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December 16, 1998
Like It or Not, Mutual Funds
Are Buying Internet Stocks
By CHARLES GASPARINO
Staff Reporter of THE WALL STREET JOURNAL
Hyperactive individual investors have long dominated the world of
Internet stocks. But there is growing evidence that numerous mutual
funds -- from "specialty-technology" to plain-vanilla-sounding "mid-cap"
growth funds -- have also bulked up on these shares in recent months.
This buying has helped to support the stocks. But it could also mean
trouble for fund investors, if and when these zigzagging stocks fall out
of favor and the big investors scramble to sell.
The issue of mainstream mutual funds dipping into Internet stocks was
recently hit home by Mary Meeker, a managing director at Morgan Stanley
Dean Witter and a top-ranked Internet stock analyst. Ms. Meeker made a
splash with a report that took issue with the notion that individuals
are the only players in the world of buying Internet stocks, attributing
at least part of a huge recent run-up in the price of Internet shares to
money managers who have "chased performance" in order to boost returns.
In an interview, Ms. Meeker says that underperformance by 90% of all
money managers has forced many to purchase Internet stocks, thus
boosting shares above and beyond their already lofty levels.
Statistics by Morningstar Inc., the Chicago-based mutual-fund
information company, lend credence to support Ms. Meeker's analysis:
Over the past six months, a number of mutual funds have shown
significant increases in the portion of their portfolio dedicated to
shares of Yahoo! and Amazon.com. Even some smaller Internet stocks,
including Books-A-Million and eBay, are showing up in fund portfolios,
according to Morningstar.
Take, for example, Bramwell Capital's flagship fund, Bramwell Growth.
Morningstar lists the fund as a "large growth" fund, while Elizabeth
Bramwell, president of Bramwell Capital Management, considers the fund a
"general growth fund."
Whatever the classification, the fund has been building up a position in
Amazon.com over the past five months or so, so that it now makes up just
under 1% of the portfolio. Should a fund of this type invest in
highflying but often unprofitable Internet companies?
Ms. Bramwell says the fund bought the stocks sometime last year, and
held on to them through the recent nose-bleeding rally, and has been
trimming the position so that it would remain under 1%. Despite the
Morningstar classification, she says she can buy whatever stock she
wants -- "I don't have any restrictions to be large, small, medium or
whatever," she says.
"Having said that," she adds, "it's not like this is 5% of the
portfolio."
But others are less enthusiastic about the whole Internet craze. Asked
about examples of mid-capitalization funds buying such stocks, veteran
investor Dick Strong says: "That sounds crazy; that's not us."
Mr. Strong, chairman of Strong Capital Management, Menomonee Falls,
Wis., says he is personally wary of the highly valued Internet stocks,
based on his experience of betting on other red-hot sectors that
ultimately cooled. "After you're kicked around a lot, you get a little
more conservative," he opines.
But Mr. Strong isn't averse to offering funds to investors with an
Internet flavor, as long as they are properly disclosed as such. In
September, Strong Capital, for example, launched Strong Enterprise Fund,
an aggressive growth fund that has 20% to 25% of its $7.5 million in
Internet shares, a spokeswoman says.
To be sure, fund managers who have snapped up Internet offerings don't
share the view that they are doing so because of a race to crank out
ever-higher returns. Several maintain their fund guidelines give them
latitude to invest in all kinds of stocks -- even those unprofitable
Internet names that have advanced mostly on future earnings' prospects
(some several years into the future, at best). Others defend their move
into the Internet as a good business decision, one that has benefited
their shareholders.
"I think its imprudent for a portfolio not to own these shares," says
Abel Garcia, portfolio manager for United Science & Technology Fund,
offered by Waddell & Reed Investment Management, Overland Park, Kan.
Mr. Garcia has about 6.6% of his portfolio in shares of Yahoo -- up from
about 2.57% around March. Mr. Garcia says the change is due not from
buying, but from market appreciation.
That said, he isn't bashful about owning so much of Yahoo. It is one of
the biggest Internet "portal" businesses, and he doesn't think it's out
of place in a fund that some might see as seemingly dedicated to more
prosaic "science and technology" stocks.
"These are the new companies, so if you don't own them you're dog meat
three or four years from now," Mr. Garcia says.
* * *
CD Yields Were Mixed in Week
Yields on certificates of deposit were mixed in the latest week.
The average yield on six-month, "jumbo" CDs, which typically require
deposits of $95,000 or more, edged up to 4.38% from 4.37%, according to
a weekly index prepared by BanxQuote Inc. On five-year jumbos, the
average held at 4.59%, the information service said.
Average yields on small-denomination "savings" CDs in some popular
maturities also were mixed, however the average six-month yield remained
at 4.05% and the five-year average stayed at 4.43%, BanxQuote said.
Yields on broker-sold CDs fell. According to BanxQuote, the average
yield on six-month, broker-sold CDs slipped to 4.97% from 5.04%, while
the average yield on five-year CDs dropped to 5.18% from 5.30%.
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