Most pros shy away from Internet stocks

Mutual Funds

Sector is considered too speculative, volatile

Mutual funds

July 11, 1999|By Bill Barnhart | Bill Barnhart,CHICAGO TRIBUNE

Investor fascination with Internet-focused mutual funds persists, despite the recent plunge of as much as 50 percent from April highs in many of the sector's stocks.

Wall Street's mating dance with the Internet phenomenon has been tentative at best, especially recently. Most professional portfolio managers deride Internet-based stocks as too speculative, even though Standard & Poor's placed one name, America Online, in its prestigious 500-stock index last year.

Brokerages have been pleased to reap commissions by flogging these stocks but less eager to buy and hold them for their own long-term portfolios.

Despite aggressive marketing of all sorts of so-called sector funds by major mutual fund advisory firms, none of the big firms sponsors an Internet fund. More broadly defined technology funds that dabble in Internet stocks are readily available. But the notion that the Internet is a new and distinct economic paradigm worthy of a separate investment classification is a minority view.

Chicago-based Stein Roe & Farnham, where numerous fund managers have been fired or resigned this year because of poor investment performance and shareholder redemptions, could be the first of the old-line investment managers to offer an Internet fund. It has registered with the Securities and Exchange Commission to launch the Stein Roe Internet Leaders Fund.

Other investment firms are backing off. Robert Pozen, president of Fidelity Management and Research, adviser to the huge Fidelity fund complex, said in February that he opposed launching an Internet fund when it was proposed inside the firm.

"The market people are beating me up on that," Pozen said at the time. "I would like to see a little more track record on those [stocks]."

New York-based Reich & Tang Capital Management, a stock-picking boutique that prides itself on tried-and-true methods of finding equity values, withdrew its proposal in June to offer an Internet fund based on the relatively pure and comprehensive 50-stock ISDEX Internet index compiled by Internet.com, an online information service. Options and futures in the ISDEX index trade at the Kansas City Board of Trade.

"We have decided not to proceed at this point in time with an Internet index fund," said Rick Smith, chief executive officer of Reich & Tang, which advises the Reich & Tang Equity Fund and the Delafield Fund.

"Obviously, it was somewhat faddish, but we have to look at what is consistent with what Reich & Tang does, which is fundamental research. We have to make certain that everything will fit within the corporate identity and the corporate philosophy. In the end, we decided it's best to stick to our knitting."

The clash of images between conventional equity management and an Internet fund is not trivial. A train wreck by an Internet fund sponsored by one of the big-name firms such as Fidelity would reverberate throughout the firm's complex of funds, because of the difficulty of rationalizing Internet stock selection techniques in comparison with the firm's advertised investment discipline.

Applying any recognized methodology of stock selection to Internet stocks, most of which have no earnings and only dim prospects of earnings soon, is a stretch.

"I think that it's just that these stocks have been too risky and maybe they think it might damage their good name," said Inigo Aguirre, a mutual fund analyst for Value Line in New York.

Because all of these funds are less than 3 years old -- WWW Internet will turn 3 in July -- it's impossible to determine whether any have found the secret of maximizing returns or minimizing losses in the highly volatile sector. Next month, Value Line will undertake regular analysis of the four best-known Internet funds: Munder NetNet, WWW Internet, Monument Internet and Internet.

The extraordinary short-term gains in Internet stocks over the past couple of years seem unsustainable. Owning Internet stocks requires a leap of faith that many conventional equity managers are unwilling to take.

But resistance to change and myopia are Wall Street traits. Only the truly shortsighted investor would fail to consider the breadth of the Internet's potential impact and its variety of investment entry points -- from electronic retailing and online information/entertainment stocks to online security and Internet browsing service stocks.

Pub Date: 7/11/99

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