Still Too Early to Find B2B-Only Mutual Funds

What are some mutual funds that represent the B2B sector?

-- Gene Fierke

Gene,

Finding a mutual fund that buys B2B stocks is easy.

Finding one that only buys B2B stocks is impossible.

Share your investing and mutual fund questions on the Dear Dagen board This scintillating subdivision of the Internet -- business-to-business commerce -- is still too new and too narrow to warrant B2B-only funds. (Some firms, like Fidelity, don't even offer Internet funds yet.)

Instead, investors clamoring for B2B should look among the likely buyers of these burgeoning tech stocks: Internet funds and aggressive-growth funds.

The B2B sub-sector started to develop its own identity around the middle of last year with two blazing initial public offerings: Ariba (ARBA) and Commerce One (CMRC).

Both companies sell software and build online networks that connect corporations with buyers and suppliers -- automating the buying and selling of goods on the Internet.

Any attraction to these stocks is understandable. Ariba is up 1,513% from its June IPO price. Commerce One has soared 2,177% since it went public in early July.

Forrester Research (FORR) estimates that businesses will buy $1.3 trillion of goods over the Internet by 2003, up from $109 billion last year and $43 billion in 1998.

However, B2B stocks, which are multiplying exponentially, can be hard to classify and hard to research. Outside of online networks like Ariba, you'll find names like middleware providers BEA Systems (BEAS) and Active Software (ASWX), VeriSign (VRSN), which sells authentication and security services, and names like Siebel Systems (SEBL), which provides customer-service software.

With online retailers like Amazon.com (AMZN), which sells goods to the general public, the average investor can at least look at the company's Web site to see what it sells and how it sells it. With B2B stocks, you can't easily see what these companies are selling or how their products fit into business-to-business commerce as a whole.

"It's much harder to get your arms around something that you can't see," says Cathy Baker, co-manager of the (RIAFX)RS Internet Age fund. "It's hard for all of us because B2B is new and it's changing really rapidly."

That complexity should give investors the perfect excuse to buy a mutual fund. You let the manager pick the stocks and you get diversification across many names.

The new RS Internet Age fund, managed by Baker and Jim Callinan, offers plenty of exposure to these stocks. Baker estimates that about 60% of the $160 million fund is in B2B stocks, if the group is broadly defined to include middleware, content providers, networking, application software and other companies. The portfolio has about 100 names, including BEA, Active Software, Aspect Development (ASDV), which makes content-management, search, and information-retrieval software, and bond trading network eSpeed (ESPD).

David Alger, manager of the (EIFAX)Enterprise Internet fund, also owns plenty of B2B.

Ariba was the fund's third-largest holding at the end of December. Vignette (VIGN), which provides content management software, was fourth. VeriSign was also in the top 10.

If you examine more diversified aggressive growth funds, you can also locate bushels of B2B, especially if you are looking into funds known for aggressive-growth investing.

And aggressive growth means PBHG.

Manager Quint Slattery estimates that 30% to 40% of his (PBNOX)PBHG New Opportunities fund is in direct and indirect plays on B2B. Although this fund is closed to new investors, you'll find many of the same names in (PBHEX)PBHG Select Equity, which he started running in November of last year. InfoSpace.com (INSP), a content provider, was the top holding in both of those funds at the end of the year. VeriSign was another top-10 holding for the funds.

If this area of the Internet space continues to grow as expected, you'll continue to see B2B stocks in Internet and aggressive growth funds in the future. However, these funds won't guarantee exposure to B2B stocks. Their directives are much broader.

If you want assurances that your money will be in B2B, you can consider buying a B2B unit investment trust. John Nuveen offers one, as does Nike Securities. (Both are called their e-Business portfolios.)

A UIT is a fixed portfolio of securities with a finite life that might run from 13 months to five years or longer. These static portfolios don't have managers who can move into newer, emerging names in the group. Plus, they come with some pretty hefty sales charges. Nuveen's two-year e-Business trust comes with a maximum sales charge of 4.5%.

By saying that you want to own B2B, you are really defining a small group of stocks, not a fund manager or an investment style. A manager's job is usually to determine the most favorable sectors of the market and the most favorable stocks in that sector.

If you must own this narrow area of the market, you may want to buy these stocks yourself.

For more B2B names, check out Cramer's B2B Rotisserie League .

Whatever you do, proceed with caution. The companies in this sector are young and unpredictable.

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