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Net funds are out shopping
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May 28, 1999: 6:22 p.m. ET
Volatility in Internet sector lures fund managers to go on a buying spree
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NEW YORK (CNNfn) - Internet fund manager Lee Manzler was hoping for a correction. Really.
After all, what better time to launch his new fund, the Analysts internet.fund (spelled that way) than when the stocks are cheaper?
"Since we opened on May 4, we've been buying," Manzler said Friday, after his fund dropped 5.8 percent in a week. "Ever since then, prices have been falling."
Individual investors might be quivering at the volatility in the Internet sector in recent weeks, which some experts are calling a correction. But Manzler and other Internet fund managers seem unruffled -- even though their funds lost as much as 15.28 percent for the week ending Thursday.
Bullish in bearish times
"We picked up some shares that other people dumped, and I like it that way," said Alex Cheung, manager of the Monument Internet Fund. The fund has $46 million in assets.
Managers blamed the losses on worries about an interest rate hike and a seasonal downturn in technology shares that typically happens in the spring and summer months. Cheung also said the sector was bound to deflate a little after such a remarkable runup.
"It's not too unexpected to see some profit-taking," Cheung said. "At the same time, a correction like this is pretty normal, especially for technology stocks."
Cheung said he's been trying to warn shareholders not to expect the stellar returns that pushed his fund up about 130 percent in April. At the same time, he says they need to be courageous enough not to flee when the market drops 25 percent. (The fund is up 76.47 percent as of Thursday, according to fund-tracker Morningstar).
"Investors should set their time horizons on three to five years, rather than three to five minutes," Cheung said.
Cheung said he added to existing positions recently in America Online (AOL) and RealNetworks (RNWK).
Other stocks, such as DoubleClick (DCLK) and CMGI (CMGI) he envisions keeping in the portfolio for 5 or 10 years.
"Most of my stocks I've been holding since the beginning of the portfolio," he said.
No bubble?
Ryan Jacob, manager of the Internet Fund, said the volatility is not a repudiation of any company or a sign of fundamental weaknesses in the sector. The fund has $650 million in assets and is up 86.20 percent year to date as of Thursday, Morningstar said. In April, the fund was up 118 percent.
"We're not seeing any money coming out of the Internet sector and going into another sector," Jacob said.
Jacob said he added to the fund's core holdings in Yahoo! (YHOO), eBay (EBAY), At Home Corp. (ATHM), Xoom.com (XMCM), theglobe.com (TGLO), and About.com (BOUT). (Jacob has found some new buys, but he declined to name any of them).
"I think there are some pretty compelling valuations out there," Jacob said. "We're adding to our existing positions and adding some new names that were too pricey before."
The Internet grows up
Why are they all so optimistic? The managers remain convinced the Internet will change the way we live and work. A flood of IPOs and online business ventures have created more choices than ever.
"It's clear the Internet will be a powerful new channel for distribution and information," said Lawrence York, manager of the WWW Internet Fund. "We're seeing a lot of big players embrace the Internet."
For example, Barnes & Noble's (BKS) Web unit, barnesandnoble.com, made a big foray into the Internet earlier this week after raising more than $400 million.
"They (Barnes & Noble) have a pretty big war chest and they plan on dominating," York said. His fund has $32 million in assets.
While York was losing money with the fund's holding of clothing retailer dELiA* (DLIA), he used the downturn to sell the stock and buy Launch Media.
Both dELiA and Launch Media, which creates music content, cater to "Generation Y," the people between the ages of 12 and 34. But Launch Media has a more focused business plan and has the backing of heavyweights like Intel (INTC) and Softbank, a Japanese software company that invests in U.S. Internet companies. York used the loss in dELiA to offset other gains for tax purposes.
"It's important to realize the Internet is beyond a fad," York said.
Manzler, of the Analysts internet.fund, said he bought shares of Amazon.com (AMZN), Pacific Internet (PCNTF), Infoseek (SEEK), Audiohighway.com (AHWY), MindSpring (MSPG), and Earthlink (ELNK). He also bought some stocks that are "stealth" Internet plays like Bank One Corp. (ONE), which is one of the largest online bankers.
Some words of caution
Other financial institutions apparently share that optimism. Three more Internet funds will debut in the next few months, including two index funds, said Peter Di Teresa, a senior analyst at Morningstar.
Reich & Tang has filed to open an index based on the Internet.com stock index and a fund that will mirror the new benchmark, Di Teresa said. Internet 100 Advisors of Arlington, Va., also plans to introduce the Internet 100 Index and two mutual funds, one with market capitalization weightings and the other equally weighted.
But Di Teresa said investors should be careful. Only the Munder NetNet Fund and the index fund in the works by Reich & Tang have experienced management, he said. He'd recommend a technology portfolio instead.
"What we're seeing is the potential for companies to make money from investors more than anything else," Di Teresa said.
Jacob, while bullish on the sector, said one area of caution is Internet IPOs. He said investors should be more selective since public offerings aren't likely to soar as they did in previous months.
"I don't think you can get away with being as indiscriminate as you could earlier this year," Jacob said.
He paused a minute.
"Investors have to be prepared to live with volatility," Jacob said. "They have to understand it can go both ways."
Finally, here are some results for the six existing Internet funds, according to Morningstar and the fund companies:
At the top of the list is the Analysts internet.fund, down 5.8 percent for the week May 20 to 27 and off 0.5 percent since its inception May 4; followed by the Unified Select Internet Fund, down 8.11 percent for the week and down 5.1 percent since its inception April 14; and the Munder Net Net Fund, down 11.30 percent for the week but up 38.09 percent year to date as of Thursday.
Next on the list is Internet Fund, down 13.91 percent this week but up 86.20 percent year to date; followed by WWW Internet Fund, down 14.87 percent this week but up 25.20 percent year to date; and Monument Internet Fund, down 15.28 percent this week but up 76.47 percent year to date.
-- Staff writer Martine Costello covers mutual funds for CNNfn.com. If you have any comments about mutual funds, you can contact her at cnnfn.interact@turner.com
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