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   Interview

    Guest Interview:

   Amerindo Investment Adv.

    399 Park Avenue, 22nd Floor
    New York,NY 10022

    Telephone: (212) 371-6360
    Fax: (212) 935-6975
    E-mail: jstewart@amerindo.com

 

    Interview Quarter: 1Q1995

 Alberto W. Vilar

 President

Q: Alberto, I understand Amerindo has affiliated offices in New York and London. How are these operations related?

A: Amerindo is a close knit team of some 34 employees that operate from offices in New York, San Francisco, Miami and London. Our research analysts and customer service teams are based in San Francisco and New York; trading is based in San Francisco; London provides back office support to the US company and manages money for our UK client base in the US, and Miami houses our CFO and his team. We function as a single business spread across four offices and are linked very closely together by daily telecommunications and frequent meetings. Our office network also gives us first hand presence in three key investment centers: New York, San Francisco and London.

Q: What is the history of Amerindo as an investment firm and what is the significance of the name?

A: My co-founding partner, Gary Tanaka, and I initially launched Amerindo as an offshore money manager in 1980. Our first office was in London because our first clients wanted us there. Our firm name reflects the fact that some of our initial clients were Chinese and Indonesian, although our investment focus has always been exclusively American. In 1985, we became a registered investment advisor with the SEC and incorporated as a California corporation. Our client base is now principally composed of US pension and endowment funds, large family trusts and wealthy individuals.

Q: Would you tell us about your education, past work experience, and how you got started in managing money?

A: I grew up in both Cuba and Puerto Rico of Cuban parentage. I attended Washington & Jefferson College and then spent two years in the US Army and two years on the international side of Citibank. At this point, my interest in the stock market surfaced and I spent the next dozen or so years in a series of portfolio management positions at Burnham & Company, M.D. Sass, Endowment Management & Research and The Boston Company. During this period, I earned an MBA, my CFA, and completed a Doctoral Studies Program in mathematical models. I am fortunate that I decided fairly early on in my career to do what I really enjoyed, namely picking stocks - I have never looked back.

Q: What have been the greatest influences on the style you now use to invest money?

A: First, we specialize in emerging growth stocks that have an orientation towards high technology, healthcare and companies benefiting from technology. Gary and I chose to concentrate our investments in the areas of the US economy where the greatest opportunity for growth would be - namely computer and medical technology. Second, we invest in early-stage newly public companies so as to participate in the period of their most rapid growth. Third, we have adopted a "post venture capital" approach to building our stock portfolios. We characteristically invest in 14-20 stocks of equal size position. From this portfolio approach, we literally let our winners run, which are usually two-to-three out of 10 stocks over a two-to-four year period which can, and do, increase five-to-ten times in value. The results have been very positive for our clients.

Q: Your investment emphasis is on leading-edge, emerging growth stocks. What kind of characteristics do these stocks have in common?

A: We look for companies with leading edge, breakthrough technologies, explosive market potential and capable professional management. In financial terms, a typical Amerindo stock will have sales and earnings growth in excess of 50% per annum and will be part of a rapidly growing sector. It will generally have low institutional ownership, will be a NASDAQ listed security, and the IPO will have been led by one of the half dozen or so investment banking firms that we hold in high esteem for bringing the best emerging technology companies to the public markets.

Q: Specifically where do you see the most exciting prospects for growth within the industries or investment areas that fit your investment philosophy?

