
Q. The recent volatility in the market has made investing
quite challenging, hasn't it?
A. Yes, it has. Market
performance over the past several months has been a hare-and-tortoise
kind of story. High tech and biotech stocks raced ahead initially
this year, continuing the trend begun in the fourth quarter of
1999. Then, during the second week of March, the situation reversed,
with tech issues dropping sharply, and the more cyclical and
basic industry stocks beginning to plod ahead. This alternation
and rotation between technology stocks and "everything else"
has continued since March.
And while this environment
certainly has been challenging, it hasn't really changed how
we invest. With the Pioneer Fund, we've been investing people's
money for 71 years, pursuing a long-term approach that focuses
on the values of individual companies and their managements.
Q. Why do you think we've seen a correction in tech
stocks over the past several months?
A. I think the correction
in the technology sector occurred for several reasons: the extreme
overvaluation of many tech issues, rising interest rates and
the slowdown in equity financing.
Q. Can you elaborate?
A. Well, first of all,
I think that before the correction, a lot of investors felt that
many tech stocks were, in fact, overpriced. But, the market was
caught up in the tech euphoria and investors were willing to
pay those high prices. At some point, however, the levels simply
got too out of hand. They often had no basis in reality and the
market began to recognize that.
In addition, in a rising
interest rate environment (like the one we witnessed this spring),
investors typically revisit stock prices. You see, with higher
interest rates, fixed income investments become more attractive
so to compete, stocks must be reasonably priced. Investors need
to feel that they're paying fair prices.
Higher interest rates
have had a hidden effect on many of the technology companies
as well. While most technology companies don't carry a lot of
debt and so aren't impacted directly by higher rates their customers
can be hurt by higher financing costs. So higher rates can impact
technology firms indirectly by eating into sales.
Q. You also mentioned equity financing and the IPO
market. How did they contribute to the correction in tech stocks?
A. Well, the IPO market,
and equity financing in general, have slowed quite a bit. It's
become much more difficult for just anyone to go to the market
and raise money by selling stock. Underwriters have become much
more discriminating. And as underwriters have become more cautious,
so too have investors.
Q. Given the ups and downs in tech stocks over the
past several months, do you still feel they offer attractive
investment opportunities?
A. Absolutely. You
just have to know where to look. Our goal when managing the Pioneer
Fund is to buy stocks at prices which provide a platform for
above-average earnings appreciation over at least three to five
years. As value investors, if we feel a stock is too expensive,
we simply wait for it to come down to a level we feel is reasonable.
A case in point is
Microsoft (1.06% of Pioneer Fund as of 5/31/00). Prior
to this spring, we had never really had a significant weighting
in Microsoft. We bought a token position late last fall when
the stock price dropped, just to get our feet wet, so to speak.
But, over the last several weeks, when the stock fell precipitously,
we built up a full position in the Fund. We now have a little
more than one percent of the Fund's assets invested in Microsoft
shares.
Q. Can you provide us with some other examples of
stocks you purchased during recent market weakness?
A. Well, we've recently
added Koninklijke Phillips Electronics (.46% of Pioneer
Fund as of 5/31/00), a Dutch electronics company, to the portfolio.
We've also bought shares of a company called Synopsys
(.74% of Pioneer Fund as of 5/31/00), which provides software
to semi-conductor manufacturers, and beefed up our position in
Motorola (1.67% of Pioneer Fund as of 5/31/00).
Q. Do you own any pure Internet or dot-com companies?
A. We actually have
a small position in Lycos (.31% of Pioneer Fund as of
5/31/00), which is one of the portal companies. Although they
have a much smaller market capitalization than Yahoo, the industry
leader, Lycos is a solid company with a good business strategy
and some interesting operations overseas. Other than Lycos, however,
we prefer to invest in the Internet indirectly.
Q. Why is that?
A. The Internet is a fascinating area, and a medium
that we believe will change the way business is done over the
next several years. It has already transformed personal and commercial
communications with e-mail and chatrooms.
However, as long-term
value managers, we prefer to focus on proven, well-established
companies that may be benefiting from the Internet, rather than
on Internet companies directly. We likely won't make a strong
commitment to any of the pure Internet companies until it's clear
that these companies have established a strong base of business,
resilience through business cycles and dynamic growth that will
make them true long-term investments.
