If boldness is any measure, Oelschlager's winner-take-all investment style is a solid match to Yardeni's forecasts. His portfolios typically concentrate on a narrow band of 20 or 25 stocks, with the top ten holdings often representing more that half of fund assets. "If you have 100 stocks and one of them doubles, it doesn't have as much impact as it would with a more concentrated portfolio," he says. "A lot of fund managers who overdiversify are essentially closet indexers."
The strong focus on technology issues has led to spectacular returns in some years, and dismal ones in others. "Over a ten-year time frame we look great," he says. "But there have been some ugly years in between. Ultimately, we will be rewarded for staying the course." A portfolio turnover rate in the low single digits illustrates Oelschlager's faith in his picks, and willingness to hold on to them through thick and thin.
Shareholders and investors, who have pulled billions of dollars from Oak Associates funds and institutional portfolios since the tech wreck in early 2000, apparently have not displayed the same loyalty. Still, Oelschlager looks forward to a return to favor when the market mood shifts. "A lot of growth fund shops blew up in the last few years, so there are not as many options now for investors," he says.
Brighter Days Ahead
Although investor preference for value stocks has made 2004 a difficult year for Oak Associates, both Yardeni and Oelschlager say that the economy is on the verge of an upturn that will be driven by technological innovation, and that growth stocks will rotate back into favor. And this isn't just a meandering, sluggish recovery, says Oelschlager, who believes that "we're on the eve of probably the strongest economic recovery the country has ever had. With productivity at a 55-year high and interest rates at a 45-year low, the stage is already set."
While value stocks tend to do well during times of slow economic growth, an economic expansion provides a more hospitable climate for growth stocks. Oelschlager says that stocks such as Cisco Systems, the largest holding in the White Oak Growth Stock fund, have excellent prospects for growth and represent attractive values at current levels.
Yardeni finds some "eerie similarities" between the early 1990s and the current economic climate. Both periods were marked by a short, modest recession followed by a lackluster recovery. Inflation and interest rates were low, earnings were solid, and the markets were flat. Congressional elections took place in 1994, while the Presidential race dominated the news in 2004. Just as the end of the Cold War helped spark an economic recovery ten years ago, the entry of China into the World Trade Organization in 2001 represents a major step toward globalization of world markets that will help the American economy thrive.
Over the next few years, Yardeni predicts that corporate earnings will grow at a rate of 7% to 8% a year, and that inflation will clock in at a moderate 1% to 2%. He expects the Dow to reach 11,700, and the Standard & Poor's 500 Index to reach 1,300, by year-end 2005. Ten-year Treasury bond rates should stay in the 4% to 5% range for the next several years, while the Fed funds rate may rise to 2% to 3% over the same period.
At the same time, he believes oil prices will remain high. "I may suggest adding some growth stocks in the energy sector to Jim," says Yardeni. Such a suggestion would be a departure from the technology, financial services and health care stocks that dominate many portfolios at the firm. But if the past is any indication, his new boss will likely be all ears.