A: We believe we are on the verge of a new cycle that will usher in a new, golden period of revolutionary new technology. This new cycle is likely to get into gear later this year and should easily run through the end of the decade. It will consist of four leading technologies: a) The internetworking of computers and computer systems through client/server architecture. The desktop computing revolution that followed mainframes and mini-computers has delivered new applications and widespread incremental productivity to individual users. It has shattered the paradigm of centralized computing power and promulgated resource and information sharing which in turn has driven significant developments in communications and networking technology. Client/server computing builds on this base by creating new software designed to take advantage of distributed networks. The profound fundamental restructuring of business organizations plus corporate reengineering require a major technological revolution in software application development tools for the 200 million unit PC market growing at a rate of 50 million per year worldwide. b) Interactive multimedia represents the timely evolution of various computing technologies producing new information platforms for consumers and businesses. It represents the ability to process virtually any kind of data (sound, image, text, and video) in an interactive picture format, rather than the information being presented in traditional "computereze". Multimedia technology stands to reap extraordinary success in consumer markets that include entertainment, education and merchandising services such as online sales catalogs and video-on-demand, which will bypass traditional distribution channels. New development tools to incorporate multimedia information into information processing applications, i.e., tools to create content, will quickly emerge. c) Broad based "wireless" technology and "wireless" communication technology. Wireless communications present several enormous investment opportunities in the near future. The largest of these is in telephony, where digital cellular, PCS (personal communications systems) and global telephone systems will transform the scope of personal telephone usage initiated a decade ago with cellular. Near term, the cost of low speed data communications on unused existing cellular capacity will permit meters, kiosks, vending machines, traffic equipment, and other devices to communicate via phone and thus eliminate labor costs associated with onsite visits or scheduled visits more efficiently. This can change the economics of existing businesses as well as create new product and service opportunities. d) Biotechnology is entering its fourth bull market cycle since the first companies came public in the early 1980s that should replicate earlier average cycle moves of 200%-250% on the upside over the next few years. New blockbuster products with revenue potential of $0.5-$1 billion each, such as Chiron's Betaseron to treat multiple sclerosis, will emerge, together with major advances in recombinant growth hormones, cancer detection and gene therapy, amongst others. This new product cycle, the strongest in the last 50 years and designed to treat advanced diseases for which no treatment presently exists, is likely to be so powerful that we could not visualize Clinton's proposed health care reform, which is nothing less than socialized medicine, being capable of derailing it. These four technologies could generate sales well in excess of $100 billion in the second half of the 1990s and afford stock market valuations of five times revenues. This will be particularly important in a global economic and investment landscape in which impressive unit product growth will be difficult to find at a time when the broad stock market remains fairly fully valued, as measured by the Standard & Poor's 500 Index/Dow Jones Industrial Average.

Q: Are you interested only in US based technology companies or do you ever consider emerging growth stocks in foreign companies?

A: On a global basis, the US dominates the specialty sectors in which we invest to a substantial degree and we expect this to continue. Naturally, success encourages imitation and there is considerable interest in our sectors in Europe and around the Pacific Rim. We do invest in a small number of foreign firms that are NASDAQ listed and expect to continue to do so. However, our principal focus will continue to be on opportunities in the US and Canada. This is where our research analysts are concentrating their time and attention.

Q: You often invest in newly public companies. Does this also include new issues?

A: Amerindo is a big player in the stocks within our chosen sectors. We are frequently the largest shareholder of the companies with whom we are invested. Consequently, it is neither possible nor reasonable for Amerindo to obtain as many shares as we want at the time of the IPO. As a result, we tend to be buyers in the post-IPO market or occasionally, we will invest in a private deal a few months before a company goes public.

Q: What are the major characteristics that tell you a company is just about to undergo dramatic growth from a small to mid-to-large company?

A: There are no completely reliable indicators that collectively give a green light signal. We try to follow the evolution of technology within our sectors and to identify companies with products that the market is ready to exploit commercially. When a company starts to enjoy very rapid unit growth owing to a new product or service, in a profitable manner, we start to sniff a potential winner. When a company starts to overpower its competition and its customers start singing its praises, we are generally onto something worthy of pursuing. Stock picking is far from an exact science. There are simply too many variables that can influence the outcome. This is why we take an actuarial-styled approach and back 14-20 emerging companies with equal bets at inception (cost).

Q: A lot of your expertise seems to be in the healthcare industry. How do you analyze this market sector when politics and not economics could easily shape its foreseeable future?

