"In the next three to six months you're going to see several major companies announce Internet funds, because that's where the cash is going," said Alpha Research's O'Leary. "They're seeing
that not only hasn't the Internet bubble blown up,
but it's continuing to new highs."

"Managers that were long disdainful of Internet and high-tech stocks are now holding their noses and buying them," [Morningstar Analyst Christine] Benz said.

"People are getting greedy," Lapman [a fund manager] said

===
Is the Gold Rush Headed for Grief?
Investor Stampede to Internet Stocks Is Drawing
Money Out of Rest of Market, Weakening the Will to
Diversify

By Ianthe Jeanne Dugan
Washington Post Staff Writer
Sunday, April 4, 1999; Page H01

Jerry McCarthy, 72, has never used the Internet.
He doesn't even own a computer. But after hearing
that his 10-year-old grandson plotted an upcoming
family trip from New Hampshire to Alaska online,
he shifted his individual retirement account into
a mutual fund devoted to Internet companies.

"This Internet thing is going to change the
world," said McCarthy, who recently sold his
Nashua, N.H., insurance business. "I'm in."

Over the years, McCarthy has picked many of his
own stocks, such as Coca-Cola Co. and General Electric Co. But he was stumped over how to
measure firms being fueled by the Internet. So he
invested $25,000 in Monument Internet Fund,
managed by Bethesda's tiny Monument Funds Group.

The investment, so far, has paid off. The obscure
fund, with $14.5 million in assets, was the
third-best-performing stock fund in the United
States in the first quarter, with a 92 percent
return to shareholders, according to Lipper
Analytical Services Inc., a New York firm that
tracks mutual fund performance. Just ahead of it,
in second place, was a rival the Internet Fund, a
much bigger New York upstart run by a staff of
two, which returned 93 percent.

Number 12, with a 54 percent return, is Munder's
NetNet fund, which in just one year has grown from
$6 million in assets to $1.4 billion. Also among
the top 25 performers is WWW Internet Fund, which
gained 35 percent.

The performance of these Net-devoted funds is an
extreme demonstration of a trend that has been
developing for three years: Investors who pour
money into a handful of household names--which now
include Internet stocks--are doing well. Funds
devoted to small-company stocks, mid-size
companies and seeking out undervalued stocks, by
comparison, are performing poorly. Last year, the
average stock lost 20 percent of its value, while
the Standard & Poor's index of 500 stocks rose 28
percent.

"The reason most mutual funds are underperforming
is that a new industry--an electronic
frontier--has developed that is sucking money out
of the rest of the market," said David O'Leary,
chief executive of Alpha Equity Research. "If
you're not in these stocks, you're
underperforming."

All told, the 6,200 U.S. stock funds (total assets
of $2.5 trillion) returned a paltry 1.63 percent
in the first quarter. Small-company funds dropped
5.98 percent, while growth funds grew 4.36
percent. Funds that track the S&P 500 grew 4.79
percent. Science and technology funds, which
include the Internet funds, returned 17.04
percent.

"The foundation of the investment business for
years has been diversification, but now investors
are asking why do I need it," said Avi Naknami,
chief executive of Strategic Insights, a New York
mutual fund consulting firm. "They see that if
they invest in 15 large companies they'll do
better. We're in an eerie period in the investment
business in which the core value of what the
investment industry offers is being challenged."

Now the Internet is bringing the divergence to a
new extreme. Even portfolios full of the stocks
that drive the Dow Jones industrial average
higher, such as General Electric and AT&T Corp.,
are being humbled by funds that are heavy on the
high-tech and Internet stocks that are defying
gravity.

As a result, many fund managers are beginning to
load up on Internet stocks--and funds devoted to
the Internet are proliferating. Van Kampen has $1
billion in a unit investment trust devoted to
Internet stocks. And Fidelity recently launched an
ad campaign touting its Select Net Fund, which
focuses on computer and software firms, as a safe
door to the Internet craze. Sources at Fidelity
said the company is even contemplating opening an
Internet-specific fund, but a spokesman denied
that.

