Internet fever may singe the old bankroll

Mutual funds

May 30, 1999|By Bill Deener | Bill Deener,DALLAS MORNING NEWS

Investors didn't seem to mind that Ryan Jacob had all of one year's experience managing money before taking over the reins of a mutual fund.

Or that he invested in the most volatile sector of the stock market. Or that the fund's expense ratio was high. Or that until recently no one ever seemed to answer the telephones at the fund's North Babylon, N.Y., offices.

Apparently, all that matters is that it has the right name -- the Internet Fund. Money has been pouring into Jacobs' fund and the three other Internet-related mutual funds over the past three months. Despite the risks of playing Internet stocks, a number of which have slumped recently, and the constant warnings of financial advisers, some investors seem to think they have found investing nirvana in these funds.

"I love the Internet and wanted to invest in it," said George Nichols, a 23-year-old Atlanta accountant and investor in the Internet Fund. Nichols made his first Internet Fund investment in July 1998 with $1,000 from a college loan. The fund promptly dropped 40 percent, but that debacle is a distant memory, since the fund was up 196.1 percent by the end of the year. That was the best performance of any of the nation's 6,000 mutual funds and brought a flock of new investors to the fund.

The Internet Fund, which began the year with total assets of $30 million, has exploded to $700 million in assets. The Monument Internet Fund, started only 6 1/2 months ago, has attracted $50 million in assets. The fund has returned 105 percent so far this year.

But analysts warn that these funds are taking an already volatile market sector, technology, and slicing it into an even more volatile subsector, the Internet, where most of the companies have never made a profit, and value is reckoned in revenue rather than earnings.

For investors smitten by the Internet, the best advice is to buy shares in a diversified technology fund, says Christine Benz, associate editor of Morningstar Inc., a mutual fund rating service. For example, Fidelity's Select Technology fund has some Internet exposure, she notes.

"Investors should keep an eye on what they already have," Benz says. "Chances are, even if they own a simple growth fund, they have some Internet stocks right there."

Moreover, Benz says, Internet funds charge management fees that are as high or higher than those of most tech-sector funds, even though the managers are less experienced.

Investors should also keep in mind that this year's hot fund is often next year's laggard.

"Back in the 1980s, there were 400 biotechnology and health care funds when those sectors were hot," says Stephanie Kendall, a mutual funds analyst at CDA Wiesenberger. "They cratered, and today there are 40. Many other sectors have been through this."

Jacob, 29, manager of the Internet Fund, counters that his critics don't understand the nature of Internet companies. He argues that his fund really isn't an Internet sector fund at all, but rather a highly diversified growth fund, albeit a risky one. One of his larger holdings, Amazon.com Inc., for example, is an online retailing company, while Yahoo! Inc. is a media company. And he holds computer hardware and software companies.

"The main question you have to ask yourself is: Am I being compensated for the risk? We are taking a higher risk," he says, "but we feel we are being adequately compensated with the returns."

David Kugler, president of Monument, says those who write off the Internet as just another fad are missing a very important point. Millions of consumers are driving the Internet, and they intuitively understand its power, he said.

"Biotechnology was completely different," Kugler says. "Wall Street was calling up brokers telling them to push biotech. But the clients never understood it, and when there was weakness, they bailed."

The investing strategy of Internet Fund is that it invests primarily in companies that get most of their revenue directly from the Internet -- "pure-play" Internet funds.

Lawrence York, portfolio manager of WWW Internet Fund, invests in technology stocks such as Lucent Technologies Inc., Cisco Systems Inc. and AT&T Corp. to complement his Internet holdings. "We understand losing money; "Our fund is structured not to lose money," York says. "We are trying to attract those with some intelligence."

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