Henry Ellenbogen
FORTUNE — Baltimore, the home of old-school mutual fund giant T. Rowe Price, is a long way from the startup scene in Silicon Valley. Henry Ellenbogen, who runs the $9.6 billion T. Rowe Price New Horizons Fund (PRNHX), straddles both worlds. He’s constantly prowling for promising tech startups, spending about 100 days a year on the road, about half of them out in the Valley. Ellenbogen, 39, has received attention for his stakes in hot private companies like Twitter and LivingSocial (he didn’t buy Facebook (FB); his fund limits itself to small-caps), but he isn’t just chasing sexy names. He invests about two-thirds in what he calls durable growth stocks and one-third in six sectors he sees as ripe for innovation: health care IT, financial payments, data, genomics, consumer Internet, and corporate technology. Since taking the helm in spring 2010, Ellenbogen, who previously ran T. Rowe’s Media & Telecommunications Fund (PRMTX), has had annual returns of 21%, easily topping the Russell 2000’s 12%. Below, edited excerpts:
Facebook’s stock is down 50% since its IPO. Are Internet stocks doomed?
Long term there’s tremendous opportunity. Right now you have a classic platform transition going on. The mobile Internet, driven by smartphones and iPads, is creating a lot of challenges for some of these companies. The right way to build a consumer Internet company today is to focus first on mobile and then on the desktop. We’ve been thinking about that transition. Our second-largest holding in this area is OpenTable (OPEN). Their monetization model is the same on desktop or mobile — and they arguably make a little more in mobile. There are issues because they basically have to rebuild some of their back-end technology, but the business model itself is ideal for mobile.
Another company we own is Angie’s List (ANGI), which is a business born over 10 years ago to help homeowners find the right people to fix their houses. It’s a classic membership organization like AAA or Costco (COST). They have negative profitability right now because when you’re expanding into local markets, you basically lose money for the first several years. But if you get beneath the blend of their P&L statement, you’ll see that the markets they’ve been in for longer than four years are highly profitable, and they’re growing very quickly there. This is a case of the market not wanting to own companies that aren’t profitable overall and not wanting to look beneath the P&L. If anything, we’ve been putting more capital into this space given the valuations and opportunities we’re seeing.
Companies need to embrace change, even though they’re in a flat spending environment. Corporate technology is where we have some of our biggest holdings. If you looked at Concur Technologies (CNQR) five years ago, they were a company that helped large enterprises deal with corporate expenses more efficiently on a cloud-based platform. Over the last five years they’ve made a second transition — the kind that allows a small company to become a large one. They’ve logically moved into the adjacency of helping people manage their travel. They’ve gone from a U.S. Company selling to large companies to a global company selling all over the world. They’re having very good success in Japan and Europe. They’re also succeeding in dealing with small businesses.
What other sectors do you like?
One area that doesn’t fit nicely into industry subsectors that we think is really important is how corporations use data to make better decisions. We believe that the traditional barrier to entry is changing as the Internet breaks down distribution and consumers become more sophisticated. It’s been said that, over the next three years, companies will generate more data than they have over the last 30. Businesses that help you make good decisions are highly valuable. In the health care space, we own HMS Holdings (HMSY). That’s a company that, for the last 10 years, has helped states make good decisions on Medicaid. Now they’re taking that skill set and going into fraud and abuse — specifically in Medicare. They’re a contractor or subcontractor for every state in this country that handles benefits.
What leads you to invest in private companies?
The last thing I want is for people to buy the New Horizons Fund thinking they’re getting exposure to a VC fund or the next hot public company. About 3% of the fund’s capital is invested in private companies, and it’s unlikely we’ll go much above that. The reason we do it is we want to own not just the best small company, but the best company, period. Every once in a while we see a business that can become much larger that’s also run by a person who has the ability to make it larger.
Take Workday. They’re creating an HR system of records for large companies. It was started by the same person [David Duffield] who started PeopleSoft. They have the next-generation product that’s winning in the marketplace. They’ve built their business to be durable. It would be easier for us if they were public, but we happened to have the opportunity to invest in them when they were private.
This story is from the October 8, 2012 issue of Coins2Day .
