DynaTech Hunts For The Innovators

• Paul Katzeff
• On 7:52 pm EST, Thursday November 5, 2009

Franklin DynaTech is on the prowl for companies that reshape the world. That's because their leading-edge leaps lead to strong earnings growth.

"We focus on companies in science and technology," said Matthew Moberg, co-manager of $615 million Franklin DynaTech A (NASDAQ:FKDNX - News).

Science and tech firms are key innovators, he adds. "And we believe innovative companies lead economic advance. Companies that lead advances tend to lead the markets."

That does not force Moberg and co-manager Rupert Johnson to position their portfolio as a sector fund. "Science and tech companies can be in any sector of the economy," Moberg said.

For example, seed producer Monsanto's (NYSE:MON - News) innovations include developing drought-resistant corn seeds. Credit-card giant Visa's (NYSE:V - News) innovations, Moberg says, include its network security and products like its chip-in-a-card.

Moberg does not have to look far to cite his mentors. His co-manager in January 1968 founded the fund they run.

Johnson's father started Franklin Distributors, the predecessor of Franklin Advisers, the fund's parent company today.

"I started here on Flex Cap Growth Fund (NASDAQ:FKCGX - News) as an assistant to Conrad Herrmann," Moberg said of the now $2.8 billion portfolio he still co-manages. "It's a very general growth fund. And I work closely with Rupert, who's been at it more than 40 years. He has a tremendous wealth of experience."

On DynaTech, Moberg and Johnson narrow their search for innovative companies by looking for sustainable growth and attractive valuation.

One key to sustainability is a competitive moat that discourages others from entering the business.

Once they are ready to buy, the managers typically do it by nibbling at a name.

"We start by buying fairly slowing," Moberg said. "We want to make sure our thesis is playing out."

The managers often take as long as six months to build a position.

Reaping Returns

Their approach has led the fund to a 34.28% gain this year going into Thursday. Its large-cap growth rivals tracked by Morningstar averaged a 25.63% gain. The S&P 500 was up 18.26%.

Over the past 10 years the fund's average annual return was 1.24% vs. -2.51% for its peers and -0.85% for the S&P 500.

Petrobras (NYSE:PBR - News), a Brazil-based oil and gas exploration and production company, was a top buy in the fund's latest disclosure.

"PBR is a leading player in deep-water development," Moberg said. "It's one of the few companies finding new oil fields. And deep-water extraction requires leading edge technology. Some of it does not exist yet."

Moberg added: "In any case, global consumers are counting on deep-water drilling to replace falling production in more mature, shallow water fields."

Despite earnings per share declines the past two quarters, Petrobras is up 94% this year.

Online search leader Google (NasdaqGS:GOOG - News), a top holding as of the fund's latest disclosure, has reformed the way advertisers can measure the results for what they spend. That is part of Google's appeal as an ad medium.

And online advertising still has room to grow in the U.S. and elsewhere, Moberg says.

Amazon (NasdaqGS:AMZN - News), another top holding, has even greater potential opportunities, he says. Despite its prominence, Amazon's share of total e-commerce is small. "That leaves a lot of room for growth," he said.

Moberg also likes the potential impact of Prime, Amazon's newly launched two-day shipping service for which it charges a flat $79 annual fee.

But only strong, nimble companies flourish. At the end of 2004, eBay (NasdaqGS:EBAY - News) was a big holding. "But Amazon started developing more innovative ways of selling on the Internet and taking share," Moberg said.

Buzz up!