Netfolio to Shut Web Fund Service

Netfolio, which offers do-it-yourself stock portfolios designed to compete with mutual funds, said Monday it will shut down because funding has evaporated.

The New York-based firm, which uses the slogan “Goodbye Mutual Funds, Hello Netfolio,” said it will discontinue its service Friday, six months after it was launched.

Netfolio was a high-profile purveyor of a new investment product called the folio, which essentially allows investors to assemble a basket of stocks that acts like a mutual fund portfolio. Some observers have called folios a potential long-term threat to the $7-trillion mutual fund industry.

Brokerage analysts say folios may have a future--but not necessarily as a stand-alone business.

“The folio concept is a good one, but Netfolio’s flaw was probably trying to build an entire company focused around that offering,” said Greg Smith, an analyst at J.P. Morgan.

“Stock-basket trading seems to be catching on, but its future is probably as a product segment of the brokerage industry.”

Folios are offered as pre-selected or customized stock baskets. They are marketed as more individualized and tax-efficient than mutual funds because investors retain control over stock transactions, which can trigger a capital gain or loss.

With traditional funds, all net realized capital gains are passed through to shareholders each year. In 2000, even many investors whose funds plunged in value faced a tax hit because gains were passed through.

Netfolio charged $200 a year for its basic service. The firm helped individuals choose from more than 200 portfolios based on investment goals and risk tolerance, and offered guidance on managing them for tax efficiency.

The firm couldn’t be reached for comment Monday.

Smith noted that several larger firms, including Fidelity Investments and E-Trade Group (ticker symbol: ET), have rolled out or plan to launch similar products. And Foliofn of Vienna, Va., which pioneered the folio concept in May 2000, appears to be having some success, he said.

“Things were tough for Netfolio because it targeted the retail investor,” Smith said. “At Foliofn, the big shift has been toward powering others, such as financial advisors, to use its platform. It’s more of a business-to-business approach.”

Retail investors have sharply curtailed their online trading in the wake of the stock market’s collapse of the last year and a half. In a message to customers on its Web site, Netfolio blamed its demise on “extremely difficult market conditions.”

Though Foliofn has survived for more than a year, it’s hard to tell how that firm is faring financially, Smith said, because it does not release customer or trading data.

Boston-based Fidelity, which rolled out its stock basket product Aug. 12, is “thus far very pleased with the response,” said Paul Graham, senior vice president of brokerage services. But he declined to say how many customers have signed up so far.

San Francisco-based Charles Schwab Corp. (SCH) dropped plans this summer to offer stock baskets after a pilot program failed to generate enough interest, spokesman Morrison Shafroth said.

Mutual funds have several built-in advantages, he said, including professional management and track records that can be easily compared through services such as Morningstar.

The mutual fund industry, which was rebuffed two weeks ago in its plea to the SEC that stock-basket services be regulated as mutual funds, may have been “breathing a sigh of relief” Monday, Smith said.

“But the fund industry still needs to look at new products,” he said, noting that fund alternatives such as exchange-traded funds and separately managed accounts have been gaining popularity.