Interesting article from today's IBD quoting the net fund managers:
What Happens If The Internet Bubble Bursts?
Date: 4/16/99
Author: Peter McKenna
Pretend for a moment that it's Jan. 4, 2000, and the Internet sector is
coming apart at the seams.
A day earlier the Federal Reserve warned that interest rates would have to
be raised substantially to ward off a sudden and unexpected inflationary
surge in the economy. To make matters worse, Fed Chairman Allan Greenspan,
during Congressional testimony, calls Internet stocks ''grotesquely
overvalued and a threat to the stability of the marketplace.''
By noon on this memorable day, Internet stocks are trading at a fraction of
their previous closing prices. Internet mutual funds are hit hard, as
brokers refuse to answer their phones and the entire market drops
precipitiously.
Internet fund managers scramble to secure emergency loans from banks to
meet massive net redemptions as shareholders sell their holdings in a
panic.
Could this happen, or is it science fiction? The answer is that anything
can happen in the stock market. The unexpected can and does occur and a
market sector, particularly a highflying sector like the Internet sector,
can seem invincible one day and spin out of control the next.
Funds that invest heavily in Internet stocks are among the hottest funds
these days, with Van Wagoner Emerging Growth up 75% this year going into
Thursday, Munder NetNet up 71%, Internet Fund up 126% and Monument Internet
up 150%. These eye popping returns are drawing in droves of new investors
trying to strike it rich.
What do fund managers with large Internet holdings think about the
possibility of a washout in the Internet sector, and what are they doing to
protect shareholders against such an occurrence? And if a washout did
occur, do these managers anticipate problems getting out of their Internet
positions?
IBD recently interviewed three Internet fund managers to get answers to
these questions.
Garrett Van Wagoner
''The Internet sector is without doubt vulnerable to a sell-off,'' said
Garrett Van Wagoner, manager of $290 million Van Wagoner Emerging Growth.
''It would take something far less dramatic than a freak problem with the
Internet to start a sell-off that would bring these stocks down 70% or 80%.
It could happen if the Fed raises interest rates, or the catalyst could be
nothing more than investors deciding they need more cyclical stocks, so
they sell their Internet holdings to buy cyclicals. This appears to be
happening already.''
Van Wagoner's fund was the most successful diversified equity mutual fund
in the country in the first quarter, with a stunning 56% return. This
success, however, has not kept Van Wagoner from being ''worried sick'' that
the Internet bubble is going to burst.
''The Internet stocks are trading at such high valuation levels that it
would not take much to start a huge correction,'' he said. ''That can keep
you up nights praying.''
What would Van Wagoner do if the Internets went into a precipitous decline?
''Once it starts, nothing can be done,'' he said. ''If everyone rushes for
the exits at the same time, fund managers will not be able to sell before
prices drop. The value of any Internet fund is going to fall dramatically
once the selling starts. . . . and there is nothing you can do about it.''
Van Wagoner, however, is taking steps now to protect his shareholders
against a sell- off. Just a month ago he had about 40% of the fund's assets
in Internet stocks. Today, his Internet stake is down to about 20%.
''We have been aggressively selling our Internet holdings,'' Van Wagoner
said. ''This includes stocks that have already made us big profits, and
stocks whose valuations are scary. We are moving the money into health-care
stocks.''
Van Wagoner said he bought Minimed, a company that makes devices that
inject insulin into the body and then monitor insulin levels, and
Pharmaceutical Products Development, a drug research company.
Van Wagoner also keeps a close eye on the size of his Internet positions.
''If we see that a position is getting large,'' he said, ''we will trim
back our holdings. We do this because it is easier to get out of a small
position than a large position if a sell-off starts.''
Once out of his Internet holdings, Van Wagoner would not buy the stocks
back unless they had dropped 50% to 70% off their highs.
Paul Cook
Paul Cook, manager of $2.1 billion Munder Net Net Fund, is not as worried
about an Internet meltdown as Van Wagoner. Cook has diversified his fund so
that it now holds about 30% pure Internet stocks, about 50% technology
stocks and 10% non-Internet stocks. His largest Internet holding is
Ameritrade. The fund ranked third among technology funds in the first
quarter.
''We are not a pure Internet fund, and we are at liberty to shift our asset
mix as we see fit,'' Cook said. ''I don't believe there is an Internet
bubble, but if it does burst, we will not be badly hurt.'' The one event
that would shake Cook's belief that the Internet sector is not in a bubble
is a rise in interest rates.
''If the Fed increased rates by 50 basis points, the Internet sector would
be hit hard, as would all stocks with high valuations,'' he said.
''I also worry that an earnings disappointment in one of the more visible
Internet stocks would drag down the whole sector,'' Cook added. ''But in
that case we would hold on to our stocks and buy on weakness. We are owners
of these stocks, not renters.''
Like Van Wagoner, Cook closely monitors the size of his Internet holdings.
He believes that liquidity would be a problem in an Internet sell-off. ''If
everyone ran for the door at the same time, it would be a problem selling
positions,'' he said. ''We watch our positions on a daily basis.''
Ryan Jacob
Ryan Jacob, manager of Internet Fund, is even less worried about a massive
Internet meltdown than Cook.
''I am not a big believer in the bubble-bursting theory,'' said Jacob.
''The upward run in Internet stocks has been extraordinary, so a backslide
should be expected. But in the long run Internet stocks are likely to move
forward, because their high valuations will eventually be justified by
their earnings.''
And unlike Van Wagoner, Jacob is not aggressively selling Internet holdings
in anticipation of a sell-off. He believes a hike in interest rates or any
hint of inflation could cause a correction not only in the Internet sector,
but in the overall market. But he feels the market would rebound, led by
Internet stocks.
''Our fund dropped nearly 45% in the late summer and early fall when the
market declined,'' he said, ''but it has bounced back. The Internets will
be volatile, but the long-term direction is upward.''
Jacob, who has large holdings in Yahoo, Doubleclick, CMGI and EBay, does
not think it would be difficult to get out of his Internet holdings if a
sell-off occurred.
''The Internet stocks are fairly liquid, they trade a lot of shares,'' he
said. ''I have a hard time believing that liquidity for Internet stocks
would dry up in a sell-off,'' Jacob said. ''In a general market decline,
buyers would eventually come into the Internet stocks to pick up bargains.
The Internet has such vast potential that there will always be buyers.''
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(C) Copyright 1999 Investors Business Daily, Inc.
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