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Internet fund managers believe we're still at the beginning of a five-year explosion in Net stocks. Spotting the winners will require a deft understanding of the technology behind roughly 400 Internet stocks and 4,000 private ventures that comprise the Internet economy. Maybe a few dozen will be crowned champions. So buying Internet stocks requires patience -- not to mention a strong tolerance for market swings. Choosing an Internet fund is a tricky business as well. It involves identifying the managers with the most Net intelligence, many of whom are jockeying for position as the Internet sector expands and more investors pour $1,000 or $2,500 investments into pure Internet funds. "Old finance hasn't kept pace with the Internet. This sector is all much more dynamic and confusing -- and we've only seen the beginning so far," says Steve Harmon, founder of the new e-Harmon Internet Fund, which has assembled an all-star lineup of Silicon Valley investment pros to direct the fund. ADVENTURE AWAITS. Oddly enough -- given how recent the Net fund business is -- past looks like prologue. In the fast-moving Internet mutual-fund game, an established track record may be the best indication of who will stay on top. Best to keep an eye on the old-timers, whose performance charts span longer than 12 months. Four funds were founded in 1996, and the largest, Munder's NetNet, posted a 173% return last year. Kinetics' Internet Fund, with holdings in NTL Communications and AT&T Liberty Media, had a 216% return, while WWW Internet charted a gain of 167% on the success of Corning, the fund's largest position. Amerindo's Technology Fund, the fourth old-timer, returned 248% last year on the success of America Online and Yahoo! Monument Internet, founded in late 1998, with stakes in Broadvision, CMGI, and DoubleClick, posted huge numbers its first full year, with a 273% return, while Guinness Flight's Wired Index fund, the oldest of the Net index funds, recorded a 68% gain in '99. If you're feeling adventurous, says Morningstar fund analyst Ramy Shaalan, you could go with Alberto Vilar's recently launched B2B Internet Fund (see BW Online, 6/5/00, "Fund Whiz Alberto Vilar: The Net-Stock Boom Is Just Beginning"). Otherwise, there are new offerings from the creators of Munder NetNet and the Internet Fund. Munder, for example, has created an international NetNet fund that has at least 65% of its assets in foreign companies engaged in e-commerce. RESPECTABLE RETREAT. Each fund has its own style and strategy, and there are already some rivalries simmering. Thirty-year-old Ryan Jacob, who formerly managed the Internet Fund, owned by Kinetics Asset Management, now runs his own Jacob Internet Fund, which holds large stakes in Ask Jeeves, About.com, CMGI, and Goto.com. Jacob is quick to distance his $150 million fund from Steve Harmon's enterprise, which has "tens of millions in assets," Harmon says (that's all he'll confirm). Harmon, who has no formal Wall Street training but for several years was a respected Internet analyst, says his fund focuses not so much on business-to-consumer plays as on Internet infrastructure companies and tiny ventures that haven't gone public. "Jacob's fund is down this year because of his focus on Ask Jeeves and Goto.com and that type of thing," Harmon says. Both of those stocks have plummeted this year, and Jacob's fund has lost 3% of its value since Jan. 1. But that's quite respectable considering the March-to-May market correction. Indeed, all of the old-timers have been down as much as 20% this year, but most are recovering and have regained most of the losses suffered during the downturn. Harmon's fund is brand-new and has no track record as yet. And while Jacob trumpets the smaller, more nimble management team that runs his no-load funds, the 35-year-old Harmon points to his all-star roundtable of advisers, including Netscape Communications co-founder Marc Andreessen and Lisa Cavallari, former principal of Barclays Global Investors. VAST NETWORK. Some of the newcomers are so new that young guys such as Harmon and Jacob haven't even heard of them. Paul de Leon, former Loomis Sayles asset manager, is one. He has $3 million in assets in the de Leon Internet 100 Fund. The fund tracks de Leon's personal choice of 100 top Internet stocks. He believes his index will emerge as a widely watched benchmark for Internet fund managers. "We've seen how the S&P 500 outperforms 75% of active managers. I don't see why things should be any different in the Net sector," de Leon asserts. "It's so hard to value these companies using traditional measures." You won't find 40% of de Leon's fund returns tied up in a few stocks -- the way Vilar's Amerindo Technology has been in the past. De Leon says too many Internet funds are too concentrated in five of the biggest Net stocks: Amazon, Yahoo!, CMGI, eBay, and America Online. He points to Guinness Flight's Internet.com Index Fund, saying the rival fund is heavily weighted in too few holdings. "In my index, my five largest holdings can be no greater than 20% of the index," de Leon says. Of course, many of the big names in finance are finally coming around to Internet funds. Merrill Lynch and Goldman Sachs, for example, both launched Internet funds that quickly surpassed $1 billion in assets. Their success is largely due to those firms' marketing muscle, name recognition, and vast brokerage network. But none of the Wall Street firms got involved initially. And they may not be Net-tempered the way the pioneers have been. "MARKET OPPORTUNITY." Paul Cook is the 38-year-old manager of Munder NetNet which, though closed, is now the largest of the Internet funds, with stakes in Cisco, Network Solutions, JDS Uniphase, DoubleClick, and Inktomi. As the market gets more crowded, he doesn't see a need to change strategy. His company remains intent on buying "computer dot-com companies, enabling-technology companies, and the brick-and-mortar firms that provide or develop Internet strategies, such as Charles Schwab," says Cook. "From the standpoint of shareholders, we're delighted to see more funds out there. That creates more market opportunity for everyone. No, I don't think it's too crowded, and we're definitely not clawing for shelf space," he says. Keep in mind, all of these funds have different costs. Funds pegged to an index are considerably cheaper, while those with greater experience typically charge more in expenses and often loads on top of that. However, with this year's volatility in Net stocks, choosing a manager who has survived unscathed may be the smart bet. Shook is a staff reporter for Business Week Online EDITED BY DOUGLAS HARBRECHT |
