From Worst to First: Jacob Internet Moves to Cutting Edge of Disclosure
01/26/01 - 03:14 PM EST
The new year is a time for turning over a new leaf, and the (JAMFX Quote - Cramer on JAMFX - Stock Picks)Jacob Internet fund is doing just that.
Jan. 16 column? "I think it's a good thing," Jacob told me this week. "There needs to be more scrutiny in the way funds are looked at. Obviously, it's a much bigger business than it was five or 10 years ago, and fund companies should strive to do better." Jacob not only talks the talk, he walks the walk. First, he voluntarily updated his prospectus to include the fund's abysmal 2000 performance, even though the fund could legally omit this information until 2002. (My Jan. 16 column details how funds can pull this off.) While it's true that the Securities and Exchange Commission staff asked Jacob to include his 2000 performance in his prospectus, it did so only after Jacob already had committed to take this unprecedented step. As discussed below, you won't find another Internet fund that shows its 2000 performance in its prospectus. Jacob noted that other industry members had suggested that he start a new fund or merge his current fund out of existence. These are legal tricks commonly used by funds that want to erase poor performance and present a clean slate to investors. Jacob rejected these overtures, he said, "because to me it's a very unethical thing to do. It's my obligation to investors to improve things after our performance in 2000." Second, the updated version of Jacob Internet's online prospectus now includes one of the most forthright warnings that you'll find in a mutual fund filing: "Many [Internet-related] companies expect to incur significant operating losses for the foreseeable future, and may never be profitable." Third, Jacob took seriously criticisms of the overly prominent statement -- in view of Internet stocks' dramatic decline in 2000 -- on the front of his fund's brochure that he expected "the continuing evolution of the Internet to yield profitable investment opportunities for the discriminating investor." Again under no legal obligation, Jacob has pulled the brochure off his Web site and plans to revise it.Family Ties
Sensing an opening, I pressed Jacob on another issue: the classification of his uncle, Leonard Jacob, as an independent director of Jacob Internet. Rules adopted last month will require mutual funds to have a majority of directors who are not affiliated with the fund's adviser (see my Jan. 18 column for more details). The Jacob familial tie doesn't disqualify Leonard Jacob from being counted toward the independent majority. Although it would be more appropriate to treat Uncle Len as a nonindependent director, it's not legally required. When the new governance rules take effect, the fund could rely on Uncle Len's independent status to meet the majority minimum, or it could create a more aboveboard board by naming a new independent director. Although not required to do so, Jacob promised to recommend to the fund's directors that the fund add a new independent director. Jacob says he has worked hard to be upfront about his fund's performance and risks and to do right by shareholders. The steps he's taken suggest he means it. Indeed, the changes Jacob's already made set new standards for fund disclosure. The SEC should also take this opportunity to turn over a new leaf, and revise its disclosure rules to ensure that investors receive current information.But Everybody Does It
Jacob and his counsel, Michael O'Hare of Stradley Ronan Stevens & Young, also point out that some of the fund's questionable disclosure practices are standard in the industry. How right they are. A sampling of the online prospectuses for 14 Internet funds that were in business for all of 2000 shows a pattern of hiding the facts. Three weeks into 2001, not one prospectus included 2000's horrific performance results. If you're a savvy prospectus reader, you can find performance results for part of 2000. Let's start with funds that were formed before 1999. SEC rules require that they prominently display their stellar performance for that year in a bar chart near the front of the prospectus. In a footnote under the bar chart you'll find the fund's performance during the most-recent quarter before the fund filed its prospectus. Some funds ignore this requirement and provide year-to-date performance in the footnote. Either way, as you'll see from the first table below, the resulting disclosure can be perverse. The (MFITX Quote - Cramer on MFITX - Stock Picks)Monument Digital Technology prospectus boasts a 272% return in 1999 in its bar chart, under which a footnote discloses the fund's negative 10% return from July 1 through Sept. 30, 2000. The footnote skips over the fund's 0% and negative 22% return in the first and second quarters of 2000. Nor is there any mention of the fund's 57% decline for the year.| Disclosure Derby Internet funds formed before 1999 trumpet their '99 performance and downplay 2000 results in their current prospectuses | |||
