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Fund Subscription Periods Provide IPO-Like Thrill but Not the Gains

In fact, the biggest beneficiaries of subscription periods are the fund companies.

Looks like mutual fund investors can have initial public offering fever, too.

As a slew of IPOs this quarter have posted triple-digit gains right out of the gate, three mutual funds,

Hambrecht & Quist IPO and Emerging Company

,

PaineWebber Strategy

and

Jacob Internet

, each have raised mountains of money in IPO-like subscription offerings.

These smashing fund launches highlight how fund investors, typically thought of as sleepy long-term investors, are getting caught up in the market's urgency -- a significant psychological shift.

"You used to think, 'If I don't buy this fund now, I'll just buy it next week or next month.' But in today's market, if this is a good idea, you want to get in now," says Dave Krimm, chief marketing officer at

Hambrecht & Quist

(HQ)

.

But there's little real advantage to investors who buy fund shares on the first day because they have little or no chance to skyrocket like some flashy stock IPOs.

Still, subscription offerings can resemble stock IPOs. Directly or through an adviser, the fund company gives you a prospectus and a few weeks to reserve launch-day shares at a set price. If you want to invest, the fund company sells you shares at the end of the subscription period and uses your money to build a portfolio, sometimes closing to new investors in the process.

More common years ago, today, subscription offerings are typical for new funds with a strong marketing hook (a star manager or hot niche) and solid distribution. These three funds fit the bill.

Launched on the heels of high-profile IPOs such as

Sycamore Networks

(SCMR)

,

NaviSite

(NAVI) - Get Report

and

World Wrestling Federation

(WWFE)

, H&Q's IPO fund capitalized on investors' IPO fervor and the paucity of funds focusing on IPOs.

H&Q's reputation as the investment bank of Silicon Valley didn't hurt either, even though another company, San Francisco-based

Symphony Asset Management

, actually picks the stocks for the fund.

H&Q

paid

Charles Schwab

(SCH)

to promote the fund on its

Web site, and the broker delivered, raising $158 million on its own during the fund's subscription period.

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PaineWebber Strategy, subadvised by a subsidiary, Mitchell Hutchins, holds PaineWebber chief strategist Edward Kerschner's roughly 25 "highlighted stocks." The firm sold the fund strictly through its own 7,000 brokers, who've been pitching Kerschner's theme-oriented picks for years. PaineWebber says the $2.1 billion raised in a six-week subscription period is a record.

"You've got a large client base there that made money off his

Kerschner's picks and a superb marketing machine," says Burt Greenwald, a mutual fund consultant in Philadelphia.

Jacob Internet's marketing hooks blend the best of both worlds. Like the H&Q fund, it focuses on a hot sector, and it's got Gen-X's market sage in 30-year-old manager

Ryan Jacob

. Jacob's mug has graced many financial magazines since he managed the

(WWWFX) - Get Report

Internet fund to a 196% return and top ranking in 1998. He left the fund in late June.

Jacob raised $92 million via his firm's

Web site using an outside administrator, and online brokers raised $58 million in one day of subscription access on Monday, the day the fund began operations.

But, in reality, these offerings have more advantages for fund companies than for investors.

Subscription launches can help a fund company avoid ponying up $100,000 to $3 million in seed capital. This outlay can be a concern for fledgling firms like

Jacob Asset Management

.

But shareholders participating in a subscription are investing in a fund with no track record. Also, a subscription offering's implied urgency is a fallacy. Unlike stock IPOs, there's little chance a fund will charge up to levels it may never see again in its first few days.

"I think it

subscription falsely plays off the idea that if you don't get in on the ground floor, you've missed out," says Jim Folwell of

Cerulli Associates

, a Boston fund researcher.

Less sexy new funds from larger fund companies often launch through "incubation" -- where fund companies manage them internally with their own money so they'll have a track record when they launch.

But incubation isn't necessarily better. Incubator funds often boast unrealistically high returns because hot stocks -- particularly IPOs -- can have an outsize effect on a small, fledgling fund. In September, the

Securities and Exchange Commission

fined

Van Kampen Investment Advisory

for not disclosing the

(VGRAX) - Get Report

Van Kampen Growth fund's heavy reliance on IPOs to post outsize gains in incubation.

On the other hand, raising a lot of money during subscription periods can lead to lower expenses for investors because fixed costs, including trading costs, can be spread over a wider base of assets.

And occasionally, subscription periods can be your only chance to get into a fund. PaineWebber's fund closed at the end of its subscription period, and company officials haven't committed to a reopening date. H&Q's fund will close to new investors on Dec. 30 after just nine weeks of operation.

Which launch method is best for investors?

"It depends on the situation. If you're dealing with a manager that doesn't have experience running a strategy, you want to see a track record. But when you have a manager with demonstrated expertise in a strategy like Kerschner, you don't necessarily need to see a record for the fund," says Andrew Arnott, general director of retail product management with $31.7 billion

John Hancock Funds

in Boston.

One thing is certain, these subscription offerings' success will breed more. Industry observers say more are in the works.

H&Q's Krimm says the firm will probably roll out more funds next year, and a Schwab spokesman says the firm plans to manage more subscription offers in the future.