If the Internet is putting brokers out of business, it's making them a lot of money in the process. Most of the money pouring into Internet mutual funds this year is going through brokers' hands.
Munder NetNet fund, sold through brokers and carrying a 5.5% load on its A shares, took in $2.2 billion during the first half of 1999. That nearly quadrupled the $596 million that investors sent to
Kinetic Asset Management's
Internet fund, which sells shares directly to investors.
Munder NetNet took in 77% of all money investors sent into Internet funds during the first half of 1999, according to
Financial Research Corp.
Those flows put Munder NetNet on the doorstep of $3 billion in assets by the end of June, while the Internet fund was still on the sidewalk with just $750 million.
"When the Internet heated up this year, I sort of assumed that the bulk of the flows into Internet funds were coming from short-term and do-it-yourself traders," says Financial Research analyst Chris J. Brown. "
But the bulk of net flows into the Internet funds are coming through intermediaries."
The figures also contradict another commonly held belief that investors will chase the hottest fund around. The Internet fund was the best-performing fund in 1998 with a 196% return, double NetNet's 97.9% return, according to
Those performance trends have continued thus far in 1999. Year to date, the Internet fund (now
sans Ryan Jacob) is returning 86.5%, compared with NetNet's 46.5% return.
But Brown says it's still easy for brokers to push NetNet. After all, 46.5% ain't bad.
"And perhaps some of it is investors coming to the brokers and saying, 'Look at this great performance! Why wasn't I in this?' So it's not necessarily the brokers pushing," says Brown.
Mutual fund consultant Burton Greenwald points out that the Internet fund had trouble distributing its shares earlier this year. It actually
ran out of shares at one point.
"If you were looking for an Internet fund, the first one that came to mind was probably NetNet, so there's really no mystery to it," Greenwald says.
Still, there's irony in the fact that brokers are pushing Internet investing, which is supposed to be their death knell.
Maybe the best thing about the
funds before the death of their manager Charles Steadman in 1997 was the fact they were closed to new investors. After all, if you couldn't get into the funds, at least you couldn't suffer Steadman's notoriously bad returns.
Well, investors will once again have a chance to buy into one of these funds.
Ameritor Security Trust
-- formerly Steadman Associated Trust -- is expected to reopen to new investment next week.
"Since Mr. Steadman's death, we have a had a turnaround to the point where, even though the track record is very short, hopefully we can attract some new money into the fund," says Max Katcher, Steadman's successor.
Katcher is being modest. It's hard to imagine death looking more kindly on a mutual fund. Under Katcher's management, Security Trust returned 59.5% in 1998. That's quite a contrast to the negative 1.3% return the fund mustered in 1997, a banner year for most large-cap funds. This year, the fund is returning 17.8%.
One of its siblings, the
fund, has posted a similarly impressive 20.2% year-to-date performance on top of a 50.6% return in 1998. (This large-cap growth fund remains closed to new investors for now, though Katcher says he plans on reopening it eventually.)
The recent strong performance isn't necessarily a reason to buy into this revived fund family, of course. Security Trust is extremely concentrated, with only nine stocks in its portfolio. And not only do these funds have notoriously high expense ratios -- 7.34% for Security Trust and 6.48% for Investment -- their long-term returns are about as appealing as having a cinderblock dropped on your big toe.
Over 10 years, Security Trust and Investment are returning 6.3% and 1.6%, respectively.
But Katcher, who's been with the funds for more than 25 years, hopes he can put the past behind the funds -- for good. He says he's changed the philosophy of the firm and is employing a different investment strategy than his predecessor. As for the expense ratios, he expects them to be lower for the current fiscal year.
"Mr. Steadman was a good stock-picker; however, he didn't hold on to his positions. He churned. He sold off stocks that he should have held," Katcher says. "My own portfolio turnover percentage this year is only about 15% to 20%." (Morningstar, which only had data through June 1998, listed Security Trust's turnover as 161%.)
Many in the mutual fund industry, which gave the family the derisive name of the Deadman funds, were dumbstruck when Katcher decided to carry on with the funds after Steadman's death instead of just liquidating them.
"I felt I could do better with these funds than my predecessor, and I wanted to remove the tarnish from the name by making these funds once again attractive," Katcher says.
Let's Get Small
If 1998 was the year of the large-cap growth stock, 1999 might be shaping up to be one of small-cap value. And
Jones & Babson
wants to be there if it is.
The Kansas City, Mo.-based company has reopened the
Babson Enterprise fund to new investors. The fund, which has returned just 2.5% year to date, according to Morningstar, had been closed since January 1992.
"Strategically, reopening the Babson Enterprise fund after many years of closure was the right thing to do, considering the prospective shift to small-caps," said Rui Morura, director of marketing for the funds, in a press release. "We are ensuring our product line is poised for any major changes in the way people invest their money."
But before jumping at the temptation of the reopened fund, investors might want to take a look at
Babson Enterprise II, a small-cap growth fund. Its 6.5% return this year is nearly triple that of the original.
Maybe the clone is even better than the real thing. Can you say Dolly? Baaaaaa!