As Ballen sees it, Oracle and Cisco are telecom companies now, or soon will be. ''Even Intel is positioning itself as a telecom company,'' he says. ''The leaders in this field are going to make a lot of money in the coming years, which may include some companies that are not formed yet."
Aside from technology and selected services, Ballen sees few other sectors for growth funds to pile into. For example, there's not much health care in his Emerging Growth Fund, at least for now. ''The election year is a wild card,'' he says. ''Health care is sure to be an issue, and there's no knowing how the rhetoric will affect those stocks. I think you can wait to buy good companies in this area.''
According to Ballen, ideas on which companies to buy and when to buy them are produced regularly by MFS' research department, which, as a biased observer, he terms a key to the success of all MFS funds, including his own. ''We have a policy of promoting research analysts to portfolio managers, which helps to hold down turnover among researchers,'' he says. ''If we brought in someone from outside to run a fund, our analysts would leave.''
Several MFS funds are run by the firm's analysts, who pick their favorite stocks in the industries they follow. ''Research has high status here, largely thanks to John,'' says Parke. ''We don't trust Wall Street's reports. Instead, we have 42 analysts who follow industries intensively. These analysts get respect at MFS: The portfolio managers listen to them. While other fund companies may focus on quarterly ups and down, our analysts take the long-term view, which is a result of John's influence. We're buying stocks that will perform well over four to five years.''
Parke cites the case of CVS, a major drug chain. ''All the retail drug stocks were hurt last year when Rite Aid lost almost all of its market value,'' he says. ''In addition, there were fears that the Internet would hurt drugstores. Granny would buy her pills online. John insisted that this wasn't an issue, so we took a close look at CVS and found a good company that's getting better.''
So to keep up with the research department's current thinking, Ballen reads analysts' reports each morning and weighs their recommendations heavily when making stock selections. ''You can't say no all the time or people will stop coming up with ideas,'' he says. ''Ultimately, though, the decisions as to what goes into Emerging Growth are about 80% mine.''
The sell decisions are his, too. ''I have four criteria for buying a stock,'' Ballen says, ''and they must all remain in place for me to hold onto it. The company must be dominant in its market, and it must participate in an industry where the growth engine is still powerful. I insist upon strong fundamentals: a solid balance sheet and increasing cash flow. Finally, I want to see a management team that remains intact. If those elements are all in place and the company shows the promise of staying a leader 10 years from now, I'll buy more shares on price weakness. But if one of those elements is missing, I'll sell the stock.''
In February, Emerging Growth added a co-manager, Dale Dutile, who will be handling a small portion of the fund, according to Ballen. Shames downplays the importance of the move: ''John has had co-managers in the past,'' he says. ''Several of our funds have two or more managers, providing complementary investment styles.''
In addition, working with Ballen may help a newcomer gain the benefit of the former's experience. When asked what lessons he has learned over the years, Ballen says he has discovered not to believe in the ''greater fool'' theory. ''Some managers justify paying any price for a stock. They think the company will announce a great Christmas or a new product and the price will go up; it's a form of momentum investing. At some prices, though, it's hard to find fools.''
Ballen also has learned to favor sustainable business models over the various ''new metrics'' that appear from time to time and eventually disappear. ''Some Internet stocks have been sold on the basis of eyeball count,'' he says, ''but I prefer to see companies that actually show signs of producing revenues and earnings. In general, we pay more attention to fundamentals such as earnings and cash flow than many other emerging-growth funds. If you don't try to set valuations based on fundamentals, there's no limits to a stock's upside, and that's not realistic.''