Hear That Pop? Bubble-Born Funds Are No-Hit Wonders

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The Big Screen: Funds' Own Not-So-Private Tech Mania

It's the morning after the Nasdaq party, and fund execs are blushing.

Eager to gobble up some of the record billions that gushed into tech and tech-heavy growth funds, they rolled out a slew of new offerings. Some took a page from Barnum's book, letting shareholders pick stocks, zeroing in on slivers of the tech sector and trying to emulate tony hedge funds. Today, many look gimmicky at best.

"I think a lot of these funds show fund companies got caught up in the [Nasdaq] swirl as much as fund investors did," says Phil Edwards, director of Standard & Poor's global funds research unit. "They purely reacted to consumer whim, not so much investment opportunity."

Let's look at some of these funds before mergers and liquidations sweep them all under the carpet. Like photos from a rowdy party, they might help us avoid the same missteps the next time around.

Shareholder-Run Funds

In the heady days of 1999, it seemed like anybody could run a fund and make money, so a handful of funds let investors try their hand.

The first was the StockJungle.com Community Intelligence fund, launched in 1999, where fund managers bought stocks from a pool of amateur picks posted to its Web site. The firm had the same arrangement with its Pure Play Internet and Market Leaders funds, and the IPS iFund and Marketocracy Masters 100 funds have followed with similar offerings this year.

But why trust your money to other hobbyists, and why pay a management fee if you're doing the legwork? Most of the folks pitching ideas on StockJungle.com's site didn't seem to buy the funds they were running. All three have been liquidated due to sagging assets and poor performance. It won't be surprising if the Marketocracy and IPS funds vanish, too.

Amateur Hour These funds let the average Joe decide what they should buy
Fund	YTD Return	Launched
IPS iFund	-47.8%*	2001
Marketocracy Masters 100	N/A	2001
StockJungle.com Community Intelligence	Liquidated	1999
StockJungle.com Market Leaders	Liquidated	1999
StockJungle.com Pure Play Internet	Liquidated	1999
S&P 500	-12	N/A
*Returns through Oct. 31. Source: Morningstar and ipsfunds.com.

Subsector Tech Funds

In the mad dash to get a piece of the tech-fund pie, fund marketers opted for thinner and thinner slices.

Last year, more than $42 billion gushed into tech funds, whose number has more than tripled to 152 since the end of 1998. In hopes of nabbing fat gains and inflows, fund shops started focusing on the hottest corners of the sector in a me-too spiral.

Suddenly there weren't just tech funds. There were Internet funds ((RIAFX Quote)RS Internet Age), foreign Internet funds ((MNIAX Quote)Munder International NetNet), business-to-business Net funds ((BTBAX Quote)Amerindo Internet B2B) and e-commerce funds ((TEFQX Quote)Firsthand E-Commerce).

Today, you can find funds focused on chip stocks (Semiconductor HOLDRS (SMH Quote)), software stocks (iShares Goldman Sachs Software Index (IGV Quote)), wireless stocks ((FWRLX Quote)Fidelity Select Wireless) and tech stocks in India (India Technology) and Asia ((MATFX Quote)Matthews Asian Technology). These sharply focused selections often seem more like stocks than funds, and consequently most have fallen harder than their more diversified peers.

Thin Slices These funds zeroed on a sliver of a sector, often painting themselves in corner
Technology
Fund	One-Year Return	Launched
Internet Infrastructure HOLDRs(IIH Quote)	-75.2%	2000
(BTBAX Quote)Amerindo Internet B2B	-66.2	2000
(TEFQX Quote)Firsthand E-Commerce	-55.5	1999
India Technology	-49.1*	2000
Internet Architecture HOLDRs(IAH Quote)	-48.5	2000
Semiconductor HOLDRs(SMH Quote)	-25.4%	2000
(MATFX Quote)Matthews Asian Technology	-23.4	1999
iShares Goldman Sachs Software Index(IGV Quote)	N/A	2001
Average Peer	-46.1	N/A
Communications
Fund	One-Year Return	Launched
Broadband HOLDRs(BDH Quote)	-64.8%	2000
(WIREX Quote)Wireless	-56.9	2000
(WCPIX Quote)ProFunds Ultra Wireless	-54.5	2000
(IWWDX Quote)Investec Wireless World	-43.5	2000
(FWRLX Quote)Fidelity Select Wireless	-36.8	2000
Average Peer	-41.8	N/A
*Return since Nov. 30, 2000. Source: Morningstar. Returns through Nov. 27.

'Open' Funds

These struck a blow for clearer portfolio disclosure, but not much else.

Funds are only required to disclose their holdings in semiannual shareholder reports, so investors often have little insight on precisely where their money is. The tech-heavy OpenFund, launched in 1999, took the opposite approach: Its management team posted and discussed the fund's portfolio and trades in real time on its Web site. OpenFund even hung a Webcam in its trading room. Some firms, like IPS Funds, had already made similar Web efforts, but none went this far.

Another take on the open idea was the Allied Owner's Action fund, launched last year. The fund would quietly buy up 5% of a sputtering company's shares and then post its position on its Web site, where shareholders could use message boards and email to pressure the company's management to clean up its act.

While both funds highlighted the helpfulness and sensibility of more frequent disclosure, neither had much success in making money or gathering assets. Both are cashed out.

Hedgelike Funds

Fund companies have also tried to give investors a taste of the tony hedge-fund world, typically seen by only millionaires and institutions.

Unlike mutual funds, hedge funds aren't strictly regulated. They have free rein to use risky strategies like shorting, or selling borrowed stock, and leverage, or investing borrowed money. Eager to please Main Street fund investors with champagne tastes, fund shops rolled out their own versions with varying degrees of success.

AIM Funds launched its (ASCOX Quote)Small-, (AMCOX Quote)Mid- and (LCPAX Quote)Large-Cap Opportunities funds, which can use leverage and shorting, and each has topped its average peer over the past year. But the (FORTX Quote)Paragon Dynamic Fortress fund has trailed 83% of its domestic hybrid peers. The (IADAX Quote)Invesco Advantage fund trails its average peer, too.

But these funds carry above-average expenses because of modest assets and elaborate strategies. Plus, how many investors really need things like the meVC Fisher Jurvetson fund (MVC Quote), a closed-end tech offering that focuses on the illiquid and extremely risky private company or venture capital market?

If anything, these far-out funds do prove the value of a diversified blend of cheap, consistent stock and bond funds. To find some, check out our Big Screen Archive. To see how they can fit together, check out our Model Portfolios.

Hedging for the Masses These funds use hedging techniques to lessen the blow of a falling market, often charging an arm and a leg
Fund	One-Year Return	Hedging Strategies	Launched
(LCPAX Quote)AIM Large-Cap Opportunities	-22.2%	Short Sales, Derivatives, Up to 33.3% Leverage, Nondiversified	1999
(IADAX Quote)Invesco Advantage	-19.7	Short Sales, Derivatives, Up to 33.3% Leverage, Nondiversified	2000
meVC Fisher Jurvetson*(MVC Quote)	-17	Up to 100% Venture Capital	2000
(FORTX Quote)Paragon Dynamic Fortress	-7.8	40% to 100% Short Sales, Nondiversified	2000
S&P 500	-13.8	N/A	N/A
*NAV return, not market return. Source: Morningstar and prospectuses. Returns through Nov. 27.

Looking for the next ill-conceived fund concept? Check out the spate of alternative energy funds, like the Turner New Energy & Power Technology, Munder Power Plus and Montgomery New Power funds, all launched this year amid California's energy crunch.

The more things change, the more they stay the same.