eBay's Might Isn't Enough to Carry Net Funds

Like a parent looking at one son's straight A's and another's F's, Net fund managers are probably shaking their heads, wondering why their little ones can't all be like eBay(EBAY).

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As most Net shops are buckling under the weight of ill-conceived business models, disappointing revenue and flagging online advertising, eBay kept outclassing its peers last week. The leading online auction firm, one of the few pure-play Net companies to make a profit, reported fourth-quarter results that topped analysts expectations by a country mile. eBay's shares gained 6.9% on Friday and are up more than 40% since Jan. 1. (For a detailed look at eBay's results check out this solid TSC Detox column, where Peter Eavis concludes the firm might actually merit a share price that's more than 120 times the next four quarters' estimated earnings.)

The eBay File

Operations

Business: Online auction site

2000 Revenue: $1.73 billion

2000 Earnings Per Share: 61 cents

2001 Estimated Earnings Growth: 29%

Stock Snapshot

52-Week Range: $26.75 - 127.50

Percentage Change from Jan. 1: 42.1%

Market Cap: $31.9 billion

P/E for Next Four Quarters: 126

Percentage of Large-Cap Growth Funds That Own Shares: 11.5%

Source: Morningstar, Baseline/Thomson Financial, and BulldogResearch.com.

The company's results reinforce its standing at the top of the Net stock class. But the chasm between eBay and its peers highlights how tough things have been for purist Net investors, whether they own Net funds or stocks. The company's announcement might boost some sagging Net funds, but it really just hammers home the idea that Net-only companies might change the world but they won't own it. Consequently, Net funds will have to broaden their definition of a Net stock to make money. The upshot for investors is that just as eBay has shown us that purely online businesses aren't all failures, Net funds have shown us that betting solely on pure-play Net firms wasn't a good long-term strategy.

As we've told you before, Net funds had a lousy year in 2000. Excluding the Potomac Internet/Short fund that gained more than 50% by betting on Net stocks to fall, the average Net fund lost more than half its value last year, according to Morningstar. Last year the TheStreet.com Internet Index fell a stunning 74% and only the (WWNPX)Kinetics Internet New Paradigm fund, best defined as a large-cap growth fund really, finished in the black with a 3.9% gain. Hardest hit was the (JAMFX)Ryan Jacob Internet fund that lost a breathtaking 79.1%.

Part of the problem is that aside from eBay, which unites buyers and sellers on its various sites around the world, few pure-play Net firms have overcome ill-conceived business models or can sidestep the potholes of a slowing economy. If the Net was supposed to be about skipping costly brick and mortar stores and titanic costly inventories, eBay is one of the Net kind that didn't fritter away all that money investors gave them.

As you might imagine, there are plenty of Net fund managers that are smitten with eBay, which broadened the scope of its services with overseas sites, an auto site and Half.com, a fixed-price site where sellers can't sell items for more than half their list price.

"We own eBay, and have since day one," says Alberto Vilar, manager of the (BTBAX)Amerindo Internet B2B fund in a TSC 10 Questions interview published today. "eBay continues to astound the pessimists as they continue to roll out new services. I think in the beginning, some people said, 'Oh, this is cute to get rid of the junk in my garage,' but they really are doing a lot more things right now, and I think they really dominate."

Vilar's business-to-business fund tops the list of funds with a big bet on eBay with 15.1% of the fund's assets sunk into the stock on Nov. 30. Funds typically have 4% or 5% of their assets in their top holding, but Vilar's B2B fund had more than 70% of its assets concentrated in its top 10 holdings at the end of November, according to Morningstar.

Funds With the Biggest Stake in eBay
Fund	Percentage of Assets in eBAY	YTD Return	2000 Return
(BTBAX)Amerindo Internet B2B	15.1%	11.9%	N/A
(JAMFX)Jacob Internet	4.6	4.7	-79.1
(EIFAX)Enterprise Internet A	4.4	11.6	-51.1
(DRGTX)Dresdner RCM Global Technology I	3.3	6.3	-14.3
(ALTFX)Alliance Technology A	3.3	11.3	-24.6
(AMCGX)Alger Mid Cap Growth B	3.2	-1.5	12.0
(PNETX)Potomac Internet Plus Inv	2.9	10.9	-77.3
(INGAX)ING Internet A	2.9	1.4	-69.2
(IDETX)IDEX JCC Growth A	2.8	10.7	-28.2
(JORNX)Janus Orion	2.7	12.7	N/A
Avg. Tech Fund	N/A	9.5	-33.1
Source: Morningstar. Performance through Jan. 19.