A: Healthcare is only about 20-25% of our holdings. We are very constructive on the long term prospects for biotechnology and what is known as A: HIMS, which is Healthcare Information Management Systems. Recombinant therapy will enable scientists to treat many previously incurable diseases with enormous benefits for the human race over the next 10-20 years and beyond. This is certain to create wealth on a substantial scale in the process and also help contain healthcare costs. While the long term prospects seem clear, the short term investment outlook is very challenging. Since the sector peaked in early 1992, we have lived through two years of bear market conditions in biotechnology. One of the factors that has contributed to this downturn has been the uncertainty surrounding the Clinton Administration's proposed healthcare reforms. Having said this and having lived with the biotechnology sector through three complete cycles over the past 14 years, we believe that one is best advised to take a three-to-five year approach to biotechnology investments. Trying to market time biotechnology, given the twin uncertainties of politics and the FDA approval process, is not an intelligent approach to this sector. In the long run, the sheer dynamics of new therapies to treat untreatable illnesses will overcome short term political considerations.

Q: Would you take us, step-by-step, through the investment process and stock selection?

A: At Amerindo, one-third of our entire staff are research analysts. In addition, I spend a good two-thirds of my time picking stocks. Our stock selection process is field research based. The analysts follow developments within the specific sectors they follow - focusing upon where the technology is heading. In the computer technology sector for example, we keep track of where the users of technology are spending money. We try to identify what the next major development will be. We look at specific companies and try to evaluate which ones hold the dominant position in a new emerging technology. We attend industry conferences, meet with individual company managements in their offices and plants, and stay in close touch with our colleagues in the venture capital business. Inevitably, certain companies emerge as promising candidates. Our analysts gather information about their management capabilities and track records. We try to meet key personnel and directly access their capabilities. At the end of the process, it comes down to a gut feeling based on a quarter century of picking stocks. I cannot tell you how satisfying it is to go through this process and be right. This is, more than any other single factor, what makes this business fun for me and my partners.

Q: Where do you get most of your investment ideas?

A: We cover the universe of trade associations, venture capitalists, underwriters, analysts, company executives, academics, scientists and other assorted specialists. We read an extensive number of technical journals and research reports. We also do 70% of our research inhouse. We all regularly attend a variety of conferences, including those organized by the leading investment houses on healthcare and high technology. From the large set of broad based inputs, ideas emerge and get refined into a strategic view about a given sector and then the relative merits of companies within that sector are reviewed. Emerging growth with its leading edge technology is notoriously competitive. An example is today's ever changing personal computer market.

Q: How do you guard against backing the wrong technology?

A: There is no magic formula here. A lot of lively debate goes on within Amerindo among the analysts on topics like this. At a certain stage in the process, the best check is to follow what "technology" the early, smart users are buying. Of course, we hedge our bets to some extent by the way we construct portfolios. A typical Amerindo portfolio holds between 14-20 stocks. Holdings typically average between 5% and 8% of the portfolio at cost, but may be higher as Amerindo evaluates a holding's weight based on its potential, not on a preset maximum. As portfolios are being constructed, Amerindo pays close attention to the statistical covariance of the potential holdings. Stocks in similar groups frequently move together. Although portfolios are concentrated by sectors and number of holdings, Amerindo strives to diversify portfolios within our investment sectors.

Q: Fast growing companies often have stock prices that get ahead of their earnings. How do you protect yourself from paying too much for a stock today based on expectations of future earnings?

A: You have clearly hit upon one of the toughest issues an investor in our universe faces. Our best defense against paying too much for a stock is to do independent research, then establish a target price at which to acquire the stock and then hope that the ups and downs of the market will enable us to take a position of the size we are seeking. Of course, up to half the stocks we buy go down within 12-18 months following purchase. Our superior returns have come from picking two-to-four (out of ten) really big winners in the same batch!

Q: Who are the other principles in your firm and what are their background and functions?

