Many Web Stock Funds May Face Final Chapter
By AARON ELSTEIN
WSJ.COM
Internet mutual funds aren't just down, many of them may be out.
Take Zero Gravity Internet Fund, which opened less than a year ago to tap investors' once insatiable appetite for Net stocks. It initially attracted $8 million in assets and, at one point last summer, was up 40%.
But last week, Zero Gravity shut down operations and started returning its remaining $2 million in assets to about 700 customers. Because the fund lost nearly 60% of its value since it opened last May, most investors will be getting back far less than they invested.
A similar fate may befall other Internet funds, analysts and fund managers say. "I think you will probably start seeing closings unless you see a dramatic turnaround in the stock market," says Paul Jackson, president of Aegis Asset Management, a Houston firm that runs the Westcott Technology Fund, formerly the Westcott Nothing But Net Fund.
More than 40 funds opened in the past two years containing the word "Internet." But many of these funds have performed dismally and manage too little money to remain viable, making liquidation the only option for some. In other words, shareholders risk being involuntarily cashed out.
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"A lot of Internet funds look like flies about to hit the windshield," says Russel Kinnel, director of fund analysis at Morningstar Inc., a Chicago mutual-fund tracking firm.
Mr. Jackson says Westcott Technology Fund, which has less than $1 million in assets, is hanging on to see if its name change helps attract new investors. In the meantime, he says, the fund has dropped more than 70% in value since it opened and is operating at a loss. "Right now, we're getting killed," he says. "We are not getting much money flowing in."
Peter Doyle, chief executive of Kinetics Asset Management and manager of its Internet Fund, agrees that many Internet funds are likely to close. "There are just too many funds of all kinds out there, not just Internet funds," he says. "The fund industry is due for consolidation."
According to Wiesenberger/Thomson Financial, 225 mutual funds were liquidated last year, a record high.
The pressure Internet fund managers face represents a drastic turn in fortunes. Two years ago, investors were furiously sending money into funds containing the word "Internet" after several upstart funds, such as Kinetics' Internet Fund and Munder Capital's NetNet Fund posted triple-digit gains in 1999 by investing in e-commerce and other Internet-related stocks. Money managers big and small rushed to open their own Internet funds. Wall Street titans, for example, launched Merrill Lynch Internet Strategies and Goldman Sachs Internet Tollkeeper.
But many of these funds have been decimated by the market's sell-off. Several funds have even shed the word "Internet" from their name or closed altogether.
In addition to Westcott shedding its Net name, the former Monument Internet Fund is now called the Monument Digital Technology Fund and the former Investors Capital Internet Fund is now the Investors Capital Internet and Technology Fund.
Zero Gravity, meanwhile, is the third Internet fund to liquidate since last fall, when the de Leon Internet 100 and the Internet Index Fund closed down after falling 49% and 51%, respectively.
James Hartmann, CEO of Zero Gravity Capital Management LLC, San Francisco, said the fund's poor performance -- led down by such top holdings as Juniper Networks Inc., down 75% this year, and JDS Uniphase Corp, down 65% -- isn't the reason it is closing.
Rather, he says, the fund failed to attract enough investor money to make operations profitable.
Mr. Kinnel of Morningstar says that most mutual funds need at least $50 million in assets to operate profitably. But only 13 of the 43 funds that contain the word "Internet" in their names manage that much money, according to Morningstar.
Some of the smaller funds include the Kinetics Internet New Paradigm Fund, with $9 million in assets under management; Strong Investments Inc.'s Strong Internet Fund, with $34 million; and the Jacob Internet Fund, with $42 million.
Jacob Internet Fund is run by former hot-shot manager Ryan Jacob, and is down 51% this year after falling 79% last year. The fund is "where ailing stocks go to die," wrote one disgruntled investor on a Morningstar message board.
Neither Mr. Jacob nor other officials at the fund returned calls.
Mr. Kinnel says such big fund managers as Strong probably have deep enough pockets to keep their small Internet funds going, but says smaller operators "face some tough decisions in the coming months." Mr. Doyle says he is satisfied with the asset-level of his firm's smaller funds, including the New Paradigm fund. Fund managers at Strong and Jacob didn't return calls.
Part of the reason that Internet funds are managing so little money is that tech-minded investors have shifted to funds with more diverse portfolios, says Morningstar analyst Christopher Traulsen. Also, the biggest fund-management firms, such as Fidelity Investments, Janus Capital Corp. and Putnam Investments, all offer customers ample opportunities to invest in tech stocks, though none of them offer "Internet" funds per se.
Some Internet funds have managed to turn things around, namely by phasing out Web stocks. Kinetics' $359 million Internet Fund, among the first to seize on the Net craze, is down just 9% this year. That is better than most stock funds and outpaces the benchmark Standard & Poor's 500 stock index, which has fallen 16% this year. The fund has outperformed its peers by avoiding the networking and fiber-optic stocks that fill most Internet fund portfolios. Kinetics' top holdings include AT&T Corp.'s Liberty Media Group and Washington Post Co.
But Zero Gravity Internet Fund, which opened last May 16, seemed to go down with the Internet ship. The fund was originally called the e-Harmon Internet Fund, after its co-manager, Steve Harmon. Mr. Harmon, 36 years old, was a well-known Internet stock pundit who helped pioneer the practice of valuing Internet companies' stocks based on their Web traffic.
He left stock research to become CEO of e-Harmon.com Inc., which operated the Zero Gravity fund. The company was backed by Hummer Winblad Venture Partners, Loudcloud Inc. Chairman Marc Andreessen, as well as top executives at MP3.com Inc., NBC Internet Inc. and other online companies. The fund represented Mr. Harmon's first foray into professional money management.
Zero Gravity also planned to make other highly speculative investments. Those included closely held companies expecting to go public, as well as private-equity deals normally reserved for venture-capital firms, according to filings with the Securities and Exchange Commission.
Last August, the fund changed its name to Zero Gravity Internet Fund, adopting the name from a book written by Mr. Harmon, and said it had adopted a "team approach" to portfolio management. In an interview, Mr. Harmon says he left the fund in October to refocus on his stock research.
Mr. Hartmann, Zero Gravity's CEO, says the firm will continue its venture-capital business.
Write to Aaron Elstein at: aaron.elstein@wsj.com. |
