Net Outflows: What's Going to Happen to All Those Internet Funds?

Wednesday

Adam Lashinsky on the State of the Internet

Dan Colarusso on Internet Growth Projections

Katherine Hobson on E-tailers' Push for Profitability

Catherine Valenti on Ailing Internet Funds

Jamie Heller on Using the Net to Track Net Stocks

Thursday

Tracy Byrnes on the Frenzy Next Time

George Mannes on Self-Hating Dot-Coms

K.C. Swanson on Old Economy Winners

David Gaffen on Measuring the Internet Economy

Friday

Ian McDonald on 'Butterfly' Companies

Justin Lahart on Real Net Valuations

Joe Bousquin on Building the Perfect Net Company

A Dan Gross Opinion Piece: Were the Old Guys Right?

TSC Roundtable on Predicting Six-Month Winners

Roland Jones on The Last Days of Daytrading

Eric Gillin on Working for a Dot-Com

Is the wrecking ball that shattered the performance of Internet stocks this year now aiming for Internet funds?

The tech selloff that began last spring has wreaked havoc with Internet fund performance, sending many funds that saw triple-digit gains last year well into negative territory. Internet funds have lost an average of 25% since the beginning of this year, according to Morningstar, and investors haven't taken the carnage lying down.

Indeed, many investors have been running for the exits since the spring selloff. A look by Financial Research Corp. at 21 Internet funds shows that many of those funds have seen net outflows since May. The biggest toll so far came in July, when funds in the group had $183 million in net outflows, according to FRC. That's a far cry from the trend earlier this year, when in March the funds looked at showed as much as $2.5 billion of net inflows. Because flows into sector-specific mutual funds are a useful barometer of individual investor sentiment, it's crystal clear that a large swath of Main Street investors has given up the Net ghost.

Now, a large number of fund watchers expect many of the Internet funds that came to market in the past two years to go the way of the 8-track as investor cash dries up. The first sign that the other shoe was dropping came late last month, when the $3 million de Leon Internet 100, which has lost some 49% since the beginning of the year, announced plans to liquidate after finding it no longer economical to run the fund. Though sometimes painful for investors, liquidations of struggling funds are often in the best interests of beleaguered fund holders.

Other Internet funds are expected to throw in the towel. To stave off extinction, funds may also link up with other small funds -- prompting a wave of consolidation. Meanwhile, many Internet fund managers have been broadening their definition of what an Internet stock is to avoid the "pure play" Net stocks that have been crushed. Funds are already using the "Internet" title loosely and investing in companies that stand to benefit from the Net explosion, such as Internet infrastructure or wireless concerns.

Reversal of Fortunes Net flow figures to Internet funds have done quite a turnaround since the beginning of the year. Figures in millions of dollars.
Fund Name	Aug 31	July 31	June 30	May 31	April 30	March 31	Jan 31
Munder NetNet	-113.6	-100.3	-51.4	-49.7	307.0	805.9	603.8
Firsthand e-Commerce	-28.4	-22.0	-71.1	58.3	282.1	21.6	0.0
Amerindo Technology	-8.2	-5.8	-1.3	2.9	4.4	87.7	66.7
RS Internet Age	-7.8	-8.6	0.9	-11.3	9.3	67.1	39.0
Merrill Lynch Internet	-6.2	-3.9	15.0	19.9	-217.1	995.0	---
Monument Internet	-4.7	-3.5	-3.0	-132.9	3.7	-2.9	55.7
ING Internet	-3.3	-1.1	6.4	1.8	6.5	5.4	14.7
WWW Internet	-2.7	-1.6	-0.5	-1.1	-0.7	2.5	11.1
Jacob Internet	-2.6	-3.3	-1.1	0.3	-0.8	0.2	44.8
Guinness Flight Internet.com Index	-2.0	-1.5	-0.6	-0.9	-3.8	4.7	5.2
Kinetics Internet Global Growth	-0.7	-1.2	-0.2	-0.6	-1.8	9.3	2.5
Kinetics Internet Fund	14.0	-69.2	-2.0	-62.2	1.6	28.3	36.8
Kinetics Internet Emerging Growth	-0.3	-0.4	-0.3	0.0	-2.6	8.2	2.2
Kinetics Internet Infrastructure	-0.7	-0.4	0.2	0.1	0.4	9.5	3.1
Kinetics Internet New Paradigm	0.0	0.0	0.0	0.1	0.3	0.5	0.9
Strong Internet	-0.4	-0.9	0.5	2.3	8.3	30.3	37.8
Mercury Internet St	-0.1	0.0	-0.1	0.1	0.0	0.4	0.4
StockJungle.com Pure Play	0.1	-0.1	0.0	0.0	0.2	0.1	0.3
Enterprise Internet	2.3	-1.6	6.1	8.3	26.0	70.4	58.7
Baron iOpportunity	9.6	3.6	-48.7	44.9	0.9	33.0	----
Goldman Sachs Internet Tollkeeper	39.2	38.7	54.7	66.1	157.5	329.5	451.4
TOTAL	-116.5	-183.1	-96.7	-53.5	581.3	2,506.6	1,434.8
Source: Financial Resource Corp.

