(June 2) – “As Internet-stock funds proliferate, mutual-fund companies are slicing the Internet-stock pie into thinner and thinner slices. Unfortunately, even with the big bounce in technology stocks this week, virtually every variety of Internet-stock fund has lost money for investors this year,” writes Karen Damato in today’s Wall Street Journal.
“Funds specializing in Internet subsectors such as ‘infrastructure’ and ‘architecture’ or in overseas Internet companies are taking it on the chin. Ditto the couple of funds specializing in the once-scorching B-to-B arena, that is, firms involved in the increasing use of the Internet for business-to-business commerce.”
“It’s beginning to seem that fund investors need an academic degree in technology just to understand the various types of Internet funds. But the simple fact is this: It doesn’t make sense to slice the Net-stock pie so thinly, some fund specialists say. Indeed, investors might be well advised to steer clear of Internet specialty funds altogether. At researcher Morningstar Inc., for instance, Net-fund specialist Christopher Traulsen says investors can get plenty of Internet exposure — with less stomach-churning volatility — through aggressive-growth funds or technology-stock funds.”
“Concentrating in just the narrow and very volatile Internet slice of the technology field, and then slicing that Internet area into segments, ‘seems like overkill,’ Mr. Traulsen wrote earlier this year. He was commenting specifically on three Internet subsector funds introduced at year-end by Kinetics Asset Management Inc., whose Internet Fund is one of the largest Net funds. (The White Plains, N.Y., fund company also introduced a fund that invests in major corporations that benefit from the Net’s continued expansion.)”
“Kinetics introduced the new funds because customers had ‘very definite ideas about how they wanted to invest in the Internet space,’ says Peter Doyle, the firm’s chief investment strategist.”
“Investors have certainly gotten varied performance, albeit all on the negative side: Internet Emerging Growth Fund, emphasizing the youngest Internet companies and Internet venture capitalists, has posted a negative 32.8% return so far in 2000; Internet Global Growth Fund is down 11% and Internet Infrastructure Fund is down 16.6%. The firm’s big Internet Fund is down 29.7%.”
“Investors have certainly gotten varied performance, albeit all on the negative side: Internet Emerging Growth Fund, emphasizing the youngest Internet companies and Internet venture capitalists, posted a negative 35.3% return for 2000 through Wednesday; Internet Global Growth Fund was down 14.9% and Internet Infrastructure Fund was down 18.6%. The firm’s big Internet Fund was down 32.1% through Wednesday.”
“Even some tech-fund executives wonder if the fund industry is slicing the Net world too thinly. Kevin Landis, chief investment officer and portfolio manager of Firsthand Funds, San Jose, Calif., quips that the next fund might be a B-to-A portfolio, poised to benefit from increasing e-commerce between businesses and aliens.”
@page_break@”More seriously, Mr. Landis has some doubts about the concept of B-to-B funds. Why specialize in companies that benefit specifically from e-commerce with businesses, he asks, but not from commerce with consumers (so-called B-to-C) as well? He is also unsure that the B-to-B label will still be widely used and meaningful five years from now. By contrast, Mr. Landis says Firsthand e-Commerce Fund, launched last September, aims to benefit from the expansion of all types of e-commerce. At least two fund firms have found the B-to-B case compelling. Amerindo Investment Advisors in New York, manager of the Internet-heavy Amerindo Technology Fund, opened Amerindo Internet B2B Fund this week. Business-to-business commerce and the expansion of global telecommunications systems are the ‘two main legs of the Internet,’ Amerindo manager Alberto Vilar said in a recent teleconference. He also said B-to-B is ‘a multitrillion-dollar opportunity, so in that sense I don’t think it’s too narrow at all.'”
“In another B-to-B offering, Merrill Lynch in February introduced an exchange-traded basket of B-to-B stocks, called the B2B Internet HOLDRS, listed on the American Stock Exchange. The acronym stands for Holding Company Depositary Receipts. Merrill’s various HOLDRS give investors an interest in underlying baskets of about 20 stocks each; the holdings generally remain fixed once the baskets are assembled.”
“While Merrill introduced a broad actively managed Internet mutual fund in March, its experience with the exchange-traded HOLDRS suggests some of the peril — and potential — in slicing the Internet narrowly.”
“In creating its first exchange-traded Internet product last September, the big securities firm picked what were then “the most prominent names” among Internet stocks, says Steve Bodurtha, Merrill’s head of customized investments. But within months it became clear that those securities, simply called Internet HOLDRS, were actually heavily tilted toward the B-to-C segment, that is, business-to-consumer companies including America Online Inc., Yahoo Inc., Amazon.com Inc. and eBay Inc.”
“Merrill’s response: It introduced three more Internet-related HOLDRS in February: the B-to-B product, Internet Infrastructure HOLDRS (emphasizing companies that help Internet companies ‘better manage their Web sites and improve online communications’) and Internet Architecture HOLDRS (emphasizing companies whose hardware or other products enhance Internet efficiency). As of now, Mr. Bodurtha says, ‘we think we’ve got the Internet universe covered.'”