High-tech for pension portfolios? Maybe - if there's diversification
There has always been a place for the risk-taker in the investment world - the person who will ''take a flyer'' on a speculative company in a new industry. But until recently, the risk-taker was not expected to concern himself with managing pension funds. This is, after all, the money that's supposed to ensure financially secure retirements.
Then why have some 15 clients entrusted more than $85 million of their pension funds with Hambrecht & Quist Equity Management (HQEM), a San Francisco firm with a stated purpose of investing only in high-growth technology companies? The firm was started about a year and a half ago by Hambrecht & Quist , an investment banking firm that also specializes in technology companies.
A key to success in this volatile area, says Albert L. Toney Jr., general partner and portfolio manager of the fund, is the same as in anyone else's investment strategy: diversification.
''What counts is the risk of the entire portfolio, not the risk of any particular part of the portfolio,'' he said in an interview during a recent stop in Boston. ''Because you diversify, putting some percentage in a higher-risk area is quite consistent if you adjust for that in the entire portfolio.
''We deal with larger funds that are used to dealing with multiple managers with different specialties,'' he added.
The kind of pension fund Mr. Toney is apt to deal with has the money for diversification. In its short lifetime, HQEM's clients have included the likes of MCI Communications, Pitney-Bowes, the State of Maryland, Conoco, General Telephone & Electronics (GTE), and the Colonial Williamsburg Foundation. The amount of money these clients place with his firm ''depends in part on the age of their work force and the degree of risk in their own business,'' Toney says. It can range from 1 or 2 percent of the total pension fund to as high as 20 percent.
The recent drop in the performance of this sector argues even more strongly for a pension fund to diversify and include HQEM as only one of its money managers. Between August of last year and this June, the Hambrecht & Quist Technology Stock Index appreciated some 140 percent. In the same period, the Dow Jones industrial averge was up 58 percent. In the last few months, however, the technology index has dropped more than 20 percent.
Toney admits he is occasionally greeted with skepticism when he discusses the possibility of investing pension money in high-technology stocks, but ''since we clearly identify what we do, by the time we get to serious discussions they've already confronted that issue.''
In any case, he adds, today's high-technology sector will likely be tomorrow's basic-industry sector. The problem is knowing which parts of the sector and what companies in each sector will be around tomorrow.
''One can be sure that over a period of time this sector will grow,'' he says. ''What's less obvious is whether the valuation at the moment is such that I should put a lot of money to work, or whether things are ahead of themselves and I should wait for cheaper prices.''
One of the difficulties of following the high-technology sector is trying to pin down exactly what ''high technology'' means. For Toney, there are three areas in this group that, by their presence, help define what he is interested in:
* Computers, including data processing, hardware, and the ''software'' that tells a computer what to do.
* Electronics, ''most particularly microelectronics as embodied in semiconductors (memory chips).''
* Telecommunications. ''Obviously AT&T (American Telephone & Telegraph Company) is the biggest example of this.''
''Clearly IBM has dominated the computer market,'' Toney observed. ''Because it has done so in a very big and rapidly growing market, it is a large and technologically powerful company.''
There are opportunities, however, for what Toney calls the ''mice that can run between the giant's feet.'' Since IBM has some $40 billion in annual revenues and is expected to reach $80 billion in the next five to 10 years, Toney says, ''that leaves markets in the $100 million to $200 million range as almost beneath their notice - something like one-tenth of 1 percent of their revenues.''
To make it in a world dominated by IBM, these ''mice'' will have to identify and go after small, specialized segments of the computer market. Having machines that are ''IBM compatible'' helps, too. This means having programs that can work on your computer as well as IBM's. One company in this category that Toney likes is Compaq, which produces a ''truly'' portable computer that is also ''reasonably priced.''
Another ''mouse'' with the potential to find some market between the giant's feet is Cromemco, a firm that makes a personal computer specifically designed for the scientific and engineering community. Neither of these companies is yet publicly traded.
''There will be lots of other markets of that sort,'' Toney says. ''I'm sure, for instance, that someone will soon have a computer that can be slipped into your pocket. The limitation on that is the display (screen) technology. You can get a computer that small, but the display is so small, it's not much fun to work with for very long.''
Toney believes some of the greatest opportunities will come in the telecommunications business, as soon as the rules governing the new AT&T and its spun-off regional divisions are set. ''It's difficult to tell what direction things will take at the moment,'' he says. ''Congress and the FCC (Federal Communications Commission) are still struggling over who's going to pay what for what.''
The divestiture is important, he adds, because of the way it changes the competitive nature of the telecommunications industry. Now, individuals are able to buy new telephones and long-distance service from AT&T's competitors, like General Electric, GTE, MCI Communications, and Sprint. After the breakup, the newly independent regional phone companies will be able do the same thing. This will create abundant opportunities for new businesses.
Even though this area, as well as computers and semiconductors, will continue to be dominated by the likes of AT&T and IBM, Toney thinks there will always be room for the daring entrepreneur who wants to start his own company, as long as the regulatory and free-market forces remain favorable.