"In the next three to six months you're going to
see several major companies announce Internet
funds, because that's where the cash is going,"
said Alpha Research's O'Leary. "They're seeing
that not only hasn't the Internet bubble blown up,
but it's continuing to new highs."

Many analysts say that buying into mutual funds
devoted to Internet stocks is highly risky. The
ride to prosperity has been volatile, and it is
impossible to measure the potential return.

"There's more bang for the buck in pure Net funds,
but over time, with it being such a volatile area
and so many fund managers skeptical, I would tend
to steer investors toward more balanced technology
funds," said Christine Benz, a senior analyst at
Morningstar Inc., which measures fund performance.
"If anything, they should invest in tech funds
that have only 10 percent to 15 percent in
Internet stocks."

Many start-up funds flew off the charts in the
first quarter, dwarfing the performance of the
biggest and oldest mutual funds. Fidelity Magellan
Fund, heaving in America Online Inc., Intel Corp.
and Cisco Systems Inc., posted a return of 7.01
percent in the first quarter. Just a year ago
would have been considered healthy. But it does
not look good next to Amerindo Technology, which
returned 67 percent even without being a pure
Internet fund.

Magellan was up 33 percent last year. Of that, 3
percent alone was America Online, which jumped
from $22 a share to $155, O'Leary said. An
additional 2 percent was due to Cisco Systems
holdings. "Magellan's outperformance last year was
the result of the Internet," O'Leary said.
"Anybody who didn't play it underperformed."

Consider the plight of Mark Lapman, who runs
Independence Investment Associates, which manages
a $30 billion portfolio for John Hancock Mutual
Life Insurance Co. It was performing in line with
the S&P 500--until the index added America Online
near the end of last year. Suddenly, Hancock's
portfolio, which is full of large company
stalwarts and light on high-tech stocks, was
lagging by nearly one-third a percentage point.

"People are getting greedy," Lapman said. "And
it's becoming harder than ever to bring down the
expectations of investors."

Lapman did add more AOL to counterbalance the
fund, following a path into Internet stocks that
is being blazed by more and more portfolio
managers. "Managers that were long disdainful of
Internet and high-tech stocks are now holding
their noses and buying them," Benz said.

But choosing the right Internet company to put in
a portfolio is a challenge, because they have no
track record and no earnings. "We have to use a
matrix that has never been used before," said John
Porter, portfolio manager of Fidelity's Select
Net. "But it's like the gold rush--and we want to
find the next Levi's and pick-axes."

The biggest fund devoted to Internet stocks is
Munder Capital Management's NetNet Fund, which
captures every aspect of the Internet. Included in
the portfolio are Sun Microsystems Inc. and other
companies that provide hardware to traditional
corporations that are benefiting from the Net,
such as Charles Schwab & Co., which now conducts
half its business online, to the Gap Inc., which
has vast online potential.

"If all of us could look back two years and
invest, we'd invest in Internet stocks," said Paul
Cook, the leader of Munder Capital's five
[spacer]portfolio managers. "Maybe in five years, we'll
look back and say now was the right time."

Still, Cook is conservative in his optimism.
"Don't put more than 10 to 15 percent of your
assets into Internet funds," he advised.

Cook in 1996 struggled to persuade Paul Tobias,
chief executive of Birmingham-based Munder, to
open the fund. Tobias recalls giving Cook $500,000
in seed money "to reward a top portfolio manager."
But skeptical teasing ensued.

Cook has gotten the last laugh. In the last year,
the fund has grown nearly 12,000 percent, to $1.4
billion.

Sometimes, a gambling instinct is necessary in
this game. When Ryan Jacob, now 29 years old,
became portfolio manager for the Internet Fund in
late 1997, he dropped some of the established
players in the industry such as Cisco, Microsoft
Corp. and Intel and instead focused on the hot new
prospects. The fund has stocks in about 35
companies, including America Online, Excite Inc.,
Double Click Inc. and Yahoo Inc., which rose 584
percent last year. The fund was also fueled by
CMGI Inc., which was up 604 percent after its sale
of GeoCities stock in an initial public offering.
"It's not unusual that the companies we have grow
30 percent to 50 percent per quarter," Jacob said.

