Dear Dagen: Untested Funds Crowd Onto Internet Bandwagon

The last couple of weeks have been a particularly brutal for technology stocks. Since July 16, the Nasdaq Composite has fallen 6.5%. A number of once-highflying stocks are well off their recent highs, including Amazon.com (AMZN Quote), down 41.3% since the end of April, and eBay (EBAY Quote), down 52.2% during the same period.

Ever since a shake-up in the sector in April, investors been wary, particularly of Internet stocks. Asset flows into the four largest Internet funds slowed dramatically, from $1.25 billion in April to $253.1 million in June, according to Financial Research.

This turmoil hasn't dissuaded fund firms from launching a handful of new Internet funds. The Unified Select Internet fund, which opened in April, has taken in $1.4 million. The Analysts internet.fund, which went live in early May, has raised about $1 million. Two other funds were launched earlier this month and at least five others are planning to begin selling shares before the end of the year.

Double Net The number of pure-play Internet funds has doubled since April.
Fund	Inception	Assets	Year-to-date return
(MNNAX Quote)Munder NetNet	August 19, 1996	$2.96 billion	45.1%
(WWWFX Quote)Internet Fund	November 6, 1996	747.9 million	85.1
(MFITX Quote)Monument Internet	November 4, 1998	47.8 million	82.1
(WWIFX Quote)WWW Internet	August 1, 1996	33.2 million	32.4
Unified Select Internet	April 14	1.4 million	n.a.
Analysts internet.fund	May 4	1 million	n.a.
ING Internet	July 1	15 million	n.a.
Enterprise Internet	July 1	18 million	64.7*
*Since July 1. Source: Financial Research Corp., Lipper, the funds.

Investors have taken earlier pullbacks in Internet stocks as buying opportunities. And maybe that's the case here. But that doesn't mean you should throw your money at these untested new Internet funds.

None have track records, and most are not backed by major companies. Only a few have managers with experience investing in the sector. And basic information on some of the funds is hard to find.

The manager of the Unified Select fund, Jack Orben, runs six index funds. That doesn't tell you much about stock-picking ability. As for internet.fund, it is managed by Lee Manzler, whose five-year annualized return at the Analysts Stock fund is 15.8% through the end of June and ranked 363 among 399 growth funds tracked by Lipper.

The ING Internet fund, which opened on July 1, already has taken in $15 million in assets. It's part of the large Dutch financial services company, ING Group. (This load fund will close when assets hit $500 million.)

Still, little can be uncovered about the fund's manager, Guy Uding. He does manage another fund at ING, the (IITAX Quote)Global Information Technology fund. However, that fund only opened in December of last year. It's up 16% for the year though July 26, ranking 43 of 52 funds in its peer group, according to Lipper.

Stein Roe Mutual Funds will come out with an Internet fund later this year. But two of the managers who were going to run it, Steve Salopek and Eric Maddix, recently left the firm and the manager lineup is still being decided.

Ryan Jacob, the former manager of the Internet fund, will launch his own fund in the near future. Jacob has a short but impressive track record as a fund manager, and his new fund will be worth considering. But it remains to be seen how Jacob's stock picking would fare in a prolonged downturn.

At least three planned Internet funds are avoiding the question of active management altogether. At the end of this week, Investec Guinness Flight will launch a fund based on the ISDEX, a 50-stock index maintained by internet.com (INTM Quote). Other index funds are planned by E*Trade (EGRP Quote) and Internet 100 Advisors, a small, Arlington, Va., firm.

The people behind the new actively managed Net funds are asking you to take their word their managers have some special insight into picking Internet stocks. With the possible exception of Jacob, they have little to show in the way of proof. As for the Internet index funds, they may not be the right vehicle in this sector, where the skills of a smart stock picker could make all the difference.

There is one new entry, however, that may be worth considering. Enterprise Internet fund, which also launched on July 1, is managed by a firm with a long-standing, easily researched record in aggressive-growth investing.

This $18 million load fund (4.75% on A shares) is subadvised by Fred Alger Management in New York. Founded in 1964, the firm has experience investing in technology stocks. (David Alger, the firm's chief executive, wrote an April 26 editorial for The Wall Street Journal touting the potential of Internet investing.)

Performance among Alger's small stable of funds has been solid. The (ACAPX Quote)Alger Capital Appreciation fund, for example, has a five-year average annual return of 36% compared with 26.8% for the (VFINX Quote)Vanguard 500 Index fund.

Simply, this firm's style fits the sector.

As for the rest, one of the managers may turn out to be the next John Neff. But don't believe that seeing a manager's name in the newspaper means he knows Internet metrics from rhubarb.

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