Funds Notebook: As Internet Fund Falters, Kinetics Rolls Out Health Fund

Kinetics Asset Management, adviser of the once-white-hot (WWWFX Quote)Internet fund, launched a second venture last week, the Medical fund. But the health fund's lack of a track record and the Internet fund's flagging third-quarter performance could cast a long shadow on Kinetics' new portfolio.

The no-load Medical fund focuses on stocks of cancer research and treatment companies as well as gene-therapy firms and medical-instrument makers. The fund's prospectus lists Kinetics Chief Strategist Peter Doyle as the day-to-day manager. But since his sector specialties are finance, utilities and real estate investment trusts, or REITs, the analytical heavy lifting will be done by co-manager Bruce Abel, a mechanical engineer with a background in nuclear physics, computer programming and industrial design.

The fund was not incubated -- managed with the adviser's money prior to launch -- so it has no performance record.

Investors looking to the Internet fund for an indication of Kinetics' stock-picking acumen might come away less than impressed. They'll see a fund that was outpaced by all its tech and Net fund peers in the third quarter, according to fund-tracker Lipper. For the quarter, its return ranks 120th among 120 tech funds and sixth of six Net funds.

Net Funds Cool Off
Fund	Third-Quarter Return	YTD Return	1-Year Return
(WWWFX Quote)Internet Fund	-11.6%	88.4%	279%
(MNNAX Quote)Munder NetNet	-3.3	53.4	161
(ATCHX Quote)Amerindo Technology	8.4	139	284
(MFITX Quote)Monument Internet	1.1	102	n.a.
ING Internet	7.5	n.a.	n.a.
Enterprise Internet	83	n.a.	n.a.
Lipper Technology Fund Category	6.9	36.1	89.3
Source: Lipper; figures as of 9/30/99.

Though the fund is still the top-returning tech fund over the past two years, as of Sept. 30, the track record was mostly built before former portfolio manager Ryan Jacob left the firm in June to start his own Internet-focused fund.

Since Jacob's departure, which roughly coincides with the fund's dip, Doyle and co-manager Steven Tuen have refocused the fund on content providers such as Liberty Media (LMG.A Quote), MarketWatch.com (MKTW Quote), About.com (BOUT Quote) and TheStreet.com(TSCM Quote), rather than Internet service providers such as America Online (AOL Quote). These moves haven't paid off yet, but Doyle isn't worried.

"I don't view it as underperformance. When you're wrong in this sector, 10% can go in a day, so I'm not concerned about last quarter. I'm focused on our record two years from now," Doyle says.

The Internet fund's hiccup hasn't discouraged prospective investors in the new fund. Doyle says the firm has received more than 12,000 requests for Medical fund prospectuses. Some investors have already bought shares by downloading prospectuses from the fund's Web site and overnighting checks. The fund currently has about $1 million in assets. Doyle expects $20 million in sales by Nov. 1.

That may be an ambitious goal, given the number of existing health funds with track records (61) and the category's weak, minus 3.7% year-to-date performance.

Doyle says Kinetics will launch more sector funds and a money-market fund around year-end. While some funds will be incubated, others will be launched without first testing performance.

ING Finds It Takes Money to Make Money

Despite an uncertain market and an unknown manager based in the Netherlands, the (INGAX Quote)ING Internet fund has raised $35 million in assets since its July 1 launch.

That could be a testament to unwavering investor attraction to Internet stocks, but it probably has much to do with the dealer reallowance being offered to 25 brokerage firms that sell the fund. Reallowance is an industry term for a boosted commission offered during a promotional period. Some industry consultants and investment advisers believe reallowance creates a conflict of interest by giving a broker incentive to sell a product because of its higher payout, rather than its suitability or quality. TSC examined the practice in an Aug. 31 story.

Sales figures for ING's fund rank in the middle of the Net fund pack for July and August. Jim Folwell, an analyst at Boston fund-researcher Cerulli Associates, credits the reallowance with helping the fund to a decent launch in a tough environment. "Twenty million [July and August sales] is pretty good for a niche fund launching in the summer while its sector is under pressure. I don't imagine many brokers felt too confident that Net stocks would go up, no matter how much they were paid to sell it," he says.

The fund has returned 7.5% through Sept. 30 and ranks in the top half of tech funds tracked by Lipper.

An IPO to Watch

Investors in Neuberger Berman funds should keep an eye on the firm's planned initial public offering, even if they have no intention of owning the stock

A successful IPO could provide the firm with currency -- stock and stock options -- to attract and keep talented investment staff, says Raphael Soifer, a financial services analyst at Brown Brothers Harriman in New York. "An IPO gives them a carrot to keep good people in-house."

On the other hand, an IPO can "lead a lot of top partners to cash out and leave. Also, a publicly owned company has more pressure to grow short-term profits, so don't expect any major fee reductions," Cerulli's Folwell says.

Most asset management stocks have not fared well this year, and analysts' reaction to Neuberger Berman's IPO, which could come as early as this week, has been mostly negative. Darkening the gloomy picture, Neuberger Berman's mutual fund business has lost more money to redemptions than it has gained in sales so far this year, according to Financial Research of Boston. Through August, the firm has experienced net redemptions of $2.5 billion -- not an insignificant drop for a firm that began the year with $17.5 billion in mutual fund assets.

"Nobody likes to bring an IPO in a down market," Soifer says. But "long term, I think the fund business is a good place to be since plenty of baby boomers have to invest for retirement."

High Hopes

Half of all fund owners bought their first mutual fund after 1990, according to a study by the Investment Company Institute, the mutual fund industry trade group. Since the 1990s have been a time of unprecedented stock returns, this might explain why many fund investors have come to expect above-average gains.