Barron's article on Wired index [30 stocks including GSTRF]
interactive.wsj.com
January 25, 1999
The Buzz on Wired
Fund based on trendy mag's index is hot but pricey
By Sandra Ward
As the market bounded higher Wednesday, so went the indexes. By
midday, the S&P 500 rose a percent or so, the Dow Jones Industrials were
up slightly, and the Nasdaq Composite spiked to new records. But something
called the Wired Index delivered the best performance. By the end of the day,
after the market made a U-turn and closed lower following a sober
assessment on stocks by Fed chief Alan Greenspan, most indexes wilted. Yet
the Wired still gained 1.25%, compared with 0.30% for the tech-heavy
Nasdaq.
Thursday was a different story. As the broad market slipped and the Nasdaq
Composite crumpled, the Wired Index short-circuited, losing more than 3%,
compared with a loss of 1.30% for the Nasdaq by the early afternoon. At the
close, however, the Wired Index rebounded slightly and managed to fare
better than the Nasdaq, down 2.88% for the session versus 2.93% for the
Nasdaq.
Welcome to the "bellwether for the new economy," as its architects dub the
Wired Index. It's hot and definitely wired, but it's not a pure Internet index.
Yet as you can see, it's almost as woolly as one. Through Thursday, the index
was up 7.97% for the year, compared with a gain of 0.48% for the S&P 500.
For those who believe it really is different this
time and want in on the action, the folks at
Guinness Flight Investment Management
introduced a fund in mid-December based on the
index: The Wired Index Fund is up 6.38% so far
this month. It's already gathered $25 million.
Financial columnist James Glassman of the
Washington Post, enamored with the concept, plugged it as one of his favorite
funds for 1999.
Named for the magazine that caters to the cutting-edge cybercrowd -- and
which brought us the "Long Boom," a provocative piece published in the
summer of 1997 that made the case for a 25-year global economic expansion
driven by technological advancements -- the Wired Index seeks to tap into
trends that are transforming the economy. The future as seen by its creators:
an eclectic mix of 40 stocks, heavy on networking and telecommunications
Yahoo; Cisco Systems; America Online; Cable & Wireless; MCI
WorldCom) but with a dab of multinationals that include a car maker
DaimlerChrysler), an airline AMR), a steel outfit Nucor) and an insurance
company AIG), among others for good measure. There's a smattering of small
companies to complement the large, and all are supposed to represent the
best in globalism, innovation and strategic vision.
Inspired by the humble beginnings of the Dow Jones Industrial Average more
than a century ago, two ink-stained types -- John Browning and Spencer
Reiss -- formulated the index in what they refer to as "seat-of-the-pants"
fashion.
"In looking at the new economy, we felt we knew it when we saw it," says
Browning, a former journalist with the Economist, describing how the pair
winnowed a list of hundreds of possibilities to a mere 40. Reiss is a former
writer at Wired, now working in an editorial capacity with George Gilder, the
social commentator and supply-sider. Drawing again from the spirit of the
Dow, Browning and Reiss don't plan to tinker with the index unless forced to
by some surprise event such as a merger or bankruptcy or a shift in business
strategy.
Says Browning: "I'm eager to keep it as unchanged as possible. You want to
track these companies over a long period of time."
The two relied on input from Wired editors, as well as from two economists
-- Paul Romer, a productivity guru at Stanford University; and Hal Varian, at
Berkeley, who along with fellow professor Carl Shapiro coauthored
Information Rules: A Strategic Guide to the Network Economy. Last but
not least, Nicholas Negroponte, director of the Media Lab at the
Massachusetts Institute of Technology, threw in his two cents.
The index is market-weighted but includes a
market-cap ceiling of $10 billion in an effort to
keep the biggest companies -- such as Microsoft
-- from unduly influencing performance. That means, when the portfolio is
rebalanced once a year, the top 30 stocks are equally weighted. At the start
of this year, the top 30 each represented 3.075% of the index, and the 10
small-fry made up the rest, based on their market caps.
Interesting stuff, to be sure. Certainly, it grabbed the attention of James
Atkinson, director of U.S. operations at Guinness Flight, a unit of the South
African financial-services house Investec. He's been busy cobbling together a
family of funds that share the common thread of trying to enable investors to
capitalize on changes in the global economy: Asia Blue Chip; Asia Small Cap;
China & Hong Kong; Mainland China; New Europe and Global Government
Bond. The Wired Index fit right into the package.
"I happen to be a believer in this concept," says Atkinson. "I wanted to invest
in it."
It is a neat concept. But the Wired Index fund is an expensive fund; costs are
1.35% of assets. Even if you can justify the still-outlandish valuations of
Yahoo and AOL, it's tough to find an excuse for that kind of price on an
index fund. At those levels, it may as well be actively managed. Indeed, to
some, it feels like an actively managed fund.
"Is it really an index when there's so much selection going on?" asks Russ
Kinnel, a fund analyst at Morningstar. "It feels more like an actively managed,
but low-turnover, fund. Part of an index fund is low cost. Over 40 basis
points, it becomes a very hard sell."
Atkinson expects the expense ratio to fall as assets grow, but he notes that the
costs of "specialty index funds tend to be higher."
And hold on to
your hats with this
offering. Already
roller coaster-like,
the fund is likely
to get extremely
volatile at times as
some names get
top-heavy despite
the prescribed
once-a-year
rejiggering. For
instance, AOL
ballooned to close to 11% of assets at the end of December.
One final consideration: When we called the editors of Wired to find out the
year-to-date performance of the index, they couldn't tell us. They referred us
to Guinness Flight. Guinness Flight executives had to scramble to see if they
had yet received a daily performance update from the calculators of the index,
HSBC in Scotland.
Maybe Wired, "the journal of record for the future," would do well to keep
tabs on the present and past, too.
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Copyright © 1999 Dow Jones & Company, Inc. All Rights Reserved.
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January 25, 1999
The Wired Index
Company
Primary business
Acxiom
Data mining
Affymetrix
Genomic equipment
AIG
Insurance
America Online
Network media
AMR
Air travel
Applied Matls
Chip equipment
Cable & Wireless
Telecommunications
Charles Schwab
Finance
Cisco Systems
Network hardware
DaimlerChrysler
Automotive
Dell Computer
Personal computers
EMC
Data storage
Enron
Energy
FDX
Transport
First Data
Financial services
Globalstar
Satellite telecom
Incyte Pharmaceuticals
Bioinformatics
Intel
Microprocessors
Lucent Technologies
Telecom equipment
Marriott International
Hotel management
Microsoft
Software
Monsanto
Agribusiness
News Corp
Media
Nokia
Wireless equipment
Nucor
Specialty steel
Parametric Technology
Automated design
PeopleSoft
Enterprise software
Qwest Communications
Telecommunications
Reuters
Information
Schlumberger
0il services
SmithKline Beecham
Pharmaceuticals
Sony
Consumer eletronics
State Street
Banking
Sun Microsystems
Computers
Thermo Electron
Technical instruments
Wal-Mart
Retailing
Walt Disney
Entertainment
Wind River Systems
Telecommunications
Yahoo!
Network media
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