Growth Guru Brandywine fund manager Bill D'Alonzo was leery of the tech sector for much of 2003--but now sees big profits ahead
(MONEY Magazine) – Following in the footsteps of a legend sounds tough, but for Bill D'Alonzo it's business as usual. Although the 49-year-old D'Alonzo took over as lead manager of the $3.8 billion Brandywine fund (a MONEY 100 pick) in 1999 after the 14-year tenure of the colorful Foster Friess, he had been co-manager since 1989. So he shares the credit for a sterling record: Over the 10 years ending Jan. 23, Brandywine racked up a 9.8% annualized return, placing it among the top third of all midcap growth funds.
D'Alonzo has stayed true to Brandywine's research-intensive style, seeking out unrecognized, fast-growing companies of all sizes. A strategy of dumping a stock once it exceeds its price target helps keep the fund's risk level far lower than those of its peers. D'Alonzo spoke with MONEY's Penelope Wang about where Brandywine goes from here.
Q. With a gain of 31.5% last year, the fund was in the bottom quartile of its peer group. What was behind the poor relative performance?
A. The reason was our risk-averse strategy--we stayed out of tech early in 2003. We'd seen tech rallies in the fourth quarters of 2001 and 2002, but they fizzled out when there turned out to be no real improvement in fundamentals. So our team was very leery going into 2003. For the year's first half, our tech exposure was only about 10% of assets. By June we were more comfortable that orders were really picking up and earnings were improving. We ended the year with 28% in tech.
Q. What's your outlook for tech?
A. What we're hearing from companies, suppliers and corporate chief financial officers is that business customers are finally loosening purse strings--and that there's a lot of pent-up demand. So now we've got 32% of assets in tech.
During the last quarter we bought Cisco (CSCO). It's got over 70% market share in the enterprise networking market, and it maintained its dominance during the tech downturn. We expect the stock to surpass Wall Street estimates of 19% earnings growth over the next fiscal year [ending this July]. We also bought ASML Holding (ASML), the leader in semiconductor equipment making. Semiconductor manufacturing is running above 98% capacity, and companies need capital equipment to expand. We expect earnings at ASML to beat estimates of $0.58 a share this year vs. a loss of $0.29 in 2003.
Q. Are you looking for a similar rebound in telecommunications?
A. We're seeing a sharp pickup in demand for traditional telecom and networking equipment. A lot of telecom networks are three to five years old and need to be replaced. There's not going to be a dramatic swing in capital expenditures, but at the margin it's improving.
We recently bought Nortel (NT), which makes telecom networking equipment. Verizon announced that it will spend billions over the next two years to upgrade its wireless network, [and the equipment] will be largely supplied by Nortel. Verizon also chose Nortel's VOIP [voice over Internet protocol] technology to upgrade its networks, an exclusive contract potentially worth $1 billion over the next 18 months.
Q. You have a big stake in health care. Given cost-containment pressures, can these companies continue to grow?
A. We see opportunity in cost-efficient companies like UnitedHealth Group (UNH), a leader in using technology to provide information and process payments online. It's implementing an automatic payment system through credit cards and has opened a bank to collect fees from providers for electronic payments, which is a new profit center for them. It generates huge amounts of excess free cash flow, which it uses to buy back stock and make niche acquisitions. We expect better than 29% earnings growth over the next quarter.
Q. Your largest holdings include financial services stocks such as American Express and Allstate. What's the story there?
A. Allstate (ALL), which provides auto and homeowners insurance, is showing better profitability thanks to higher prices, cost controls and lower-than-expected storm claims. And American Express (AXP) is benefiting from increasing business travel as corporate spending rebounds and credit quality improves. The company has stepped up marketing and is aggressively going after more market share. Also, it may have a huge growth opportunity if the Justice Department prevails in its antitrust action against Visa and Mastercard, which would result in banks issuing American Express cards. Even without that, we expect double-digit earnings growth this year.
Q. Sounds like you believe that the economy is finally heating up. Are you worried that rising interest rates may slow corporate earnings growth?
A. Modest inflation gives companies pricing power, so I'm not so sure that it is always a negative. Some of the best years in the market have happened when there's been some inflation. Right now, we've got corporate spending rising steadily, and I believe employment will pick up. Nothing suggests that interest rates are headed up dramatically. So I think most of the stars are lining up.