Wow, awesome TheStreet.com article on Net funds! Another great article from Joe Bousquin @ TheStreet.com. It's about WWWFX's huge expense ratio hike. It also follows up an earlier one that points out Munder NetNet's diversification strategy is being soundly beaten (thus far) by The Internet Fund's moves. In particular, MNNAX has fallen just as hard as WWWFX yet doesn't keep up with WWWFX on the upswing. Case in point? How about today: WWWFX: +4.01%; MNNAX: +1.83%; MFITX +1.41%
[with free trial subscription]:
1) Article on Munder diversification strategy vs. WWWFX
thestreet.com
2) My letter to editor published in response-it was an email
I didn't expect to be printed. Oops, otherwise I wouldn't
have been so blatantly critical of Munder NetNet. Sorry, Munder:
thestreet.com
And the last article is the big one on the expenses as well as Munder's
defensive reply to the first article. I'll reprint it below. With a
free trial subscription at TheStreet.com, you can view this and a *ton*
of other great Net Fund articles written by Joe Bousquin & lots of
related stuff:
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Internet Fund Investors Paid Premium Price For Their Top-Ranked
Returns: Plus, More on Munder NetNet
By Joe Bousquin
Staff Reporter
6/17/99 6:21 PM ET
URL: thestreet.com
Assets and returns aren't the only things that have been rising at the
Internet fund this year.
Expenses also have jumped -- by more than 50%. The fund's annual expense
ratio, which includes operating costs and the
management fee, was 3.08% for 1998, up from 2% the previous year,
according to its latest prospectus. That works out to
about $600 in fees for 1998 on a $10,000 investment at the beginning of
the year.
That's way above the 1.75% expense ratio of the average technology fund,
according to Morningstar.
Given the Internet fund's ballooning assets -- it has grown from a
measly $5 million last October to more than $650 million
now -- the increase in fees flies in the face of conventional wisdom.
"Generally speaking, fund expenses should decline as assets grow," says
Scott Cooley, an analyst at Morningstar who
conducted a study on fund fees earlier this year. "But there are
unfortunately plenty of exceptions to that rule."
The jump in the expenses wasn't welcome news to one Internet fund
shareholder who lives in Atlanta and follows the fund
closely.
"Ouch! Formerly reasonable costs have become exorbitant!" wrote George
Nichols, who runs the Internet Fund Fan Club
Web site, in an email to TheStreet.com.
Internet fund manager Ryan Jacob says the higher expense reflects what
actual expenses were throughout 1998, when asset
levels were much lower. The fund began the year with $200,000 in assets.
That total rose to $22 million by December,
according to Financial Research Corp. of Boston. The real explosion in
assets didn't begin until January 1999 after Lipper,
Morningstar and others named it the top-returning fund of 1998.
"We try to keep the expense ratio as reasonable as possible given our
level of assets," Jacob says. "At the beginning of last
year, we had less than a million in assets, so any little tiny expense
can kind of throw that number off."
Both Jacob and the fund's administrator, Firstar Mutual Fund Services in
Milwaukee, say the fund's expenses should be
lower this year, given the much larger asset base the fund now has. They
declined to put a number on it, though the fund's
semi-annual report, to be written at the end of June, should report a
"significantly" lower expense ratio for 1999, they say.
Michael Weckwerth, Firstar's compliance administrator for the fund, says
it was the explosive growth of the Internet fund that
actually caused its expenses to spike.
The fund was started by Peter and Margaret Doyle and friends in 1996,
and run out of their residential home in North
Babylon, N.Y. It chugged along in relative obscurity until the fourth
quarter of 1998, when the boom in Internet stocks began.
The Doyles took care of the fund's so-called "back office" work --
fielding shareholder telephone calls and going through the
mail -- themselves.
But the fund's 196.1% return for 1998 sparked intense investor interest
-- more than the Doyles' homegrown operation could
handle.
The Doyles "had to outsource a lot of their services that they no longer
could provide in-house. By doing that, they had to incur
a significant amount of expenses," says Weckwerth. "There was a lot of
cleaning up to do."
In March, Kinetics Asset Management, which had been the adviser for the
fund, agreed to sell it to Lepercq, de Neuflize,
a New York money management concern. The deal has not been finalized.
It's a lot easier for an established firm, like Fidelity Investments,
with its legions of stock analysts and plenty of infrastructure
in place, to launch a new fund than it is for a small operation, says
Morningstar's Cooley. The Internet fund's history -- and the
spike in its expense ratio -- show the risk shareholders take by
investing in funds run by less-than-established firms.
"They clearly didn't have the infrastructure in place to handle that
kind of growth, and of course, that would be a concern for a
lot of potential shareholders," Cooley says.
Postcard from Munder
In Monday's story, Diversification Is Not the Cushion Munder NetNet Had
Hoped It Would Be, TheStreet.com noted that
Munder NetNet fell just as much as the Internet fund during downturns in
the market even though Munder NetNet is billed as
the more diversified fund.
"I think your conclusion is wrong," NetNet manager Brian Salerno said in
response. "I actually do think diversification helped
our fund a lot, especially in this [most recent] downturn where a lot of
the Internet stocks were down 50%, 60% and 70%.
Our fund is only down 30% off its high, so I think that is the
definition of diversification."
During the third quarter of 1998 NetNet lost 14.1% -- compared with the
smaller, 9.8% loss of the Internet fund -- because
the market's downturn was broadly based, says Salerno.
"If you look back at the market downturn last third quarter, it was not
an Internet downturn, it was an overall market
downturn," Salerno says. "So [Jacob] made the smarter move then by being
in Internet-only stocks, and they didn't get hurt as
much -- or any worse -- than the market."
Salerno's argument holds up to scrutiny. During that quarter, the
average diversified domestic equity fund fell 15%, according
to Lipper, while the average technology fund only gave up 11%.
"In my opinion, I think the conclusion should have been diversification
helps Ryan Jacob, rather than diversification did not help
Munder NetNet," Salerno says.
Fair enough.
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