Timothy J. Miller is a senior vice president and portfolio manager at the Invesco family of mutual funds. He manages the $2.2 billion Dynamics Fund, which holds a mix of small and medium-size growth firms, and helps manage the $100 million Endeavor Fund, formed in late 1998 and designed to be an aggressive, concentrated fund not limited as to what it can invest in. Both funds have done well this year, with Dynamics up 29 percent and Endeavor up 30 percent.
Miller sat down last month to talk with Washington Post editors and reporters about his funds and his investing style. What follows is an edited transcript of the conversation, which came after a period in which large growth companies, the market leaders in the past few years, had given back some of their gains and smaller companies were again in favor with investors.
Q: Maybe you could just give us a brief summary of the two funds and how they differ, what their basic investment goal is.
A: Well, we tend to own the same names [in both funds], but for different reasons and at different times of the market. I describe our style as the traditional or classic growth [style]. We're looking for growth in the market, leading companies with high returns, because those are ultimately the stocks that become Coca-Cola and Cisco and Microsoft. We're looking at large market opportunities, companies we think have good long-term growth potential.
Dynamics is a mid-cap growth fund. We launched the Endeavor Fund in November of last year. That is an all-cap fund. . . . It's been more concentrated, a little higher-risk.
Q: Why do new funds always have a great start? Any fund company that starts a new fund, it's as though it can be arranged somehow.
A: A lot of new funds are successful. The ones that aren't, you don't hear about, so there is a little bit of misperception that all new funds are successful. But there's a clear size advantage in managing a small fund, with easy flexibility, moving in and out of positions without disrupting the market.
Q: The Dynamics fund is up smartly too this year. They are both up about 30 percent.
A: Dynamics is about $2.2 billion, and Endeavor is tiny. They're both, for different reasons, doing pretty well. Dynamics is doing well because we're staying true to our mid-cap discipline and the market has broadened out this year. The Endeavor fund is doing well, but when we first launched the fund in October we were probably 65 percent large-cap and the balance mid- and small-cap. That worked for the first three or four months, but now with the broadening of the market and with large-cap growth actually being a worse-performing sector, we took a little bit of pressure in the spring and actually reallocated the portfolio. So now we're about 65 percent small- and mid-cap.
Q: You've been a big holder of America Online. I think in your last report it was the number one holding in the Endeavor fund. Is it still?
A: No, we've cut it dramatically. It went from about 7 1/2 percent of the fund to about 2 1/2 percent.
A: Couple of reasons. Number one, the Internet sector overall, we felt, was somewhat vulnerable to rising interest rates. That was one reason. Secondly, on the competitive front there are some issues with AOL, whether it's open access to cable or the free [Internet service provider] trend that hurt their subscriber growth in Europe. We are trying to assess what the intermediate implications of those are for AOL, what the response will be and whether they maintain the momentum that they have.
Q: Is that the way you evaluate all your holdings?
A: We have a very simplistic point of view in looking at companies. There are basically three criteria we look at: the growth of the market, competitive position of the company and the financial returns they generate. If one of those three comes into question, that's either a signal for us to reduce or eliminate the position, and in this case there were some competitive issues and some financial issues related to [AOL], whether they can continue to generate such a strong revenue stream, with both subscriber fees and advertising revenue.
Q: Who's number one now?
A: Number one is a semiconductor company. It's a company called Altera Corp.--programmable logic devices. What we like about the company is it's growing very rapidly and there are really only two strong competitors in that market. Generally an industry with a handful or less of leaders is a good industry to invest in. Their financial returns are stellar. They're in good product cycles, so a lot of the elements are in place for a good stock and it's worked pretty well for us.
Q: And are those devices used in telecommunications products primarily?
A: Pretty much--that's the other element we like. The surging growth is coming from networking andtelecom, but it's also pretty broad-based, serving a number of other end markets in the technology sectors.
Q: What do you think are the hottest sectors now for investing?
A: Well, looking out over the next couple of years, the Internet and telecommunications are the two hottest sectors in the market.
Q: What companies do you like in those two areas?
A: We're going to focus on the leading companies, so we are trying to be patient during this temporary correction phase of the market and get positioned in the companies we want to own. On the Internet side, it's both portal companies like Yahoo and potentially Amazon.com that we could consider, and we already have a position in AOL. We're looking at software companies like Ariba that just went public or companies that are deploying on the Internet to gain share in their existing business, a company like Grainger, which is a basic boring industrial company.
Q: How about overseas? You own some European telecommunications stocks, right?
A: Their opportunities are as good as they are here. The size of the market isn't nearly as big as it is here, and in this particular case the competition is less intense over there than it is in the U.S. We've had very successful telecom CLEC [telephone competitive local exchange carrier] investments in the U.S., focusing on the leading companies, and not surprising they were the ones that got acquired. Europe's the same situation. Colt [a British phone company] probably at some point is going to be acquired.