This long-term tax efficiency is no accident, judging by the way Ballen warms to the subject. ''Our tax efficiency may slip a little,'' he says, ''but we'll still be tax-efficient. When we trim our positions in our large holdings, we pick the lots that will bring investors the lowest possible tax bills and we harvest losses when we can. In fact, we have $1 billion in unrealized losses we can take in order to offset gains.''
While Ballen obviously takes tax efficiency seriously, he's not impressed by the recent spate of "tax-efficient funds" to come onto the market. ''Some of these funds are being mis-sold,'' he says. ''If investors are going to realize gains, they're going to have to pay capital gains tax at some point.''
While Ballen downplays the trend toward positioning funds as avowedly tax-efficient, his record shows the drawback of another trend adopted by many financial advisors: an aversion to ''style drift.''
Any planner who discarded MFS Emerging Growth for its lack of style continuity likely lost out on some impressive returns. Buying and holding stocks such as Oracle and Cisco, true ''emerging growth'' companies, the fund moved into mid-cap territory in 1995 and became a large-cap 1999. ''This movement explains a couple of subpar years in the late 1990s, when mid-caps underperformed,'' says Sarah Bush, an analyst at Morningstar. That is, Ballen's fund gained a mere 14%, 20%, and 24% in 1996-1998, trailing the S&P 500 each year, during a period when investors seemed to want only the biggest of the big names.
Bush rates Ballen's record ''very impressive,'' saying that his fund has proven itself in different types of markets and has held up fairly well this year. ''Nevertheless, whenever a diversified fund holds 68% of its assets in technology stocks, it's extremely aggressive, and potentially risky for investors,'' she says.
Although Ballen's fund is now listed as a large-cap in the Morningstar style box, he denies positioning himself as a large-company stock picker. Lipper Inc. classifies the fund as multi-cap, while Morningstar's Bush calls it an all-cap entry.
According to its charter, the fund ''normally'' invests at least 80% in stocks of small- and medium-sized companies. Even though the fund's largest 10 holdings comprised over 62% of assets recently, the fund owns at total of more than 500 stocks. ''John Ballen likes to hold small positions in many companies that might grow into the next Oracle or Cisco,'' Bush says.
''We pulled back from small-caps in the mid-1990s,'' says Ballen, ''which turned out to be the right move. Now, I think that small-company price-earnings ratios look better, compared to earnings growth rates, so we're becoming more interested in smaller companies. If you consider small- to medium-sized companies to be those that go up to $20 billion in market capitalization, it's possible for such companies to make a significant impact, even in a fund as large as ours.''
When asked which companies he's buying now, with new funds as well as with the proceeds from cutting his holdings of Oracle and Microsoft, Ballen supplies a varied list, including Network Solutions, which rents Internet domain names; Office Depot, which has a dominant retail franchise; Bisys; and Global Crossing. He also is bullish on high-quality wireless stocks, such as Sprint PCS and Nextel, explaining that he prefers service companies to equipment suppliers in this area. ''It's a better business model,'' he says. The expected emergence of the wireless Internet could make participants Wall Street favorites.
Indeed, telecommunications is shaping up as a major trend in Ballen's eyes. ''Bandwidth is vital,'' he says. ''Instead of having a phone conversation, we should be able to see each other and display graphs to illustrate our points. We're limited now by the devices we have, but that will change soon.''