Fund Investors Get Two New Internet Plays

That brings the number of Internet funds to six as the big mutual fund firms continue to avoid direct entry into the sector.
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Two more mutual funds are dotting their coms and jumping into the Internet-investing fray.

Unified Select Internet

fund (800-408-4682) and

Analysts internet.fund

(513-792-5400), both no-load funds, join the list of just four other open-end mutual funds targeting Internet stocks.

Like the existing Internet funds, the two newbies come from small, relatively unknown money-management firms. Meanwhile, the biggest fund companies continue to

shy away from Internet-specific funds.

Unified Select Internet began selling shares to the public on April 6. Analysts internet.fund will start selling shares on May 3. Here's a close-up look at each.

Unified Select Internet

Jack R. Orben, lead manager of Unified Select Internet, is an unlikely Net-stock jockey. At 60, he has 25 years of investment experience and can remember a time when there was still actual tape on Wall Street.

Though he's old enough to discuss the Nifty Fifty with firsthand knowledge, he talks of Internet stocks like a true believer.

"I don't think ... that tomorrow morning we wake up and -- even though it may be overvalued --

America Online

(AOL)

is out of business," he says.

AOL is one of the names in his portfolio, which also includes

Yahoo!

(YHOO)

,

Inktomi

(INKT)

,

CMGI

(CMGI)

and

CNet

(CNET) - Get Report

. While he has yet to completely fill out the portfolio, he says it will number 15 to 25 stocks.

Orben, of course, recognizes the high valuations of many Internet stocks. But those are the prices investors are willing to pay, he says, and he doesn't foresee a change in that sentiment. "I don't think the basic mood -- represented by people who buy Internet stocks and the instincts they operate on -- fundamentally is going to change. At least not in the near term."

Orben is chairman of

Fiduciary Counsel

in New York, a unit of Indianapolis-based

Unified Financial Services

, which has $1.6 billion in assets under management. He also is responsible for the operation of six index funds offered by Unified. Previously, he ran

Orben & Associates

, a consulting firm that advised bank trust departments.

The fund's prospectus allows it to operate as an Internet index fund if an "appropriate index" becomes available, but Orben says there are no plans to do so.

Unified Select's 0.35% expense ratio is extremely low for any type of fund, let alone one that invests in the Internet. The average expense ratio for all funds is 1.5%, and for science and technology funds it's 1.7%, according to

Lipper

. That makes Unified Select Internet the cheapest pure-play Internet fund, hands down.

Unified Financial Services also runs back-office administration for other mutual fund companies, and it won't ask investors in the Internet fund to pick up any of those costs. With the company's phone, computer and staffing systems already in place, Orben says he'll be able to keep costs for the new Internet fund to a minimum.

"We'll probably eat some

of the costs at the adviser level for a while, but not too long," Orben says. He also believes that established infrastructure should help Unified avoid some of the

problems other start-up Internet funds have had in meeting investor demand for customer service.

Another unique aspect of Unified Select Internet is its philanthropic "Voice" program. For investors maintaining a balance of $25,000 or more during a given quarter, Unified will donate an amount equal to 0.25% of the shareholder's balance to an institution of his or her choice. The donation comes out of Unified's own income and won't affect the fund's assets, according to its prospectus.

Analysts internet.fund

Lee Manzler, manager of the Analysts internet.fund, knows a little bit about risk. He's had a lot of time to think about it while throwing himself out of airplanes.

An avid skydiver, Manzler used to make money dropping the

Flying Elvises

out of his Cessna 206 airplane for air shows. He flew Hueys as a Marine helicopter pilot before that.

"It's good training -- pilot training and military training -- for investing," says Manzler, 38. "It teaches you discipline."

Discipline, of course, is a must-have for an Internet fund manager to deal with the sector's stomach-churning volatility. But Manzler, despite the high valuations of the field, calls himself a value investor. He acknowledges his brand of value investing might be a little different from the vanilla type, though.

"Value doesn't just have to be low

price-to-earnings ratios and low price-to-book ratios," he says. "What I'm trying to do is look at each company and look at their business plan, their model and their cash flow, and look at the growth rate of the industry they're in."

Manzler manages a stock fund and a fixed-income fund for

Equity Analysts

, the Internet fund's Cincinnati-based adviser, and has been in the investment business since 1990.

internet.fund will have about 30 companies in its portfolio initially, but that number could grow if Manzler needs to find more companies to put cash to work, he says.

That portfolio should include names like Yahoo!, America Online and

Cisco

(CSCO) - Get Report

. But he also wants to look at smaller companies because of the phenomenal growth rates investors can see in those areas.

"If there's a company and an industry that's using the Internet and the rest of its counterparts are not, I want to look at that company because I think they're going to have a good chance," Manzler says.

This fund has a few unique twists. While it believes in the future of Internet stocks, it also has the ability to sell them short and profit from their downfall. For an extra bonus, it will have the ability to deal in futures and options as well.

Manzler says he doesn't plan on shorting stocks -- the fund's prospectus allows for short sales to make up no more than 5% of the portfolio -- but he wants to give himself the option if he sees an opportunity to employ it.

"If we saw a company that was super-overvalued, I guess we could theoretically look at shorting it," Manzler says. "But my philosophy is not in shorting, so that won't be a big part of it. This is a buy-and-hold fund."

The ability to use futures options will allow Manzler to manage cash flow if he has more money than he can put to work right away. This method is often used by index funds, including the

(VFINX) - Get Report

Vanguard Index 500 fund, to put new money to work immediately upon receiving it.

Having that option might be good if Manzler's fund attracts assets on the same scale as his predecessors have. With just $60 million under management, Equity Analysts is hardly a giant in the world of funds.

"We've got four people that work in my marketing department. We are small. If we had 1,000 phone calls a day, we would be in trouble," Manzler says.

Analysts internet.fund's expense ratio is 3%, one of the highest among the Internet funds. But it does come load-free, and its expense ratio decreases as assets grow -- it bottoms out at 1.75% if assets hit $100 million, according to the prospectus.