Funds for the ‘New Economy’: It’s All in How You Define It

Depending on whom you ask, the proposed uber-merger of Internet giant America Online and media giant Time Warner proves one of two things.

To some, the watershed deal is the clearest sign yet that the Internet isn’t a novelty but rather the defining commerce and communications medium of the new century.

Others would argue that the deal confirms that even in the digital age, content is still king.

If you believe the former, an Internet- or technology-sector stock mutual fund might seem to be a great place to park some of your long-term money.

If you believe the latter, a fund that invests heavily in media or entertainment stocks might appear to be a better way to go.

Increasingly, mutual fund companies are marketing another option: so-called new economy funds that invest in a cross-section of industries that have some of the best growth prospects going forward--or so the funds hope.

This fund idea isn’t exactly new. Los Angeles-based American Funds created its New Economy fund 16 years ago.

But the ranks have grown rapidly in recent years. The Berger family of funds in Denver launched Berger New Generation in 1996. Last week, Boston-based Putnam Investments--which already runs the New Opportunities fund, which is scheduled to reopen to new investors this week--announced plans to create a fund called New Century Growth, which will focus on Internet, software and telecom stocks.

Of course, not all funds with some variation of “new economy” in their names are truly new economy funds. Some are merely small-company stock funds, for example. So investors have to do their homework before plunking any money down.

But of the funds that specifically pitch themselves as a way to buy into the best growth ideas of the new economy, the performance results of recent years would seem to suggest the formula is a winning one.

As the accompanying chart shows, most of these funds have blistered the benchmark Standard & Poor’s 500 index of blue-chip stocks not just in 1999, but also over the last three years. Berger New Generation, for instance, surged 144% last year, versus the 21% rise in the S&P.; And over the last three years, New Generation has delivered tech-fund-like gains of 54% a year.

This isn’t surprising because this fund recently held nearly 45% of its assets in tech. In fact, many of these new economy funds generated big returns precisely because they latched on to the tech stock craze early on--exactly what you’d expect a forward-looking fund manager to do.

But unlike tech funds, new economy funds generally spread more than half their money over other stock sectors.

Which raises the question: How do you define the “new economy”? For instance, are all tech companies part of the new economy or just pure Internet plays? Do all entertainment companies belong in the new economy or just some of them?

James Atkinson, head of the Pasadena-based U.S. operations of fund firm Guinness Flight, tries to explain it this way: “The last economic revolution was driven by capital and machinery. Today, ideas are the coin of the realm. This is a change-driven, idea-driven, innovation-driven economy.

“The term ‘new economy’ is a shorthand way of describing companies that make money with ideas rather than machines,” he says.

A little more than a year ago, Guinness Flight launched its own new economy fund, Guinness Flight Wired Index. The passively managed fund tracks Wired magazine’s index of 40 new economy stocks, including such names as Internet portal Yahoo, entertainment conglomerate Walt Disney and auto maker DaimlerChrysler.

Wait a minute? Doesn’t DaimlerChrysler make money with machines?

That only goes to show that these funds can widely interpret which companies are best positioned for success in the 21st century.

American Funds’ $9.5-billion New Economy fund, for instance, picks among stocks in the telecom, computer, broadcasting, publishing, health care, advertising, leisure, tourism, financial services and transportation sectors. It owns about 180 stocks in all.

The $18-billion Putnam New Opportunities fund focuses on U.S.-based telecom, technology, media, entertainment, medical technology, retail and personal finance companies.

The $2.9-billion Fidelity New Millennium fund, meanwhile, invests in foreign and domestic stocks “that may benefit from social and economic trends.” That includes companies ranging from Internet portal Lycos to online broker E-Trade to media giant Viacom. Its portfolio recently held 247 stocks.

There is also a subset of new economy funds that focuses specifically on leisure industries. Among the better-known funds in this category are the $446-million Gabelli Global Interactive Couch Potato fund, which invests in communications, entertainment, media and publishing companies; and the $480-million Invesco Leisure fund, which also invests in communications, entertainment and media industries--but also buys stocks of toy makers, sporting goods companies and hotel chains, among others.

To be sure, one could argue that new economy funds are just a big marketing gimmick. After all, how many fund managers would say they invest in the past? (Imagine marketing the Fidelity Medieval Global Leaders fund.)

Certainly, investors can gain exposure to many of the leaders of the 21st century economy by simply investing in a broadly diversified growth-stock fund. Indeed, most of the Janus funds, which are big investors in AOL and Time Warner, are de facto new economy funds.

So too is MFS Massachusetts Investors Growth Stock fund, which has been around since 1933, when the phrase “new economy stocks” referred to companies such as Bethlehem Steel and Ford Motor.

As times changed, so has the fund. Today, Massachusetts Investors Growth Stock owns a wide array of tech, telecom, and media leaders such as Cisco Systems, MCI WorldCom and Infinity Broadcasting, in addition to traditional companies such as retail giant Wal-Mart.

A key question for new economy funds going forward is whether the best growth ideas in the near term will be among recently hot tech issues or among mainstream companies that are hustling to exploit technology.

As Alan Skrainka, chief market strategist for the brokerage Edward Jones, notes: “The first stage of the Internet boom was all about dot-com infatuation and IPOs. The next stage will be marked by traditional companies spreading their Web feet--companies like Wal-Mart and American Express.”

If you believe that, then the best way to cash in on the new economy may in fact be to go with funds that take a broader view of what that term means, as opposed to a narrower tech or telecom focus.

Think of it this way: If the new economy means freedom to go anywhere and try anything, money managers looking for the best ideas may have to do the same in terms of industries and companies.

Do you have ideas for mutual fund and 401(k) topics for this column? Times staff writer Paul J. Lim can be reached at paul.lim@latimes.com.