Inflation, according to Douglas MacKay, portfolio manager of the Red Oak Technology Select Fund (ROGSX), is neither a hibernating bear nor a wild creature temporarily tamed by Federal Reserve Chairman Alan Greenspan, � la Siegfried and Roy.
"To us, inflation is dead," MacKay says.
MacKay manages the newest addition to the mutual fund family operated by Oak Associates and its founder, James Oelschlager. For several years, MacKay has co-managed the company's two other funds, White Oak and Pin Oak, and has learned Oelschlager's deft touch, which has made the flagship White Oak fund one of the best-performing large-cap growth funds ever.
The company's philosophy is to identify the best-run companies in growing sectors, then build a concentrated buy-and-hold portfolio and stay fully-invested.
"We're a top-down money management firm," MacKay said. "We think that interest rates determine the overall level of stock prices. To us, interest rates are the tide that can raise or lower all boats and that guides our decision as to whether we're in a favorable environment or not."
Like other money managers gung-ho on technology, MacKay speaks of a "second industrial revolution" and likens the impact of computers and the Internet on American business to that of the railroads and steamships and electricity. And while businesses more fully embrace new technologies, the true impact on productivity is yet to come. And that means there is still a lot of room for the economy to grow without inflation rearing its ugly head.
"The healthiest industry in America is the technology industry and yet in the tech industry, prices are rapidly coming down because of productivity and yet profits continue to grow for the sector."
The US has also regained its lead in developing innovative technologies, pharmaceuticals and financial services, such as 401(k) plans, and is now exporting these advances to a hungry world yet more evidence that the current economic boom has pretty sturdy legs, MacKay says.
Red Oak is a new fund, just coming upon its one-year anniversary. It is heavily concentrated and non-diversified, owning a mere handful of stocks, between 15 and 25 typically. The fund zeroes in on three main sectors: technology, financial services and pharmaceuticals. And while it aims for performance, it does so using a long-term strategy, meaning MacKay is not going to be buying and selling rapidly to chase short-term trends. But his buy-and-hold strategy is going to add to volatility, so only the hearty need apply.
"You know corrections are going to happen. They are a given," MacKay said. "You know with Oak, given we do have a concentrated style and we focus on a few sectors, we are going to deviate from the indexes from time to time. We're not closet indexers. We don't want to be. We want our shareholders to be as enthusiastic in the areas we invest in as we are."
The areas of interest to MacKay are the ones showing signs of true long-term growth.
"Where is the hiring occurring in our economy? Rather than shifts in employment, where is the true organic growth in employment occurring? We ask ourselves, 'If we were just coming out of college, is this the kind of company we'd want to go to work for?'"
One company MacKay would like to work for is Cisco Systems, a stock that has been in his portfolio from day one and has been a staple of all the Oak Associates portfolios.
"By far that's our favorite company," MacKay said. "Not only because we made a lot of money in the stock, but because we think we can continue to make a lot more money."
Cisco, which makes routing systems for computer networks and the Internet, and another Red Oak holding, EMC Corp., which makes computer storage devices, are what MacKay calls "infrastructure plays." Rather than bet on which dot-com company is going to survive the Internet wars, MacKay figures it's safer to bet on the companies that provide e-commerce backbone and will win no matter which retail player prevails.
"They're at the core, like Intel was to the PC," he says of Cisco. "It should grow 30 to 50 percent per year."
So how is he doing?
From the beginning of the year through Aug. 31, the fund has returned 41.30 percent according to Morningstar, handily beating the Standard & Poor's 500 index. So far, his strategy seems to be paying off, although investors are again warned that the concentrated style of the fund will make it more volatile than most. But MacKay does not intend to level the ride by keeping large cash reserves. And he puts his money where his mouth is: He says all his investments since the beginning of the year have been in Red Oak.
"I think our biggest value added as an organization is keeping people from selling," MacKay said. "People hire us and you have to do some hand-holding, but we truly try to be longer-term in our approach. We think 90 percent of your return is whether you're in or out of the market. And so we keep cash at a bare-bones minimum.
"If I've learned anything from Jim (Oelschlager), that's the most important thing stay in the market. You can't make money if you're not trying."