| Fund | 1999 Return in Bar Chart | Partial 2000 Return in Footnote | Actual 2000 Return |
| (MFITX Quote - Cramer on MFITX - Stock Picks)Monument Digital Technology | 272% | -10%* | -57% |
| (ATCHX Quote - Cramer on ATCHX - Stock Picks)Amerindo Technology | 251 | -1** | -65 |
| (WWWFX Quote - Cramer on WWWFX - Stock Picks)Kinetics Internet | 217 | -28*** | -52 |
| (MNNAX Quote - Cramer on MNNAX - Stock Picks)Munder NetNet | 176 | -15**** | -54 |
| (WWIFX Quote - Cramer on WWIFX - Stock Picks)WWW Internet | 167 | -19**** | -57 |
| Source: SEC filings and Morningstar. *July 1 through Sept. 30. **Jan. 1 through March 31. ***Jan. 1 through June 30. ****Jan. 1 through Sept. 30. | |||
| Disclosure Derby II For Internet funds launched in 1999, the return you see in the current prospectus isn't necessarily what you got in 2000 | ||
| Fund | Return Listed in Financial Highlights | Actual 2000 Return |
| (GITAX Quote - Cramer on GITAX - Stock Picks)Goldman Sachs Internet Tollkeeper | 92% | -37% |
| (IINTX Quote - Cramer on IINTX - Stock Picks)Investec internet.com Index | 82 | -59 |
| (OPENX Quote - Cramer on OPENX - Stock Picks)MetaMarkets.com OpenFund | 72 | -42 |
| (INGAX Quote - Cramer on INGAX - Stock Picks)ING Internet | 41 | -69 |
| (SJPPX Quote - Cramer on SJPPX - Stock Picks)StockJungle.com Pure Play Internet | 24 | -67 |
| (RIAFX Quote - Cramer on RIAFX - Stock Picks)RS Internet Age | 22 | -46 |
| (TEFQX Quote - Cramer on TEFQX - Stock Picks)Firsthand E-Commerce | -2 | -55 |
| (EIFAX Quote - Cramer on EIFAX - Stock Picks)Enterprise Internet | -12 | -51 |
| (PNETX Quote - Cramer on PNETX - Stock Picks)Potomac Internet Plus | -15 | -77 |
| Source: SEC filings and Morningstar | ||
Phantom Fourth Quarter
Where Jacob Internet really puts other Internet funds to shame is in reporting fund performance on its Web site. The SEC requires that fund performance in fund ads -- which generally means any place other than the prospectus -- be current as of the most recent quarter. Jacob Internet again goes one step further, and updates its performance on a daily basis. One would expect an Internet fund to exploit the advantages the Internet offers to the full by posting real-time performance data. The (SJPPX Quote - Cramer on SJPPX - Stock Picks)StockJungle.com Pure Play Internet, (WWWFX Quote - Cramer on WWWFX - Stock Picks)Kinetics Internet, (WWIFX Quote - Cramer on WWIFX - Stock Picks)WWW Internet, (ETECX Quote - Cramer on ETECX - Stock Picks)E*Trade E-Commerce Index and (OPENX Quote - Cramer on OPENX - Stock Picks)MetaMarkets.com OpenFund funds, like Jacob Internet, all update their performance on a daily basis. Most other Internet fund sites, however, merely comply with SEC requirements by posting performance through the last quarter of 2000. But even that's better than many funds. The Web sites for (TEFQX Quote - Cramer on TEFQX - Stock Picks)Firsthand E-Commerce, (GITAX Quote - Cramer on GITAX - Stock Picks)Goldman Sachs Internet Tollkeeper, (IMLLX Quote - Cramer on IMLLX - Stock Picks)iMillennium, (INGAX Quote - Cramer on INGAX - Stock Picks)ING Internet and (RIAFX Quote - Cramer on RIAFX - Stock Picks)RS Internet Age funds all showed performance through Sept. 30, 2000, more than three weeks after these figures were required to be updated through the fourth quarter of 2000. Many Japan funds, which like Internet funds also experienced large fourth-quarter downturns, posted stale third-quarter performance on their Web sites as well.| The Lost Quarter These Internet and Japan funds' Web sites seem to have forgotten there was a fourth quarter last year | |
| Fund | 4Q 2000 Return |
| (INGAX Quote - Cramer on INGAX - Stock Picks)ING Internet | -53% |
| (IMLLX Quote - Cramer on IMLLX - Stock Picks)iMillennium | -48 |
| (TEFQX Quote - Cramer on TEFQX - Stock Picks)Firsthand E-Commerce | -45 |
| (RIAFX Quote - Cramer on RIAFX - Stock Picks)RS Internet Age | -40 |
| (GITAX Quote - Cramer on GITAX - Stock Picks)Goldman Sachs Internet Tollkeeper | -32 |
| (NJOAX Quote - Cramer on NJOAX - Stock Picks)Liberty Newport Japan Opportunities | -27 |
| (PRJPX Quote - Cramer on PRJPX - Stock Picks)T. Rowe Price Japan | -23 |
| (FJEAX Quote - Cramer on FJEAX - Stock Picks)Flag Investors Japanese | -18 |
| (GSJAX Quote - Cramer on GSJAX - Stock Picks)Goldman Sachs Japanese Equity | -18 |
| (CVJAX Quote - Cramer on CVJAX - Stock Picks)Chase Vista Japan | -17 |
| (JPNAX Quote - Cramer on JPNAX - Stock Picks)MSDW Japan | -17 |
| (DFJSX Quote - Cramer on DFJSX - Stock Picks)DFA Japanese Small Company | -15 |
| Source: Morningstar | |



