Playing the Net, Using Mutual Funds
So far, the Internet stock frenzy is a story of a lot of individual traders and investors getting rich off a lot of individual stocks.
But investors who’ve chosen to play this sector via mutual funds haven’t done so bad, either: Their gains last year topped 70% in many Net-focused funds, versus 14% for the average U.S. stock fund.
And given the volatility in this sector--and the fact that Internet firms are capable of changing their technology and business plans in the blink of an eye--the idea of playing the Net through a professionally managed, diversified mutual fund might even seem like a good one.
But before you plunk money into one of the small but growing number of funds with a “net” or a “www” in their names, analysts say you should keep a few things in mind.
For starters--and perhaps most obvious--an Internet stock mutual fund won’t provide the upside thrills of an individual Internet stock. That’s the downside of diversification.
Which means the eye-popping gains of any particular stock in your fund will be watered down.
Indeed, while some of the best-known Net stocks soared more than 30% on Monday, the Munder NetNet fund’s net asset value rose 8.3%. To be sure, that’s still an impressive gain. But it’s nowhere near as exciting as what an individual stock in this sector can deliver.
That said, with the stocks at their current heights, this sector is certain to remain highly volatile for a long time to come. And just because an Internet fund claims to spread risk among dozens of different stocks doesn’t mean it can protect your investment if the bottom falls out of the entire sector.
“Every dog has its day,” said Russ Kinnel, equity editor for fund tracker Morningstar Mutual Funds in Chicago. “While a portfolio of highly volatile stocks will have its good years . . . it is bound to lose money too” at times.
Consider the Internet Fund. In 1998, this $35-million portfolio was the country’s best-performing mutual fund, delivering a total return of 196%. But during the late-summer market slide, the fund was actually down as much as 45%. “We try to caution investors to look long-term with a fund like ours,” said manager Ryan Jacob.
Finally, and perhaps most important if you’re shopping for a Net fund, note that just because a fund has a “net” or “www” in its name doesn’t mean it’s a pure Internet portfolio.
At least no more so than a basic technology fund might be.
When Morningstar recently looked for funds with the greatest Internet exposure, it discovered that the “purest” Internet play--which it defined as the fund with the largest percentage of its assets in companies in the Isdex Internet stock index--wasn’t a Net-specific fund at all.
It was Amerindo Technology, which focuses on technology in general.
This should come as no surprise. With Internet shares leading the market overall in the last year, mutual fund managers of all types have been increasing their stakes in these shares just to keep up.
Meanwhile, Munder NetNet--the largest and perhaps most established Internet fund, whose assets have grown from $95 million to $380 million in a little more than three months--had the second-biggest exposure to the Internet, according to Morningstar’s study.
Yet among the 2 1/2-year-old fund’s top holdings recently were names such as Microsoft, Intel, MCI WorldCom, Cisco Systems and Intuit--large, mainstream technology stocks common to thousands of diversified domestic stock portfolios.
“Doesn’t it seem like it’s about marketing, not about investment positioning?” asked Paul Merriman, editor of the Fundadvice.com newsletter in Seattle.
Munder NetNet co-manager Alan Harris said his fund is indeed “an Internet fund” and that it invests in these general tech stocks for a purpose.
“Our investments span a very wide perspective so that our fund has more stability,” Harris said. A third of NetNet’s assets are in big, established companies that enable the development of the Internet--companies such as Sun Microsystems and computer networker Cisco Systems; another third is in pure Internet plays such as Yahoo, the Net directory firm; and the final third is in companies whose business models benefit from the Internet.
This final group includes stocks that few would describe as Internet plays, such as Office Depot, an office supply and furniture superstore chain. Yet Harris notes that Office Depot now makes more than 12% of its sales online.
The WWW Internet stock fund, another established Net fund (it, too, was launched 2 1/2 years ago), fared much worse in Morningstar’s comparisons. It finished ninth, behind four general technology funds, two large-cap growth funds, a mid-cap growth fund and Munder NetNet.
