I've been looking for an article that clearly states that Mutual Funds don't own Internuts. Here's one.
I'm not sure where you are getting your info about the high institutional ownership of the internuts.
thestreet.com
Fund Watch Features: Hot Net Stocks
Absent from Most Fund Portfolios
By Joe Bousquin
Staff Reporter
12/10/98 2:11 PM ET
Highflying Internet stocks with instant triple-digit returns
have captured the attention of Wall Street and individual
stock traders lately. But if you own stocks primarily through
mutual funds, don't expect a big boost in your own fortunes.
Chances are, your fund doesn't own many -- or any -- of the
highest-soaring names.
Yes, some Internet-related stocks like America Online
(AOL:NYSE) are coveted by professional money managers
-- those individuals who invest assets owned by large
institutions, including mutual funds. Institutional owners have
snapped up 82% of AOL's shares.
But others, like Amazon.com (AMZN:Nasdaq), are virtually
shunned. Even though the online bookseller is considered a
model for using the Internet as a ready-made distribution
channel, institutions own a mere 5% of its outstanding
shares, according to Baseline. Even Yahoo!
(YHOO:Nasdaq), a franchise player among Internet portals,
has just 4% of its stock in the hands of the pros. By
comparison, professionals own 50% of the shares of
Coca-Cola (KO:NYSE) and 35% of Microsoft
(MSFT:Nasdaq) shares.
The newest, hottest public offerings, like online auctioneer
uBid (UBID:Nasdaq), which more than tripled in value during
its first day of trading last week, are even harder to find in
the portfolios of mutual funds and big institutions.
Why? Either the pros can't get their hands on the stocks or
they don't want them because they're too high-priced.
For Jeffrey Van Harte, manager of the $275 million
Transamerica Premier Equity fund, there aren't enough
shares available of the hot Net stocks to make them worth
his while.
Fighting for 'Float'
When companies are taken public, institutional investors are
typically given first shot at their shares. But many new
Internet companies have offered only small percentages of
the companies' stock -- say 15% to 20% -- for public
exchange. (The rest stays with inside owners of the
company.) With such a small portion available to eager
buyers, demand quickly outstrips the supply of shares
"floated." Those shares are quickly snatched up.
The few shares available "get tied up with the hot stock
players, hedge funds or deal flippers," Van Harte says. "So
to get anything of size on a direct Internet play is very
difficult."
Van Harte manages nearly $1.5 billion in assets in both the
Premier Equity fund and individual accounts, so picking up a
sizable enough percentage of these stocks to make a
difference in his portfolio is difficult.
Managers who have to settle for a tiny piece of the action
are likely to flip out of the shares quickly and take profits on
the astronomical rises we've been seeing on the first day of
trading.
At least that was the case for Aash M. Shah, portfolio
manager of $400 million Federated Small Cap Strategies
fund when uBid went public last Friday.
Shah, who says he's made a lot of money in technology this
year, liked uBid when he heard about its initial public
offering. He liked it so much, in fact, he asked Merrill
Lynch, the underwriter, for 300,000 shares at its initial
valuation of $15. The number of shares Shah eventually got?
A mere 5,000.
"Even though it was a fair amount of shares, it wasn't
something that we could build a core portfolio position out
of," Shah says.
So Shah sold them for $52 shortly after the stock opened on
Friday. That's a cool 247% return on his investment in the
time it takes to watch a movie. Since he sold, uBid has
sunk steadily, closing Wednesday at 35 11/16.
Shah's situation really isn't that surprising. Consider Merrill
Lynch's position. It only had about 1.6 million shares -- a
mere 17% of the company's outstanding shares -- to offer for
sale. If it gave 300,000 of those shares to Shah alone, other
well-heeled clients would have felt snubbed.
The end result? Institutional investors end up cutting each
other out of the deals. The tiny slices they do get are
quickly sold to the many after-market retail investors -- in
other words, individual traders -- who are willing to pay
higher valuations to get in on the way up. After the price
goes up, the pros won't buy back in because they judge the
stocks too expensive relative to their underlying value. So
the stocks stay largely in the hands of retail investors.
So if these stocks crash, guess who will be left holding the
bag? Not the pros.
Retail Buyers' Pack Mentality
Brian Selerno, a co-manager of the $175 million Munder
NetNet fund, which concentrates on buying Internet stocks,
says a pack mentality has developed on the retail side,
causing individual investors to hit the buy button with little
prompting.
"I'm probably overgeneralizing," he says, "but I think the
main reason [for the disparity between retail and institutional
ownership] is that retail investors are easier to convince or
excite into action than professionals. Think about the
fistfights occurring in Wal-Marts (WMT:NYSE) around the
country to get Furbies."
Salerno, whose fund was one of the first to concentrate on
Internet stocks, also sees some old-fashioned snobbery on
the part of many old-line institutions.
"I believe most [institutional investors] are, by nature,
reactive and arrogant," he says. "Most don't see the
potential until it's passed them by. For that reason, I believe
many institutional investors will miss the boat when -- or if --
these stocks take a pause."
Expensive Stocks Trimmed Back
Still, as even Salerno admits, high valuations make it difficult
for institutions to hold onto these stocks. Salerno has cut
back some of his own fund's highest-flying Internet names,
especially the portal sites. His fund now has less than 10%
of its assets in those companies, whose sites provide a
launching point for people who want to access the Web.
Yahoo, the leading portal site, is less than 0.5% of his
portfolio, he says.
Van Harte, the Transamerica manager, also agonizes over
the fundamentals. With a stock like Amazon.com, which
has yet to produce earnings, trading at more than $216 on
Wednesday, Van Harte says it's hard for him to justify
buying it.
"When railroads were a new technology, it was a fantastic
industry," he says. "But for every five that went public, four
went bankrupt."
Doug MacKay, co-portfolio manager of the soon-to-
be-launched Red Oak Select Technology fund, says Oak
Associates, the fund's adviser, is consciously staying away
from an overweighting in Internet stocks.
"It's like the old maxim that there are good stocks and good
companies, and then there's understanding the difference,"
MacKay says. For his fund, which will launch Dec. 31, the
aim is to find leaders who will make money off the Internet,
but not rely on it for sole survival.
"To us, some of the names in the Internet do look a little bit
like the biotech stocks did in the early 1990s," MacKay
says. "There will be some losers."
Shah, the Federated manager, says institutional owners'
reluctance to touch these stocks indicates trouble. "It
means that people who do this for a living don't feel
comfortable with it," he says.
That being the case, should you?
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