The mutual funds that are the biggest investors in Microsoft Corp. say the company's business prospects outweigh concern over a judge's finding that the world's biggest software maker operates a monopoly.
That view helped shore up the company's shares in the wake of the Nov. 5 finding. About one-third of the 2,600 U.S. domestic stock funds tracked by Morningstar Inc. hold at least 1 percent of their assets in Microsoft, which is the most heavily weighted stock in the Standard & Poor's 500-stock index, with a market capitalization of $460.2 billion.
No manager has a bigger stake--as a proportion of holdings--than Max Katcher. About $1 million of his $5 million Ameritor Security Trust Fund is invested in Microsoft. He said he's not paring his position.
"Certainly there is some concern, but long run I think Microsoft is a solid company and I think they will weather this," said Katcher, who manages the Washington-based Ameritor Security Trust fund, founded in 1935.
A breakup of Microsoft is among a range of remedies being considered by the Justice Department after Judge Thomas Penfield Jackson said nine days ago that Microsoft "stifled innovation" by using its dominance over PC operating systems to quash rivals. While the findings were a setback for the company, some investors believe a breakup would benefit shareholders, as it did in the case of AT&T Corp., which was broken up in 1984.
That means investors who sit tight are betting that the company will continue to beat the benchmarks. In the past five years, Microsoft has gained just more than 1,000 percent, compared with the 200 percent gain in the S&P.
Of funds with assets totaling more than $5 billion, Fidelity OTC Portfolio Fund has the highest percentage in Microsoft at 8.79 percent. Vanguard Growth Index follows with 8.19 percent. Janus Twenty Fund has 6.12 percent, Vanguard U.S. Growth Fund has 5.9 percent, and American Century Ultra Fund, at 5.7 percent, rounds out the top five, according to Morningstar.
In share terms, Vanguard 500 Index has the biggest stake, at 42 million shares, followed by Fidelity Magellan at 41 million, American Century Ultra at 22 million, Fidelity Growth & Income at 18 million and Janus Twenty at 16.8 million.
Frank Walsh, the equity analyst responsible for Microsoft at Putnam Investments, said his company is "not worried."
"Our perspective is that this may take a long time to resolve, and there is an appeals process, the Supreme Court," Walsh said. "If Microsoft takes it to those levels, we feel that they have made some valid points during the trial, and that unless the government is really going to go out of its way to hurt this company, the company should continue to prosper."
While the ruling will create some uncertainty over the next six to 12 months, Microsoft's fundamentals remain strong, Walsh said, adding that he doubted it would be split up in the next year.
"They are going to enter into one of the strongest product cycles in their history with Windows 2000," he said.
Charles Smith, who manages $5 billion for J&W Seligman & Co. in New York and has about 4.3 percent of his portfolio in Microsoft--about equal to its S&P weighting--concurred. "They are incredibly profitable. Their margins are huge and they generate a tremendous amount of cash," he said.
Granted, some investors may consider selling if the courts rule against Microsoft.
Amy Domini, president of the Domini Social Equity Fund, said the Microsoft issue is a tough one for socially responsible investors.
"Socially responsible investors have not historically screened on antitrust," Domini said. "However, the scale of this puts it in the Standard Oil category, and AT&T, and these you have to view as special cases, so if there is a finding of law against Microsoft, we will be very definitely prejudiced. But at this juncture I don't even know. It's a debate internally."
Even the prospect of a breakup doesn't bother investors.
"A breakup is thought of as something that could create value," said Richard Sichel, chief investment officer at Philadelphia Trust Co., which owns Microsoft shares. "The company is doing a lot of great things, and the outcome won't really stop the forward progress."
Of funds with more than $5 billion in assets, Vanguard 500 Index has the largest number of shares of Microsoft; the software company's stock has soared since it went public March 1986.
Name of fund Number of Microsoft shares held*
Vanguard 500 Index 42 million
Fidelity Magellan 41 million
American Century Ultra 22 million
and Income 18 million
Janus Twenty 17 million
* As of Oct. 31