WSJ chat with Morningstar on Net Funds transcript:
[I hope WSJ doesn't get too peeved I'm reposting the transcript,
maybe the greater positive attention their Voice events will receive justifies my minor breach of user agreement here...]
April 5, 1999
Events Transcripts
Voices Events With...
Christine Benz
Morningstar Funds Senior Analyst Christine Benz participated in a Voices
Event on Monday, April 5, 1999. The following is a transcript of that
event. It has been edited for clarity.
WSJ_Host: Welcome to Voices Events with Christine Benz, senior analyst at
Morningstar Mutual Funds. I'm your host Ravina Khosla.
Cbenz: There's obviously a lot of interest in Internet funds, if the number of
calls I get from subscribers and the press is any indication. I'm here today to
discuss investment options when navigating this area of technology investing.
WSJ_Host: Investing in the Internet has often been described as a bubble
waiting to burst. Any opinions?
Cbenz: I think that many experienced money managers recognize that the
Internet represents new terrain. And certainly applying standard fundamental
analysis to these companies is a huge challenge.
Toonces: Since the 1996 inception of Net funds, Morningstar (particularly
analyst Russ Kinnel) has been a vocal critic, warning investors to stay away
from these "gimmicks" run by "fourth-rate managers." Can you detail the
justification for dismissing these funds?
Cbenz: I think that Russ has identified some important red flags with these
funds. The main factor is that expenses on these funds have tended to be on the
high side, but in many cases management is less experienced. So you're
potentially paying more and getting less.
Warrenc: Can you talk generally on Internet Fund and how it carries a higher
return annually than the others?
Cbenz: Internet Fund is a more concentrated play on Internet stocks than most
of the others -- meaning that it doesn't own stocks with a marginal connection
to the Net. It is also quite concentrated in its top holdings. Those bigger bets
have led to bigger returns.
Stacie: Is WWWInternet Fund a better fund to invest in for the long-term as
opposed to Internet Fund?
Cbenz:WWW Internet hasn't been as impressive on the return front, and did
have a blowup in one of its holdings this year. It also tends to have more
investments outside the Internet space, such as IBM, than does Internet Fund.
Rajudallas: What % of my IRA should be in Internet funds?
Cbenz: That's a great question. Unfortunately, it's wholly dependent on what
you already own. I would argue that a well-diversified growth fund might offer
you all the Internet exposure you need. If you want still more, you could look at
a diversified tech fund.
G. Stubbs: What general direction do you see Internet stocks heading in this
year? Can this crazy growth rate continue?
Cbenz: I guess that's the $64,000 question, right? I think that the stocks
probably won't move en masse as much as they have, as investors start to sort
through the gimmickry from the companies with staying power. I think we're
already starting to see that, as a few Internet companies have fallen to earth.
Kandich: Do you think the Internet is overvalued? Do you think valuation will
come soon? Is yes, any idea when?
Cbenz: Certainly most valuation-conscious fund managers I talk to recognize
the importance of treading lightly in the Internet area. And even fund managers
who own Internet stocks have to do some mental gymnastics to justify owning
them.
Sathakrar: What funds are investing in companies that benefit from the growth
in the Internet (not just pure Internet companies)?
Cbenz: Lots of the more diversified tech funds do this, as well as diversified
growth funds. The managers of Alliance Technology, for example, like Dell
because the company has lowered its overall costs by selling more PCs online.
Warrenc: Personally I have placed my entire Roth contribution to Internet
funds knowing I will not pay taxes on the gain. Generally I do not see a crash of
the industry anytime soon. Only volatility by individual equity where a fund
would minimize. Your thoughts?
Cbenz: I guess it depends on what your other investments are. No one doubts
that the Internet represents a huge opportunity -- the main question is whether a
lot of these companies' upsides are already reflected in their stock prices.
Fizzfazz: Should expense ratios be a concern when growth is at double-digit
(triple digit?) rates?
Cbenz: Great question. It's really easy to sneeze at an expense ratio when
everything is going up. But low expenses are one of the single biggest predictors
of outperformance for funds over time. There's just no getting away from them.
Toonces: Internet Fund has exploded in popularity yet was started in
someone's small house. Despite the resounding success of these Cinderella Net
funds, why have the established mutual-fund families failed to respond to
market demand and start their own Internet funds?
Cbenz: I wouldn't be surprised to see more new Internet funds sprouting up.
I'm certainly seeing more established fund companies putting bigger and bigger
investments in this area. Last I talked to the manager of Fidelity Select
Technology, for example, he had about 15% of assets in Net stocks.
Tamrich: Can you mention a few examples of Internet companies that have
fallen to earth?
Cbenz: In early March, for example, trading was halted on the stock of USA
Talks.com and the stock took a humongous hit.
Kevbraah: How long does a fund need to exist before you give it a ranking
Cbenz: Three years for a star rating.
