Baron iOpportunity Is More Than Tech

• Jonah Keri
• On 6:10 pm EDT, Wednesday October 7, 2009

Punch up Baron iOpportunity at Daily Graphs' Fund Center or Morningstar.com and you'll see many of the hallmarks of a tech fund.

Here we see top sector weightings in software and telecom; there we see tech leaders Apple (NasdaqGS:AAPL - News), Qualcomm (NasdaqGS:QCOM - News) and Google (NasdaqGS:GOOG - News) among the top 25 holdings -- all you would expect from a fund (NASDAQ:BIOPX - News) with a little "i" at the start of its name.

But then you see that it's classified as a midcap growth fund. Well, that makes sense too, given the funds' big weightings in business services and sizable exposure to financials.

Michael Lippert just laughs at attempts to pigeonhole his $151 million fund. "They don't know how to categorize us," he said.

This year, the fund can be classified as a winner on performance. Year to date going into Wednesday, the fund was up 48.6% vs. 31.01% for midcap growth funds, 48.70% for tech funds and 19.01% for the S&P 500.

For the past five years, the fund produced an average annual return of 6.07% vs. 2.15% for midcap growth funds, 3.42% for tech funds and 0.47% for the S&P 500.

The first and biggest difference between Baron iOpportunity and other tech funds is Lippert's time horizon for holding stocks. He's not looking to turn a moderate profit, then cash out in a year, the way many fund investors do.

Instead, Lippert searches for companies that he can buy and hold for four or five years. His goal: double his money. He and his fellow Baron portfolio managers and analysts look for companies with a long-term competitive edge in their industry.

"There's no secret sauce involved" in Baron's research, Lippert noted. "We just spend a lot of time looking at every angle. We approach investments the way people do in the private equity world. How big can this business be in four or five years? Does the management team have the same long-term focus? How much cash flow and earnings can they generate? If the competitive advantages are there, we'll invest."

Value Bent

The second factor differentiating iOpportunity from many other tech funds is the value tinge to its growth approach. It's not quite a growth-at- a-strict-reasonable-price (GARP) strategy. But the fund is still finicky about valuation -- even with its half-a-decade time frame for holding many stocks. If Lippert truly believes in the company, he won't hesitate to average down and buy at prices so depressed it would do a value manager proud.

Take Equinix (NasdaqGS:EQIX - News). Lippert started following the network solutions firm for Baron in 2002, soon after joining the firm as an analyst. Lippert's predecessors bought shares that year, when the company did a secondary offering.

Over the years, Lippert says Baron got to know Equinix's business "better than anyone on Wall Street." The stock delivered robust gains for several years and is now the fund's top holding. When Lippert took over management of the fund in 2006, he kept riding Equinix, and the stock kept delivering.

Then came the market's plunge in 2008. Equinix raised its earnings guidance six times last year. The company beat estimates each quarter.

But the stock tanked anyway, plunging about 70% from its November 2007 high to its November 2008 low.

"Last year, the market was indiscriminate," Lippert recalled. "It was a race to cash. People were pulling money out of the market and selling everything. We kept saying: 'I know the market's terrible, but this company is great.'"

So Lippert bought and kept buying. He nabbed shares around 80, then 60, then near the lows in the 40s. What looked like a risky proposition turned into a winner, as Equinix now trades above 90 a share.

Also different is the breadth of the stocks in iOpportunity's portfolio. Morningstar dubs the fund midcap because the average market cap of an iOpportunity stock falls into that range. But the market caps of the fund's holdings run from Apple's $170 billion to tiny IT advertising firm TechTarget's $255 million.

Buzz up!