No wonder. Thus far, manager Lawrence York has refused to buy shares of the online bookseller Amazon.com, describing it as a “low-margin business with no barriers to entry.” And he sold his position in Yahoo last year, thinking the shares were fully valued as they were crossing the $100-per-share threshold.
Instead, York focuses on three types of companies: “mature companies,” big blue-chip tech firms that are aggressively pursuing Internet business (companies such as AT&T;, Time Warner, Motorola, Bell South and Compaq Computer); “mid-life companies,” whose products are directly benefiting from the initial growth of the Internet (such as PeopleSoft and computer leasing firm Comdisco); and “adolescent companies,” the purest Net plays, such as the search engine outfit Excite or online auction firm EBay.
“Our portfolio is solely focused on companies building and developing the Internet,” said York, whose fund was up 70.5% in 1998, after just a 0.6% rise in 1997. “But we’ve also been in the money management business for some time. We realize that investing 100% in start-up emerging companies is a very risky thing to do.”
But given the fund’s name, “the bad news is, those investors who think they’re getting pure exposure to Internet stocks through these funds are not,” Merriman of Fundadvice.com said.
Yet that’s also the good news, he said.
Indeed, the strong numbers that these funds have posted are as much a result of their exposure to tech giants such as Microsoft and Cisco as their positions in companies such as Yahoo or Amazon.com, analysts say.
Meanwhile, one fund that wasn’t in Morningstar’s universe when it did its study may now be the purest Internet play among Net funds: the aforementioned Internet Fund (phone: [888] 386-3999).
Among manager Jacob’s top holdings are Net venture fund operator CMG Information Services, Yahoo, Net ad firm DoubleClick and search engine Lycos.
(Unfortunately, the average investor will have a tougher time finding what’s currently in Net funds’ portfolios. Because mutual funds are only required to disclose their complete holdings twice a year, it may be virtually impossible to know for certain whether, right now, your Net fund actually invests the bulk of its money in pure Net stocks, or whether it is a general tech fund in disguise.)
One big concern with all Net-focused funds is what happens as they balloon in asset size.
Charlie Bevis, managing editor of the FRC Monitor, a trade publication for the fund industry, questions whether funds like this will be able to focus on pure Internet plays if investors plow too much money into the funds too quickly.
“When funds are small, I’m sure it’s quite easy to pick out good Internet stocks,” Bevis said. “It’s going to get harder and harder as they grow.”
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Paul J. Lim can be reached by e-mail at paul.lim@latimes.com.
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A Sampling of Net Funds
Here are the 10 stock mutual funds that had the highest percentage of assets in “pure” Internet stocks at the funds’ most recent reporting date, according to Morningstar Inc. Note that the portfolios may have shifted significantly since the reporting date, given the surge in the Internet stock sector.
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% of Port- assets 1998 Monday folio in Net total fund Phone Fund date stocks return gain number Amerindo Technology 9/30 47.2% 84.5% 12.1% (888) 832-4386 Munder NetNet 9/30 28.3 98.0 8.3 (800) 438-5789 IPS Millennium 12/31 23.0 40.3 2.6 (800) 232-9142 TCW/DW Mid-Cap Equity 9/30 21.5 62.7 5.3 (800) 526-3143 Pimco Innovation 9/30 21.5 79.4 2.8 (800) 426-0107 Managers Cap. Apprec. 11/30 20.0 57.3 2.4 (800) 835-3879 John Hancock Glo. Tech. 10/31 19.3 49.2 3.1 (800) 225-5291 Northern Technology 9/30 17.9 83.0 2.8 (800) 595-9111 WWW Internet 6/30 16.0 70.5 7.7 (888) 263-2204 Janus Olympus 11/30 15.7 57.0 1.7 (800) 525-8983
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Source: Morningstar Inc.