Panda: Is the Internet investment focus going to continue forging ahead at this
fast clip for the long term? Internet Fund (WWWFX) has been the best
performer, are they a good strategy for the long term? Would selling my other
securities and purchasing all on this fund make a good sound choice?
Cbenz: I would argue for more diversification in your portfolio, rather than
putting all of your eggs in one basket. The key will be adding something that will
act differently than the Internet stocks. Small-cap value stocks, for example,
have been behaving awfully as Internet stocks have soared.
Tamrich: What is your opinion of the Munder Net Net fund?
Cbenz: I think the fund has one of the more sensible strategies in the Internet
space. They own Internet stocks straight up, as well as more established
companies with more diversified operations, such as Sun. So the fund might not
participate as much on the upside, but it should be more even-keeled than the
rest of the bunch. I think the key question when looking at Munder, though, is
how much it differs from other, better-established tech funds such as Alliance
Tech or T. Rowe Price.
Kevbraah: What is the overall risk of a novice investor opening an online
account with etrade or Datek?
Cbenz: I'm not sure I've explored this issue enough to comment on it.
1butler: You mentioned small-cap performance in comparison to the rise of
Net stocks. Do you think that the rise of Net stocks has harmed the small-cap
sector? If Internet stocks sink, do you think small-caps will rise again?
Cbenz: Well, I'm not sure it will be such a direct relationship. And many of the
Net stocks still are small caps. I was speaking mostly about small-value stocks
-- stocks of small-cap financials and industrials. Most fund managers we talk to
think that the valuation discrepancy between small value and large growth is
historically wide and can't last forever.
Sathakrar: As the Internet continues to mature, will sub-specialty funds
develop e.g., infrastructure, retail, ISPs, communication, e-commerce, etc.?
Cbenz: Possibly. Considering that there are funds dedicated to golf and auto
racing, nothing would surprise me. But investors in such narrow funds might be
doing away with one of the biggest advantages of the fund Format:
diversification.
Warrenc: Can we say that the run up in Internet stocks above valuation is a
direct result of online traders with no mental ties to valuation.
Cbenz: I know that that has been a common criticism. But Internet stocks have
been increasingly creeping into big funds, such as Fidelity Contrafund, too.
AOL's addition to the S&P 500 has prompted fund managers to either own it
or have a pretty good reason for not owning it. And increasingly other Internet
stocks are creeping into fund managers' benchmarks. So no, I don't think Net
stocks are necessarily driven by individual investors trading online.
WSJ_Host: Speaking of diversification :)
Thare: Should I have more than one Internet mutual fund
Cbenz: That seems like overkill. You will probably find that you have a lot of
overlap if you own more than one of these things.
Rajudallas: Any recommendation on which diversified tech fund might be
good?
Cbenz: It's boring, but I would tend to want to go with the funds with more
Seasoned Managers: Alliance Tech, Seligman Communications & Information,
T. Rowe Price Science & Tech. These funds haven't done as well as the
Internet has been on a tear, but I'm more comfortable with them as long-term
investments. I'm also intrigued by Janus' new tech fund. It goes against the idea
that you want to invest with a seasoned manager, but I think Janus' tech
analysts have done a pretty good job on the diversified funds, so this is an
intriguing rookie.
Toonces: A closed-end mutual fund will debut later this year, according to
Smartmoney.com, which may provide an opportunity to buy Net stocks at a
discount -- any thoughts?
Cbenz: I just heard about that this a.m. In some respects the closed-end format
makes sense for something this specialized, because ill-timed inflows and
outflows won't hinder managers. Net stocks will have to fall off their pedestal
for the fund to trade at a discount, though, I would think.
Warrenc: In line with diversified tech can you speak on the Interactive
Investments Technology Leaders Fund?
Cbenz: Performance has been pretty good so far, and I think Kevin Landis is a
smart tech investor. My main reason for wanting to stick with the more
established fund shops is that they put more analysts on the tech sector, which
will probably be an important advantage over time.
Sathakrar: Is it just as risky to buy a portfolio of Internet companies?
Cbenz: If investors are determined to get some Internet exposure yet haven't
had experience buying stocks, I think they're better off with a fund. Particularly
when you consider the valuations at which many Internet stocks are trading.
Fizzfazz: Which Internet funds get the greatest allotment of net IPOs?
Cbenz: Generally speaking the heavy hitters (the bigger funds/fund companies)
would get bigger allotments. But there are probably exceptions to that rule.
WSJ_Host: Before we let you go this afternoon, what is the biggest blunder
investors make in regards to Internet stocks?
Cbenz: Great question. From my perspective, it's that investors aren't paying
enough attention to the underlying companies they're buying. It's more like
gambling about the direction something will go rather than paying attention to
the underlying company fundamentals.
WSJ_Host: Thank you for joining us this afternoon, Christine.
Cbenz: Thanks for all of the great questions this afternoon. Please feel free to
check out Morningstar's site, Morningstar.net, for more specific fund and stock
information, as well as a lot of great articles for investors at all levels. Good luck
with your portfolios!
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