A: As the firm has grown, we have brought in professional staff to assist us. James Stableford, Michael Sandifer, and Ralph Cechettini assist Gary and I in portfolio management. Tony Ciulla is our head trader. Both Ralph and Tony have 30+ years in the business. Michael Sandifer and Heidi Walker also work with me on client servicing; Kenneth Riffle is responsible for internal marketing; Dana Smith is our Compliance Officer; Fran Saldutti, Harvey Allison, and Christine West are technology analysts; Sarah Gordon Wild and William Slattery are biotechnology analysts, and Sam Kim recently joined as an analyst in the users of technology sector. Recently, I brought in Charles Young as Chief Operating Officer to handle administration. This enables Gary and me to stay totally involved in managing money without the administrative headaches.

Q: How do you implement your sell discipline?

A: The actual management of the portfolios at Amerindo is a team effort. Gary Tanaka, Ralph Cechettini and I oversee the entire process. When our investment committee decides to buy or sell a given security, the implementation of that decision is carried out by our trading desk. Using our investment style, a stock will generally be sold for any of the following reasons: * Revenues exceed $350 million
* Upside target achieved
* Change in company fundamentals
* Change in strategic stock market and sector outlook
* Adverse trading environment
From these qualitative and quantative filters, our investment committee will reach a decision on selling a given stock. Once a sell decision has been reached, our trading function will implement it by working with the market makers of the given security. Amerindo prefers to work with market makers of our stocks by reacting to bids for and offers of blocks of stocks in our universe, but we will very rarely leave a working order with them.

Q: I see you have a chart in your marketing brochure that addresses the historically low relative valuation of stocks with small-capitalizations. Where do we stand now and what does that say about the future for these small-cap issues?

A: We continue to believe small capitalization stocks are in the midst of a major bull market and they are an exceptional buy at this time. There are a couple of good measurements available that support our belief. Two come to mind: the PE ratio of the T. Rowe Price New Horizons fund compared to the Standard & Poor's 500 Index (S&P 500) P/E ratio (it currently is in the value range) and the Montgomery Small Cap Universe vs. the S&P 500 Index, which calendar 1994 P/E ratio is 15.5x vs. 14.5x for the S&P 500, but the three year projected growth rate is 22% vs. the S&P 500's 8%. We are also in the first productivity-lead recovery since the 1960s, which directly benefits technology companies that improve productivity. Looking forward, the productivity gains in the US, which Japan and Europe painfully have yet to achieve, are extraordinarily important to our universe of high technology stocks. This massive restructuring of much of Corporate America, which occurred during the 1980s, is now entering its second phase when its maximum benefit starts to impact our companies. By way of background, the first wave in a productivity recovery is massive cost-cutting, followed by the second wave, which is dominated by capital formation used to equip and train workers with new technologies and tools to maintain the earlier painful gains achieved by layoffs. In the current recovery, this portion of the capital equipment cycle has been the strongest on record. We fully expect this stage will be dominated by purchases in our three specialty sectors: electronics and software, allied healthcare information service companies, and innovative corporate users of new technological advances. This cycle should continue through the end of the decade. Amerindo firmly believes that this productivity based technology cycle will be dominated by US companies. Today's valuations make our sector a very attractive investment universe.

Q: What kind of client would be happiest and most comfortable with Amerindo's style and investment methodology?

A: Amerindo is an investment manager with greatest appeal to long term investors interested in above average returns. The greatest returns in the Amerindo universe go to investors patient enough to leave their money invested for three-to-five years, long enough for the winners to emerge and run to their full potential of five-to-ten times the original investment. Amerindo also appeals to investors interested in emerging technology driven companies to be found at the cutting edge of the US economy, making them the envy of the entire world. We are certainly not suitable for traders, market timers, or investors with a very short time horizon.

Q: Amerindo has made its name managing money for pension funds - are you interested in the individual investor?

A: Although our US business is concentrated in managing money for big ticket institutional accounts, we can manage money for small to mid size corporations, individual investors, and family trusts and offer a variety of approaches to meet the needs of qualifying individuals, including two small technology funds aimed at sophisticated investors. Amerindo does not offer a mutual fund for small investors.

 
 
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