Those who are familiar with Mr. Dines' mentions of the effect funds will have on the Internet sector may find this article from today's WSJ interesting.
Had a laugh when I read this part:
>>The $5 billion Brandywine Fund, managed by Foster Friess, holds no pure Internet stocks, even though technology companies currently form almost 50% of the fund. "We don't invest in concept stocks," says Brandywine spokesman Chris Long. "We only invest in companies with real earnings."<<
Ho, ho, ho!!!!
Cheers,
Bond
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January 21, 1999
Little Guys' Internet Mania
Moves to Mainstream Funds
By PUI-WING TAM
Staff Reporter of THE WALL STREET JOURNAL
Don't think that your mainstream mutual fund has escaped the Internet-stock frenzy.
Internet stocks used to be an arena that only specialized technology funds would touch -- along, of course, with hyperactive individual investors trading online. But now, some of the nation's largest and best-known mutual funds, including those that may form part of your 401(k) retirement portfolio, are increasingly embracing anything.com, even though the funds aren't ordinarily associated with such highflying and risky investments.
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Mutual Funds Turn Toward Web Stocks
Internet-Boosted Funds
Performance of some mutual funds that have recently disclosed increased stakes in Internet stocks, with performance through the end of 1998:
TOTAL RETURN
Three Year One Year
Fidelity Magellan 23.62% 33.63%
Janus Mercury 27.76 58.41
Janus Olympus 34.32 56.97
Strong Enterprise N.A. N.A.
Transamerica Premier Agg. Gr. N.A. 84.07
N.A.= Not applicable; fund is too new
Magellan's Top Holdings
Top-10 holdings for Fidelity Magellan, which account for 26% of fund assets as of Dec. 31, 1998*:
1 General Electric 6 Home Depot
2 Microsoft 7 MCI WorldCom
3 America Online 8 Lucent Tech.
4 Intel 9 Wal-Mart Stores
5 Cisco Systems 10 Merck
*The percentage each stock makes up in the fund's portfolio is disclosed on a semiannual basis.
Sources: Lipper, Fidelity Investments
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Earlier this week, the world's largest mutual fund, $83.5 billion-in-assets Fidelity Magellan Fund, disclosed that online giant America Online Inc. had risen onto its list of top-10 holdings; indeed, it grabbed third place in the lineup, replacing tobacco company Philip Morris Cos. It was part of a portfolio makeover in which Magellan skipper Robert Stansky doubled the fund's technology weighting to 25.8% by the end of 1998. Fidelity won't comment on specific stocks it owns.
Another holder of AOL these days is $3.1 billion Janus Mercury Fund, a large-capitalization-stock growth fund that also counts the stock among its top 10. To be sure, AOL turns a profit and at year-end became a member of the Standard & Poor's 500-stock index. So that holding looks relatively tame compared with some of the recent additions to the $1.3 billion Janus Olympus Fund, another large-cap growth-stock fund.
Join the Discussion: Will Internet companies grow into their high valuations? Will Internet stocks avoid a bust?
Janus Olympus Fund's top 10 now includes online book and music seller Amazon.com Inc. as well as AOL, and the fund has also purchased high-speed Internet provider AtHome Corp. and search engine Excite Inc. (which has agreed to be acquired by AtHome).
A ballooning number of smaller funds that look for fast-growing companies are also purchasing Internet stocks. Funds such as Transamerica Premier Aggressive Growth Fund and Strong Enterprise Fund hold sizable stakes in stocks that include Amazon.com, Internet software concern BroadVision Inc. and Internet ad firm DoubleClick Inc.
The moves underline a change in sentiment. As recently as 18 months ago, most money managers dismissed the Internet sector -- where many companies' share prices have rocketed even as they face many more quarters of red ink -- as speculative and volatile.
"A lot of institutional managers that used to shun the Internet area are now starting to dabble," says Ryan Jacob, fund manager of the $70 million Internet Fund, the type of fund where you would expect to find daring Internet darlings. "It's like they've found religion."
With a sprouting cadre of professional money managers beginning to accept Internet stocks, the sector may experience even more of a lift going forward. "When Fidelity and other big fund companies get into the Internet area, that shows Internet stocks are becoming a legitimate investment," says Donald Dion, publisher of Fidelity Independent Adviser newsletter in Williamstown, Mass.
Of course, many fund managers are still resisting the Internet craze. The $5 billion Brandywine Fund, managed by Foster Friess, holds no pure Internet stocks, even though technology companies currently form almost 50% of the fund. "We don't invest in concept stocks," says Brandywine spokesman Chris Long. "We only invest in companies with real earnings."
Yet for fund managers to dismiss Internet stocks altogether may be even more damaging to their fund in the short term than buying the stocks. With share prices of these companies doubling or tripling in short periods of time, a mutual fund could get walloped if it doesn't take advantage of such turbo-charged performance. In a report late last year, Morgan Stanley Dean Witter analyst Mary Meeker noted that funds that didn't own hot technology stocks at the start of 1998 would likely end up trailing benchmark indexes. Indeed, most actively managed funds lagged behind the S&P 500-stock index.
"You can't watch America Online go up six for one and wish that you hadn't owned some of it," agrees David Fowler, co-manager of Vanguard U.S. Growth Fund. While the Vanguard fund currently doesn't own any Internet stocks, Mr. Fowler says his team of analysts is assessing the sector, especially because "there are expectations of very high growth to come."
Claire Young, manager of Janus Olympus Fund, says the soaring share prices of Internet companies caught her eye last year. Although she had already owned AOL for a while, she asked two analysts to examine the growth prospects for other Internet firms. That led her to purchase Excite, Amazon.com and AtHome, among others.
While Ms. Young concedes that valuing the stock of companies without profits is difficult, she says she only buys companies with business models that she understands. Amazon.com and AOL, for instance, are widely regarded as leaders in their fields. "We can't ignore the growth" of Internet firms, Ms. Young says, "but we want to make sure we understand the dynamics driving the industry."
Still, Ms. Young says she is concerned about how frothy some of the Internet stocks have become. She recently trimmed some Internet holdings as they soared faster than stocks in other parts of her portfolio. "I don't want my Internet holdings to get so outsized that the fund looks like an Internet fund," she says.
Adds Drew Cupps, manager of Strong Enterprise Fund, "I think it will take six months to a year for these stocks to settle" to more realistic levels. Mr. Cupps recently sold all of his shares in AOL, Amazon.com, Yahoo! Inc. and Internet auction firm eBay Inc. because of their skyrocketing valuations and bought into somewhat cheaper Internet plays, including BroadVision and DoubleClick.
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