Of course, it hasn't been a halcyon ride for eBay. Last year the stock lost more than 47%, and over the past 12 months it's down almost 40%, according to Morningstar.

But it looks a lot healthier than other Net bellwethers. Over the past 12 months, shares of leading portal Yahoo!(YHOO) and leading online ad shop DoubleClick(DCLK) are both down more than 80%, according to Morningstar.

It's dreary returns like those that led the Monument Internet fund, 1999's top Internet fund, to broaden its focus beyond pure plays and change its name to the (MFITX)Monument Digital Technology fund. The fund fell nearly 57% last year, compared to a 33% loss for the average tech fund.

Last year it certainly paid for Net fund managers to broaden their horizons beyond pure plays. The cumulative top holdings of the three top Net funds in 2000, Kinetics Internet New Paradigm (3.9%), (GITAX)Goldman Sachs Internet Tollkeeper (-37.2%) and (WWWGX)Kinetics Internet Global Growth (-37.8%), are wireless shop Vodafone Airtouch(VOD), publishing firm Meredith(MDP) and European media company SBS Broadcasting(SBTV).

Those might not sound like Net stocks to you, but holding pure plays didn't work out too well. The five biggest Net funds, a list that includes pioneers like the broker-sold (MNNAX)Munder NetNet fund and the (WWWFX)Kinetics Internet fund, had cumulative top five holdings that look a lot more Net-centric. Problem is, these stocks are down 65% on average over the past 12 months, and these funds are down 50% on average over the last year.

Top Dogs These battered stocks are the top five cumulative holdings of the five biggest Net funds
Stock	% Net Assets	1-Year Return
VeriSign(VRSN)	2.6	-53.3%
Ariba(ARBA)	2.5	-58.6
CMGI(CMGI)	2.4	-94.1
Macromedia(MACR)	2	-62
Art Technology Group(ARTG)	2	-58.2
Returns through Jan. 18. Holdings as of most recent portfolio reports. Source: Morningstar.

The bottom line is that if you're a fund investor and a Net bull, you're probably better off choosing an aggressive growth fund that gives you exposure to Net stocks without betting the farm on them. You probably noticed the young (JORNX)Janus Orion fund on the list of funds with the biggest bets on eBay. Later this week, this column will troll the growth fund waters for those with solid performance and a taste for Net stocks.

If the Net is a powerful phenomenon, albeit without a completely obvious way for investors to profit from it, these might be the best Net funds out there -- though they don't have Net labels.

The Junk Pile

Let's have a moment of silence for the poor souls answering the customer service calls at Janus right now.

By now you've probably read or heard about Fortune's recent expose on Janus' past power struggles. The article has achieved a certain notoriety for airing the dirty laundry and maverick lifestyle of firm founder Tom Bailey, alleging that he maintains a more consistent interest in recreation and recreational drug use than in running the business. The takeaway is that Bailey may bear more than physical resemblance to iconoclastic radio personality Don Imus, but I don't think Janus shareholders should be rattled by these revelations.

No doubt you'll form your own opinion, and I could be wrong, but I find it hard to believe that Tom Bailey's colorful past and somewhat bizarre, hands-off style is justification to sell a Janus fund.

The reason: Bailey doesn't run any funds and the people that do run them appear to be a tightknit cabal, accustomed to doing their own thing. It seems as if Scott Schoelzel, manager of the (JAVLX)Janus Twenty fund, and other veteran Janus stock pickers -- not necessarily Tom Bailey -- are filling the leadership void created when chief investment officer Jim Craig left.

The article is certainly an intriguing and insightful look behind the scenes at a big, quiet company, and for that reason it will rightly sell a lot of magazines. But if you're looking for insight you can use as a shareholder of Janus funds, read the "Will the Janus Way Go Astray?" sidebar highlighting Janus funds' asset heft and why that might make eye-popping returns less likely in the future. It's a sentiment expressed last week in fund guru Ken Gregory's 10 Questions interview.

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