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Internet mutual funds: An affordable alternative

It's mind-boggling: Amazon.com selling for $337 a share before a 3-for-1 stock split ... eBay's shares peaking at $311 ... AOL pricing out at $160 after gaining 78 percent during December alone. With prices and advances like these, Internet stocks are certainly in the stock market's stratosphere. So what's an individual investor to do if he or she wants to play the Net, but doesn't want to spend a millionbucks.com for their investment? The answer may lie in Internet mutual funds.

Three sector funds currently invest primarily in the World Wide Web: Munder Net Net Fund, the WWW Internet Fund and The Internet Fund -- and their performance in 1998 was impressive. For example, the Munder Net Net Fund placed in the top top 10 (Sorry, I couldn't resist) of mutual funds ranked for 1998 by Business Week with a 74 percent increase in its net asset value. This fund's share price is certainly a lot closer to reality than individual Internet stocks (for the non-Donald Trumps of the world) at $27.01 a share for its "A" shares. Meanwhile, the WWW Internet Fund ranked 35th among all mutual funds in performance with a 41 percent gain for the year. This fund closed out 1998 selling for $15.91 a share.

Still not impressed? Then perhaps The Internet Fund's statistics will change your mind. An investor who plucked down $10,000 on March 7, 1997, into fund de la Internet saw their money blossom to be worth nearly $40,000 by the beginning of 1999 -- a return of 400 percent in less than two years, according to the fund's Web site. With a recent share price of $15.17, this mutual fund is certainly affordable to the average investor. But are these funds truly a great way for small potatoes investors to buy stocks that they would otherwise shake their heads at?

"No question in my mind," says Karen Sabath, president of Black Rock Funds in New York City. "It's no different from any other sector fund, but it's a hot sector. For the individual, this is one of the best ways to do that."

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However, not every financial guru thinks the Internet is a good buy -- especially for the short term.

"These are volatile investments ... aggressive investments. This is bordering on gambling," says Alan Erb, partner for J.C. Bradford and Co. in Nashville, Tenn. "This is a trader's game."

"I wouldn't touch Internet stocks with a 10-foot pole," blasts Peter Anderson, senior vice president and chief investment officer for American Express Financial Advisers in Minneapolis. "Nothing I see is short of bizarre ... This is reckless speculation. Many of these companies have no earnings."

Tiptoe through the tulips

"This is tulip mania at its best," declares Anderson.

Anderson refers to the infamous panic in the Netherlands in the 1600s over the sales of tulip bulbs. But Edmund Martinez, director of investments, retirement services, for Merrill Lynch in New York City, thinks that Internet sector funds smell more like a rose.

"This does not relate to the tulip panic," Martinez says. "Those type of comments are made by people who can't explain the valuations. No doubt the Internet is here to stay ... Who knows what is reasonable or not? There is no benchmark that is relevant."

Surprisingly, Paul Cook, lead portfolio manager for the Munder Net Net Fund in Birmingham, Mich., agrees with both sets of analysts.

"I think in the short term these companies typically trade on news -- more of a price-to-news ratio instead of a price-to-earnings ratio," Cook quips. "Over the last quarter, these companies have seen all kinds of great news, and I see it continuing into the first quarter [of 1999]. But there is some downside risk. ... In the short term, the pure plays are a bit overextended."

To compensate for the risk of a downturn in "pure" Internet stocks like AOL, Yahoo! and Lycos, the Net Net Fund also invests in companies that expand the focus of the World Wide Web and that use online retailing for their benefit. For example, Cook's fund buys businesses that "branch out" from the Internet further into cyberspace like Sun Microsystems, Oracle and Microsoft. Also, the Net Net Fund invests in retailers like Office Depot and The Gap that look prime to cash in on the online shopping craze that is growing fast.

Online Taxi Service?

Cook believes the Internet's full potential is nowhere near being tapped. He believes that your friendly neighborhood cyber service will expand into places previously considered impossible by the common Web surfer. For instance, Cook predicts that someday our air conditioning system will be able to make service calls for itself using Internet technology. He also sees the potential for the Web to spread its power to cell phones and pagers, imagining that our pager service could work to automatically book airline reservations or to hail a cab.

"Long term, the sector is under-hyped," Cook insists.

Hype or no hype, let's just hope the taxi drivers on the Information Superhighway don't drive like crazy New York City cabbies.

Beam me up, Bill Gates

Lawrence York, lead portfolio analyst of the WWW Internet Fund in Lexington, Ky., shares Cook's beliefs that the Internet has more growth potential than an NBC sitcom with a cushy Thursday night time slot.

"The Internet industry 20 years down the road will encompass everybody," York forecasts. "The Internet's ability to do anything anywhere anytime is not really understood. My view is that right now we have a phone, a computer, a TV that will come together as one appliance ... kind of like Star Trek."

If you're interested in beaming your money into Internet sector funds, Munder's Cook does offer some words of caution. First, he insists that your portfolio be exposed to no more than five to 10 percent in the Internet sector. Otherwise, your investments are not diversified, and you are overexposing your nest egg to the possibility that Internet stocks might someday turn sour.

Second, he is weary of people buying his fund based on the fact that it was ranked among the handful of funds that beat the S&P 500 in 1998. A savvy investor should know that the Lexington Troika Russia Fund, which was the No. 1 performing fund of 1997, turned around and ranked dead last in performance in 1998, losing an ugly 83 percent, according to Business Week.

"Don't buy a fund based on price performance to date or since inception," Cook warns. "You have to be comfortable with the investment process. Buy my fund because you believe we'd do the best with your Internet investment."

-- Posted: Jan. 8, 1999

 

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