Long-Term Technology

In 1999, when technology stocks were at their peak, the managers for the city of Philadelphia Public Employee Retirement System (Philadelphia PERS) took a hard look at market conditions and mulled over whether they needed to adjust the fund’s portfolio. “We were wondering whether we should start to change our asset allocation at a time when equities were far and away outperforming bonds,” recalls Anthony K. Johnson, the fund’s chief investment officer.

The fund’s investment staff recommended that the board adhere to their long-term approach to investing and maintain the fund’s allocation. “We felt as though our allocation was appropriate for the risk we were willing to take in the market,” explains Johnson who oversees $4 billion worth of employee pension assets and advises a team of 56 investment managers. “Over the last four years, we’ve kept a 70% equities — 30% bonds ratio, even as the stock market continued to turn and completely reverse itself. We continue to believe that, in the long run, stocks are going to add value.”

The Philadelphia PERS guidelines generally instruct large-cap managers to buy stocks of companies that have a market capitalization above $10 billion and are included within its industry sector index. Fund managers are also instructed to limit the percentage of any one company in the fund to no more than 2.5 times the percentage of the company held by the benchmark index. Fund managers make all stock selections independent of Johnson. Using these criteria, Philadelphia PERS investment managers have allocated funds into tech stocks they believe are undervalued and still have great potential for an upside surprise, in spite of the recent technology downturn.

Enterasys Networks Inc. (NYSE: ETS), formerly known as Cabletron Systems Inc., develops and designs network solutions that enhance network security, availability, and mobility across the enterprise. “The company recently refreshed its entire product line for the first time in two years, making them more competitive,” says Johnson. “One of our managers bought Enterasys shares, confident that the firm is going to earn money in the foreseeable future.”

Another tech stock is LSI Logic Corp. (NYSE: LSI), a company that designs and manufactures high-performance integrated circuits and storage systems. According to Johnson, the fund bought LSI Logic on the expectation that sales in the third and fourth quarters of 2003 would pick up dramatically due to increased holiday orders of recordable DVD players, which use components produced by the firm.

AVX Corp. (NYSE: AVX) is another company that has been adversely affected by the recent slump in technology. It manufactures a broad range of passive electronic components and interconnect products for multi-national original equipment manufacturers and contract equipment manufacturers. Johnson says the manager who selected this stock was high on AVX because “the company holds the No. 2 position in market share, and they have low debt and a lot of cash.”

The final selection from Johnson’s fund managers is Big Lots Inc. (NYSE:BLI). Big Lots operates closeout retail stores across the United States. The stock is attractive because the company has refocused