Indeed, (MFITX)Monument Internet fund -- one of the oldest Net funds -- announced today it is now the Monument Digital Technology fund. Its focus will expand beyond pure play Internet stocks to include a broader range of hardware and software shops that help consumers and Old Economy companies use the Web. The fund, which racked up a 273% gain in 1999, is down 39.6% this year.

"I think that, one, investors have more choices, and two, they've been painfully made more aware of the risks of these funds," says Morningstar analyst Christopher Traulsen. "That may discourage investors from putting more money into [Internet] funds than they may have done in the past."

With technology companies like Yahoo! (YHOO) and Palm (PALM) representing roughly 30% of the market capitalization of the S&P 500 , many planners say investors might be better off getting tech exposure from a diversified, large-cap growth fund.

"I would discourage a client from going into an Internet fund," says Debby E. Vinyard, certified financial planner with Vinyard Financial Planning & Associates in Marion, Ill. "But, if after discussing it for a few minutes and all the risks were explained, and they still wanted 5% to 10% of a portfolio in a pure Internet fund, I probably would get more particular than usual in seeing what companies were represented."

Because of the market's disillusionment with the financial prospects of pure-play Internet companies, many Internet fund skippers have already begun moving away from those companies to swim in broader tech waters. But the broader market's weakness so far this year has kept that strategy from bearing fruit.

Bob Grandhi, portfolio manager of the $96 million ( MFITX )Monument Internet Fund is one such manager. Since taking the fund's helm in May, Grandhi got rid of holdings like drkoop.com (KOOP) and Lycos (LCOS) in favor of infrastructure companies like business-to-business software developer Ariba (ARBA) and provider of Internet security systems Verisign (VRSN).

"By the time I came in, the fund was a pure Internet fund," says Grandhi. "I completely turned it over, and, more or less, it is mostly an Internet infrastructure fund."

Though he strongly believes that the money to be made in the Internet lies in the providers of the nuts-and-bolts technology of the medium, the fund's performance is struggling this year. The fund is off almost 35% year to date, a far cry from last year's whopping 273% gain.

On the much smaller end of the scale, Mike Amodeo, manager of the $1.8 million Investors Capital Internet Fund, has not been deterred by his fund's 16.8% slide since the beginning of the year.

Since taking over the barely 1-year-old fund in the second quarter, Amodeo has also looked for companies that stand to benefit from the rise of the Internet, such as Check Point Software Technologies (CHKP) and JDS Uniphase (JDSU).

"If you limit yourself to the dot-coms of the world, it's going to be exceedingly difficult to make any money in this environment," says Amodeo. Amodeo is also undaunted by his fund's minuscule size compared with other funds. He sticks by the adage that big is not necessarily beautiful in the mutual fund world and eschews the notion that his fund will have to consolidate to survive.

"Someone who has a time frame of three to five years should go with a smaller fund where the manager has more discretion in terms of the market and can pretty much pick and choose a smaller more concentrated portfolio," says Amodeo. "Even though I'm getting beaten up right now, I really feel that when the dust clears, I will be in a good position," he adds.

Diminishing Returns Year-to-date returns of Internet funds.
Munder NetNet	-31.3%
Firsthand e-Commerce	-35.6
Amerindo Technology	-39.8
RS Internet Age	-29.4
Merrill Lynch Internet	N/A
Monument Internet	-41.2
ING Internet	-49.3
WWW Internet	-36.1
Jacob Internet	-66.1
Guinness Flight Internet.com Index	-30.8
Kinetics Internet Global Growth	-29.9
Kinetics Internet Fund	-40.7
Kinetics Internet Emerging Growth	-49.1
Kinetics Internet Infrastructure	-31.4
Kinetics Internet New Paradigm	-5.5
Strong Internet	-13.2
StockJungle.com Pure Play	-46.7
Enterprise Internet	-23.5
Baron iOpportunity	-23.5
Goldman Sachs Internet Tollkeeper	-18.3
Source:Morningstar, company reports. Performance through Oct. 29.

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