Q. Can you provide some examples of companies that
are benefiting from the Internet without being directly involved
in it?
A. IBM (2.35% of Pioneer
Fund as of 5/31/00) is a good example. They provide a great deal
of equipment to Internet companies, and are enjoying renewed
sales growth because of the Internet boom. The advertising agencies,
Interpublic (.56% of Pioneer Fund as of 5/31/00) and Omnicom
(.98% of Pioneer Fund as of 5/31/00), have seen a boost in revenue
because of their large number of Internet business clients.
In addition, many of
the so-called old economy firms are using the Internet to improve
their profitability or the way they conduct their businesses.
Ford Motor, for instance, which is one of our largest
positions (1.44% of Pioneer Fund as of 5/31/00), is in the midst
of organizing a parts-purchasing cooperative with General Motors
and DaimlerChrysler. We also own shares in Barnes & Noble
(.13% of Pioneer Fund as of 5/31/00) the parent company,
not barnesandnoble.com. Of course, the parent company owns the
majority of barnesandnoble.com, which is the second leading Internet
book selling service, but they also operate a chain of successful
book stores.
Q. It sounds like you take a more conservative approach
to Internet investing.
A. Yes. Obviously we can't hide our heads in the sand
and ignore this marvelous new technology this great new phenomenon
that the Internet represents. And I do think that it's a fabulous
new medium which will be with us for a long time. But, we're
looking at it from different angles, and taking a long-term perspective
and thinking about how we can make money from reasonably priced
stocks not the high flyers.
Another way we play
the Internet indirectly is through the telephone companies (which
represent substantial Fund assets). Providing Internet access
has become a fresh source of revenue for many of the big phone
companies. So instead of owning AOL, for instance, which is a
pure Internet access provider, we own a number of large telephone
companies which are launching Internet access services. So again,
we are participating in the Internet phenomenon, but in a more
conservative way, consistent with our value strategy.
Q. Are there other themes that have driven your stock
selection so far this year?
A. Again, from a value perspective, we take a contrarian
approach to stock selection. We tend to focus on sectors that
we feel the market is ignoring or undervaluing, or are out of
favor with Wall Street firms. On the other hand, we also tend
to shy away from those areas with glowing reports where all of
the recommendations are positive, and where all of the good news
already is factored into the stock prices.
For example, we've
been quietly building up positions in railroad stocks, which
have been out of favor for over a year now. Food companies, such
as Best Foods (1.36% of Pioneer Fund as of 5/31/00), and
Sysco (.48% of Pioneer Fund as of 5/31/00), have strong
long-term potential and are reasonably priced.
We're also emphasizing
basic material stocks, such as aluminum and copper. These stocks
have been out of favor for some time, and we believe offer good
value. In addition, we've increased our weighting in some of
the major oil companies, and have some exposure to forest product
companies as well. And, while the banking industry has been under
a cloud for over a year now because of rising interest rates,
we've found some attractive opportunities with some of the higher
quality regional banks. Overall, we think the valuations are
pretty compelling and offer tremendous potential if you're patient
and can look at things on a two, three, four year horizon.
Q. What to you think we can expect from the stock
market in the months ahead?
A. I'm generally hopeful
that we'll see continued broadening of investor interest that
people won't just want to own technology stocks, that they may
want to own some banks and food companies, maybe even a railroad
or two.
I also think that the
differences between new economy and old economy stocks are going
to blur. I don't think it's a dichotomy that is going to be sustained.
I expect that investors will begin to realize that many of the
old economy companies are not as stodgy and outdated as many
people believe and that they are taking part in the new economy,
perhaps just not directly.
On the other hand,
there are a lot of new economy companies that have old economy
business problems to solve. ultimately what it comes down to
is that all businesses have to provide goods and services to
their customers. It's as simple as that. Many investors have
focused on the glamour and the allure of new technology companies,
and have lost sight of the fact that technology companies are
businesses in the end. They have basic business functions they
need to fulfill in order to succeed longer term, and they need
to be profitable in order to survive long-term.
Editor's Note: For information on Pioneer Fund, please request a free kit from your investment representative or Pioneer at 1-800-225-6292. The kit includes a prospectus describing charges and expenses, and a quarterly fact sheet containing the latest quarter's top 10 holdings and fund performance. Please read the prospectus carefully before you invest or send money