The Internet Fund's assets swelled from $200,000
to $30 million in a year, as investors tried to
get in on its stellar returns--196 percent last
year.

But it has been a bumpy ride. After soaring 90
percent during the first half of last year, the
fund lost more than half its value during the
summer lulls.

Jacob remains humbled by the experience. "Most
companies are priced for success," he said. "Not
everyone will get there. Some will fall by the
wayside."

For now, the companies' stock prices are being
pushed up, giving companies devoted to them a fast
ride. "The Internet is the future of commerce,"
said Lawrence York, chief executive of WWW
Internet Fund in Lexington, Ky.

This quarter, WWW Internet returned 35 percent to
shareholders in three portfolio
sectors--adolescent, midlife and mature.
Adolescent choices include AOL and Amazon.
Considered midlife are companies such as Adobe
Systems Inc., Cisco and Compuware Corp. And in the
mature category are companies such as Compaq
Computer Corp., Intel, Microsoft and Sun
Microsystems.

One of the youngest of the Internet funds is
Monument Funds, which touts itself as a
broad-based Internet fund that invests in
companies that provide the framework as well as
commerce online. "Lots of companies are behind the
headline companies--people who lay cables, provide
security, content, get signal down to your house
and the router," said David Kugler, a former
Merrill Lynch & Co. stockbroker who founded
Monument.

The concept was to market the new economy--and
also get some attention. "How does a tiny place
distinguish itself?" he asks.

The fund follows 43 companies, with America Online
accounting for a full 4.5 percent of the
portfolio's value. Monument Funds has $35 million
in assets. The Internet portion, launched in
November, accounts for $13 million.

He, too, learned quickly about the risks of the
sector. In a week after it began, it soared to
$12.06 and then went down to $10.22, during a
post-Thanksgiving Internet slump.

"It's crazy," Kugler said. "It can be very
painful. But I believe that over the long run,
this is going to be the place to be."

That is the philosophy of McCarthy, the New
Hampshire investor. His grandfather at the turn of
the century laughed at a friend who encouraged him
to buy into Bell Telephone. A few years later, the
friend advised him unsuccessfully to buy into
automobiles.

"He thought it was a fad, utter foolishness,"
McCarthy said. "He put it in the bank, and along
came the Depression." McCarthy did not want to
repeat that mistake. "It's impossible to measure
it the way you measure the steel industry," he
said. "But I know it's the wave of the future."

A Hot Quarter for Internet Funds

Internet funds have far outpaced the S&P 500 and
Wilshire 5000 indexes.

FUND (top holdings)

TICKER

NET ASSETS*

Return, Annually

1997 1998

Munder NetNet: 800-438-5789

(CNET, Sun Microsystems, Intel, AOL, Microsoft)

MNNAX

$1.4 billion

30.4% 97.9%

Internet Fund: 888-386-3999

(CMGI, Yahoo, Double Click, Allou Health & Beauty
Care, Lycos)

WWWFX

$300 million

12.7% 196.1%

WWW Internet: 888-263-2204

(Ascend Communications, Checkfree Holdings, Compaq
Computer, Qualcomm, Motorola)

WWIFX

$20.7 million

0.5% 70.5%

Monument Fund: 888-420-9950

(AOL, RealNetworks, CMGI, Double Click,
Broadcast.com)

MFITX

$14.5 million

** **

*as of March 31

SOURCES: Lipper Analytical, Morningstar, Bloomberg
News, Monument Fund

**Monument Fund inception date: Nov. 4, 1998

Year-to-date returns (through March 31)

Internet Fund 93%

Monument 92%

Munder NetNet 54%

WWW Internet 35%

S&P 500 5%

Wilshire 5000 3%

© Copyright 1999 The Washington Post Company
===

- Netconductor.com