Glut of New Net Funds Headed to Market
By Danny Hakim
RYAN JACOB managed the Internet Fund (WWWFX) to a 486% gain since he took over at the end of 1997. Now he plans to leave the helm of the best performing mutual fund of the past 52 weeks to start a Net investment company of his own.
He'll need more luck, because the tentatively titled Jacob Asset Management will have plenty of competition. In the past seven months, three new funds have joined the original trio of Internet-focused funds that launched in 1996, and registration statements for nine more have been filed with the Security and Exchange Commission. The best performing retail fund of this year, Amerindo Technology (ATCHX), has transformed itself into an Internet-focused fund, and online broker E*Trade (EGRP) has also said that it is considering starting a fund to track an Internet index.
This glut of competition will be a novelty for the original trio of Net funds, which were started by firms few had heard of: Munder Capital, a mid-sized Michigan fund manager; WWW Advisors, a tiny Kentucky company that only runs its Internet fund; and Kinetics Asset Management, the adviser of the Internet Fund which make its headquarters in the house of a retired Long Island postal worker.
How to Play the Internet? Count the Ways...
FUND YTD EXP RATIO* LOAD
The Original Three
The Internet Fund 97.30% 3.08% NONE
WWW Internet 31.10 2.50 NONE
Munder NetNet 48.10 1.48 5.50
New Net Funds
Monument Internet 82.90 1.90 4.75
Unified Select Internet N/A 0.35 NONE
Analysts Internet.fund N/A 3 NONE
On the Drawing Board
FBR Technology N/A 1.95 NONE
Stein Roe Internet N/A N/A N/A
ING Internet N/A 1.59 5.75
LCM Internet Growth** N/A 2.50 NONE
BGI Dow Jones Internet*** N/A N/A N/A
Enterprise Internet N/A 1.90 4.75
Internet 100 N/A 1.75 NONE
Internet 100 Equity N/A 1.75 NONE
Guinness Flight Index**** N/A N/A N/A
De Facto Internet Funds*****
Amerindo Technology 102.90 2.25 NONE
Performance data through 6/23/99
*Not all SEC fund filings have full expense details listed.
**Closed-end fund.
***The Barclays Global Investors fund will be open-ended but trade like a stock.
****Investec Guinness Flight has filed a registation statement for an Internet fund, but is still negotiating for the rights to the ISDEX Internet index with its owner, Internet.com.
*****Tech funds over 50% invested in Internet stocks.
Source: SEC filings, Morningstar
None of the trio caught on until Jacob took over the Internet Fund and shifted the fund's assets, less than $200,000, from broad tech stocks like Microsoft (MSFT) to "pure" Internet plays like Yahoo! (YHOO). The fund gained 196% in 1998 and 97.3% so far this year, well ahead of rivals Munder NetNet (MNNAX) and WWW Internet (WWIFX).
After July 2, Jacob will no longer be running the fund, which now has $654 million in assets. He resigned after Kinetics' deal to sell the fund to Lepercq, de Neuflize, a Manhattan firm, fell through. Jacob will be joined in his new venture by the Internet Fund's current analyst, Michael Dubrow, a former vice president at Merrill Lynch. The new firm will launch both retail and institutional Internet investment products.
"I was deeply disappointed that the transaction between Kinetics and Lepercq was not consummated," says Jacob. "There were a number of issues but there's not a whole lot I can say. They tried to convince me to stay but I felt that it was best to separate myself from the situation as much as possible."
During Jacob's tenure, the biggest mutual fund firms -- Fidelity and Vanguard -- dismissed the Internet as too narrow a sector for a mutual fund. Other established firms apparently feel differently. Take fund manager David Alger. His company, Fred Alger Management, was named one of the top five fund families of last year by SmartMoney, and Alger helped himself by making big bets on Internet stocks like Amazon.com (AMZN) and America Online (AOL). (See story.) Now he's decided to manage his first sector fund in conjunction with Enterprise Capital Management of Atlanta.
Stein Roe, which has $8 billion worth of mutual fund assets, also plans to launch a Net fund, as does ING Funds, a branch of Dutch bank ING Group. So does the Chicago-based LaSalle St. Capital Markets, which plans to launch the first closed-end mutual fund to focus on Internet stocks. All of these funds are in their SEC registration phase and likely to open in the next few months.
Meanwhile, several other companies are vying to launch the first Internet index fund. An upstart firm in Arlington, Va., Internet 100 Advisors, plans to launch two mutual funds that track their own Net index. Barclays Global Investors, the world's second largest money manager with $691 billion in assets, plans to launch a fund that tracks the Dow Jones Internet Index early next year. And Web portal Internet.com is working on a deal to start a fund tracking its ISDEX index, one of the oldest indexes of Internet stocks.
So what does all this mean for investors? More choice. More confusion. There will be funds that invest in only Internet stocks, funds that call themselves Internet funds but aren't much different from general technology funds, funds that have managers with years of experience and funds that have freshly scrubbed first-timers. For index investors, will it be Dow Jones Internet, Internet 100 or ISDEX? E*Trade even says it's considering a fund that will track a subindex of the Goldman Sachs Technology Index.
At least there will be some much needed pricing pressure. The recently opened, no-load Unified Select Internet (sorry, no snapshot available) has a 0.35% expense ratio, an annual management and marketing fee deducted in daily increments from an investor's assets. Compare that to the Internet Fund, which has the highest expense ratio of the group, 3.08%, following a recent price hike. That's a sizable price gap. The difference between the two funds represents a savings of 2.73% of an investor's assets per year, and all the money that would've been earned from those assets. And then there are all the Net funds that pile sales loads on top of their expense ratios.
Whether Unified Select Internet will have returns in the Internet Fund's ballpark is another matter. Then again, many Internet Fund investors wonder if their fund will be able to match its previous performance without Jacob. So we asked him. "I'm a portfolio manager until the end of next week," he said. "After that, it's out of my control."
* * * * *
The fund-management firm Reich & Tang has dropped out of the deal to launch a fund that tracks the 50-stock ISDEX Internet index. As we reported previously, Internet.com, the Internet portal that owns rights to the index, is looking for a deal to sell exclusive rights to the ISDEX. Reich & Tang, which already filed a registration statement for an "Internet.com Index Fund," declined to explain its decision. Now the bidding is down to the fund firm Investec Guinness Flight, which has also filed with the SEC to launch its own version of an ISDEX fund, and a third firm, according to Internet.com CEO Alan Meckler. We'll let you know what happens.
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