Like It or Not, Mutual Funds Are Buying Internet Stocks
By CHARLES GASPARINO
Staff Reporter of THE WALL STREET JOURNAL
Hyperactive individual investors have long dominated the world of Internet
stocks. But there is growing evidence that numerous mutual funds -- from
"specialty-technology" to plain-vanilla-sounding "mid-cap" growth funds --
have also bulked up on these shares in recent months.
This buying has helped to support the
stocks. But it could also mean trouble for
fund investors, if and when these zigzagging
stocks fall out of favor and the big investors
scramble to sell.
The issue of mainstream mutual funds dipping into Internet stocks was
recently hit home by Mary Meeker, a managing director at Morgan
Stanley Dean Witter and a top-ranked Internet stock analyst. Ms. Meeker
made a splash with a report that took issue with the notion that individuals
are the only players in the world of buying Internet stocks, attributing at
least part of a huge recent run-up in the price of Internet shares to money
managers who have "chased performance" in order to boost returns.
In an interview, Ms. Meeker says that underperformance by 90% of all
money managers has forced many to purchase Internet stocks, thus
boosting shares above and beyond their already lofty levels.
Statistics by Morningstar Inc., the Chicago-based mutual-fund information
company, lend credence to support Ms. Meeker's analysis: Over the past
six months, a number of mutual funds have shown significant increases in
the portion of their portfolio dedicated to shares of Yahoo! and
Amazon.com. Even some smaller Internet stocks, including
Books-A-Million and eBay, are showing up in fund portfolios, according
to Morningstar.
Take, for example, Bramwell Capital's flagship fund, Bramwell Growth.
Morningstar lists the fund as a "large growth" fund, while Elizabeth
Bramwell, president of Bramwell Capital Management, considers the fund
a "general growth fund."
Whatever the classification, the fund has been building up a position in
Amazon.com over the past five months or so, so that it now makes up just
under 1% of the portfolio. Should a fund of this type invest in highflying but
often unprofitable Internet companies?
Ms. Bramwell says the fund bought the stocks sometime last year, and
held on to them through the recent nose-bleeding rally, and has been
trimming the position so that it would remain under 1%. Despite the
Morningstar classification, she says she can buy whatever stock she wants
-- "I don't have any restrictions to be large, small, medium or whatever,"
she says.
"Having said that," she adds, "it's not like this is 5% of the portfolio."
But others are less enthusiastic about the whole Internet craze. Asked
about examples of mid-capitalization funds buying such stocks, veteran
investor Dick Strong says: "That sounds crazy; that's not us."
Mr. Strong, chairman of Strong Capital Management, Menomonee Falls,
Wis., says he is personally wary of the highly valued Internet stocks, based
on his experience of betting on other red-hot sectors that ultimately
cooled. "After you're kicked around a lot, you get a little more
conservative," he opines.
But Mr. Strong isn't averse to offering funds to investors with an Internet
flavor, as long as they are properly disclosed as such. In September,
Strong Capital, for example, launched Strong Enterprise Fund, an
aggressive growth fund that has 20% to 25% of its $7.5 million in Internet
shares, a spokeswoman says.
To be sure, fund managers who have snapped up Internet offerings don't
share the view that they are doing so because of a race to crank out
ever-higher returns. Several maintain their fund guidelines give them
latitude to invest in all kinds of stocks -- even those unprofitable Internet
names that have advanced mostly on future earnings' prospects (some
several years into the future, at best). Others defend their move into the
Internet as a good business decision, one that has benefited their
shareholders.
"I think its imprudent for a portfolio not to own these shares," says Abel
Garcia, portfolio manager for United Science & Technology Fund, offered
by Waddell & Reed Investment Management, Overland Park, Kan.
Mr. Garcia has about 6.6% of his portfolio in shares of Yahoo -- up from
about 2.57% around March. Mr. Garcia says the change is due not from
buying, but from market appreciation.
That said, he isn't bashful about owning so much of Yahoo. It is one of the
biggest Internet "portal" businesses, and he doesn't think it's out of place in
a fund that some might see as seemingly dedicated to more prosaic
"science and technology" stocks.
"These are the new companies, so if you don't own them you're dog meat
three or four years from now," Mr. Garcia says.
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