Diversification Is Not the Cushion Munder NetNet Had Hoped It Would Be

In the rough-and-tumble world of Internet mutual funds, (MNNAX)Munder NetNet was supposed to be a safer bet than most.

Michigan-based Munder has aggressively marketed the $2.3 billion NetNet as a "diversified" Internet fund, one that invests in bricks-and-mortar businesses that benefit from the Internet's rise as well as the pure-play Net companies.

But that conservative orientation has not paid off recently for investors in the three-year-old grandfather of Internet funds. While NetNet enjoyed only half the stratospheric returns of the purer-play (WWWFX)Internet fund in 1998, it lost as much or more as the Internet fund during down periods in the market.

For instance, from these funds' April 13 highs through their most recent lows on June 3, the Internet fund was down 26%; NetNet lost an almost identical 26.1%.

Both funds fared better than the pure-play (MFITX)Monument Internet fund, which lost 33.5%. But (WWIFX)WWW Internet fund, which also touts itself as a broadly diversified Internet fund, lost only 19.2%.

Diversification Disappoints Munder NetNet's blend of bricks and mortar with pure Net plays didn't provide a cushion as planned
WWIFX: WWW Internet	WWWFX: Internet
MNNAX: Munder NetNet	MFITX: Monument Internet

When you hold the returns of NetNet and the Internet fund up to the light during other down periods, the trend becomes more pronounced. During 1998's third quarter, when the market sunk badly, the Internet fund outperformed NetNet. It lost 9.8% that quarter while NetNet gave up 14.1%. The average science and technology fund, by comparison, lost 11% during the period, according to Lipper.

Moreover, from the beginning of 1998's summer selloff on July 17 to its bottom on Oct. 8, the two funds posted nearly identical losses of 39.6% for Internet and 37.2% for NetNet.

NetNet's portfolio includes Internet-enabled retailers like Gap (GPS) and Office Depot (ODP) as well as some companies with less-obvious Net connections, such as Cendant (CD) and Racing Champions (RACN), a maker of race-car collectibles. Why didn't this diversification provide a cushion during these down-market periods?

Brian Salerno, co-manager of the fund, says it did. He suggests that the Internet fund, managed by Ryan Jacob, didn't fall further because it has become less of a pure-play Internet investment as it has been forced to find new companies in which to invest its cash.

"They've moved toward what we're doing," Salerno says. "We haven't changed a bit." He noticed the similarity in returns himself and even had to explain them to his own marketing department, which had its own questions on the subject.

But the Internet fund's Jacob rejects any suggestion his fund is less than pure.

"You know, what's an Internet stock?" Jacob queries. "If you start getting into that definition, I think it's a little deceptive. Within the Internet sector, there are a variety of sub-sectors we invest in."

The Internet fund did start buying more telecommunications and general technology stocks in February. And Delia*s (DLIA), a catalog retailer of teen clothing that has embraced the Net, is among his top 25 holdings.

But it did some well-timed selling too. Internet fund reduced its exposure to Amazon.com (AMZN) and America Online (AOL) as both stocks tanked this spring.

AOL, which dropped 41.1% from April 13 to June 3, and Amazon.com, which fell 33.6% during the same period, are no longer among Internet fund's top 25 holdings (though they're still in its portfolio). In contrast, AOL was in NetNet's top 10 on March 31, according to Morningstar. Both stocks are still in NetNet's portfolio, according to its Web site.

Jacob crows about the fact that his highly concentrated fund -- he holds 30 to 35 stocks compared with NetNet's 90 -- fared as well as NetNet in the downturn.

"I hate to pat ourselves on the back, but it makes us look good," Jacob says.

On the up side, the Internet fund has returned a remarkable 92.8% this year, more than double NetNet's 42% return. During 1998, it returned 196.1%, while NetNet returned 97.9%.

Net Funds' Net
Fund	1998 return	Year-to-date return through 6/10
(WWWFX)Internet fund	196.1%	92.8%
(MNNAX)Munder NetNet	97.9	42
(WWIFX)WWW Internet	70.5	28.9
(MFITX)Mounment Internet	n.a.	82.4
Source: Morningstar

Salerno says the gap in returns will begin to narrow as the Internet fund broadens out. He suggests that while Internet fund was a truly pure Internet play last year when it had as little as $8 million in assets, it now can't put its $700 million to work solely in the Internet space.

"It's like for the first lap he was running 100 miles an hour and we were running 50," Salerno says. "So he got a lead. But in the second lap, we're both running 50."

But Jacob says the onslaught of new Internet stocks this year has made it easier to put his cash to work.

Internet funds, in general, started broadening out late last year, says Reuben G. Brewer, manager of mutual fund research at the Value Line Mutual Fund Survey.

"They were starting to look a lot more like technology funds with a bias toward the Internet," he says.

In the end, though, he says returns merely reflect the talent of a manager. And there, he tips his hat to Jacob.

"They made better bets," he says of the Internet fund. "And you could also say that the diversification aspect of the Munder NetNet didn't allow them to concentrate on the upside as much."

That's something NetNet investors already know and Internet fund investors can be smug about.

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