Portfolio Talk: David Mills

Is the timing right to launch a fund like this, considering what's happened in the market?
We wanted to launch it around November/December time frame which would have been perfect but it took longer to put together that we thought.

People who invested on day one in the Aussie fund are down by 8 or 9 per cent so it's not great for them but given the potential returns it's not a disaster. It's not like they are down by 30 or 40 per cent or something. So timing is not great but Murphy's law it never is.

How hard is it to actually find decent stocks in this market, considering what's happened?
In some respects it's easier because they are all cheaper.

One of the fund's biggest holdings, Cisco, is down quite a bit at the moment isn't it?
Cisco is off about 20 - 22 per cent. It obviously got knocked a bit by the article in Barons magazine.

So it is still cheap in your view?
Yes very cheap. The Barons article looked at the PE and said that there must be problems there. I don't want to get religious about it but there is very little about Cisco that you can actually fault. Their strategy, their transparency, anything to do with management, I mean you could conceivably say they don't have the best product but did that stop Microsoft become a massive company?

The best run technology companies are not run by techco geeks, they are run by the sales people most often than not.

It's just very difficult to fault Cisco or their strategy or the ways they implement it, forget about the products.

The one point you can argue on, you can debate backwards and forwards, is valuation. Valuation is all up to assumptions, if you think it is going to grow quickly then it looks undervalued, if you think it's growth is going to slow then it looks overvalued. But you can't just look at a headline PE and say it's expensive.

How much of the fund is in dot.coms?
It's still small, probably up to 3 - 3.5 per cent and that's spread over 4 or 5 names. It's an incredibly volatile area.

What are some of the names?
The key one is Ariba which is a business to business software company. Whenever we invest in any of these things they have to have a lot of leadership and you've got to really be able to see customers buying a lot of their product to give you at least a degree of confidence that they are building a franchise.

How is your portfolio divided up at the moment?
We are at about 30 per cent in telecommunications. It's interesting that telco is broadly split into new age and old-world. We've got very little in the old-world. The likes of Telstra, AT & T, SBC Communications, British Telecom we've got very little in those sort of stocks. We have got a lot in new age telco companies, that actually where we are at, the most new age, more than the tech itself. Because we just think the franchisees are under such phenomenal threat in old-world telco companies. But then 53 - 55 per cent in IT and then 10 or 12 per cent in media.

In terms of those sectors though can you say whether you are over weight or under weight in each of the sectors?
We are largely, and it just falls out like this actually, at weight on the three broad categories.

About 9 per cent. That's just because cash is coming in so fast. If we get wary about the markets we just let cash build up a bit.

Can someone go and just replicate the TIME index and do an index fund?
Yeah, sure.

Why is the Nasdaq not a good proxy?
It's 100% US by default which is not everything. Also it does have a lot of non-TIME stuff, like bio-tech. There is quite a lot of financials, and new-world stuff such as small banks and small retailers. The other thing it doesn't have, which we didn't want to completely ignore, is some of the older world TIME stuff like AT & T, and IBM. Some of those companies are great companies and you want to invest in them and they are very big companies.

What experience does the BT team have in the time sectors?
They are virtually all finance geeks, there's not many techno geeks in there. We've been strongly aligned on sector analysis for, depending on the region, anywhere between two and five years. It would be nice to have 16 people with 10 years experience each specifically on sectors but it's just not like that. Its more two to three years specifically on a sector and then from there out to anywhere up to 14, 15 years on something to order in company analysis.

Can you put the recent correction into perspective?
I am still incredibly up beat on the broader sector, I think over the next three to four months it is likely to continue substantial volatility. You traditionally do get a lot of volatility going into the northern summer. The second quarter tends to be quite volatile with a bit of a downward thrust and clearly we've seen that come earlier and more volatile than normal this year. I wouldn't expect it to suddenly go onwards and upwards on its merry way next week, it's just going to continue to be volatile.

The Nasdaq has been a volatile index. Every year for the past decade it has had 3 to 4 times a year when it gets set back over 10 per cent. I personally don't classify day to day volatility with risk but a lot of people do.

There's no Australian or New Zealand stocks in your fund - why is that?
We do have a strong bias towards bigger stocks (US$10 billion and up). The risks are greater with smaller stocks so there's got to be a good reason to buy companies below US$ 3-5 billion.

Using that broad $3-5 billion mark in itself means there's not that many opportunities in Australasia, and Australasia is only about 1 or 2 per cent of the index

How hard is it to actually sort out the winners from the losers in this technology?
If you're talking companies that are quite established such as Nokia and Cisco, it's actually reasonably easy 70-80 per cent of the time to see, in a fundamental sense, who's going to win for the next 2,3,4,5 years.

Nokia is clearly going to win the mobile phone race, I mean Alcatel and Phillips just aren't going to bounce back. Cisco will win the router race; Nortel will probably win the optical race.

If you go down a level to companies in the earlier stages of business it's a bit harder. The key thing with those ones is really understanding the franchises and the growth sufficiently to value them.

Understanding the franchise is a matter of doing enough research to complete the assumptions. We look at the management track record, talk to customers to see how business is being young.

With this TIME fund, what sort of returns would investors expect over say the next five-year period?
I personally think 20-25 per cent. Now the reality is probably more like 15-20 per cent. Using underlying earnings, it should be 20-25 per cent and there is probably going to be a degree of ratings compression in there which might bring it back to 15-20 per cent.

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