Funds Notebook: Triple-Digit Returns Aside, Net Funds Not All Alike

Also: Bill Miller's new fund launches and Magellan seeks more flexibilty.
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Internet funds' triple-digit 1999 returns might look equally tantalizing at first glance, but a closer look at the numbers shows that funds with "Internet" in their name aren't all the same.

Since Net stocks bottomed the first week of August, their performances have varied, highlighting key differences as the category matures.

"There's a tendency to think Net funds must all be the same, but the fact is, they all take differing paths," says Chris Traulsen, the analyst who follows many Internet funds for fund-tracker

Morningstar

.

The four oldest Internet funds, the $1 billion

(WWWFX) - Get Report

Internet, $1.8 billion

Munder

(MNNAX) - Get Report

NetNet, $89.2 million

Monument

(MFITX)

Internet and $70.1 million

(WWIFX)

WWW Internet funds, typically started out focusing on dot-coms and other pure-play stocks like

America Online

(AOL)

and

Yahoo!

(YHOO)

. (

Amerindo

(ATCHX)

Technology began as a tech fund but recently reclassified itself as a Net fund.)

Munder NetNet has always had a broad definition of an Internet stock, but over time, the rest of the "First Four" also have branched out. Now they also invest in companies that use the Net in their businesses, but aren't necessarily Internet companies per se.

While

Ryan Jacob

managed the Internet fund, for instance, he focused on pure-play Net stocks. Since his departure at the end of June, managers Peter Doyle and Steve Tuen have sold several of Jacob's holdings, citing sky-high valuations. In the meantime, they've shifted their focus to content providers like

Liberty Media

(LMG.A)

, their top holding, and networking/infrastructure companies like

Telephone & Data

(TDS) - Get Report

and

RCN

(RCNC)

.

It appears those moves haven't borne fruit yet. In the six months since Jacob departed, the fund lags its peers and the average technology fund, according to

Lipper

.

Munder NetNet has held retailers like

Gap

(GPS) - Get Report

, while WWW Internet has turned to multimedia content providers like

USA Networks

(USAI) - Get Report

and

Time Warner

(TWX)

, according to Traulsen.

Monument Internet has shifted its focus to companies that handle business-to-business Web transactions like

Ariba

(ARBA)

and

Commerce One

(CMRC)

, says manager Alexander Cheung.

Each of these funds have bets of various sizes on mainstream technology companies

Microsoft

(MSFT) - Get Report

,

Intel

(INTC) - Get Report

and

Sun Microsystems

(SUNW) - Get Report

, according to their most recent portfolio data.

The funds' performances and portfolios beg the question: What's a Net stock?

It "is largely in the eye of the beholder," says Ed Rosenbaum, director of research at fund-tracker

Lipper

.

In fact, managers could call "clicks-and-bricks" retailer

Wal-Mart

(WMT) - Get Report

a Net company, since it recently started a consumer Web site. They could also invest in industrial titans that use private intranets to manage inventory or transact with vendors, which would make virtually all of them Net companies.

The upshot for investors is that they should remember that as the Internet matures, many Net funds may lose their unique, pure-play status. Traulsen says the First Four Net funds are starting to look like run-of-the-mill communications or technology funds -- two categories where investors can find funds and managers with longer track records.

Investors should also remember that most Net funds posted the lion's share of their triple-digit returns when they had few assets, says Burt Greenwald, a mutual fund consultant in Philadelphia. The top-performing Net fund since Aug. 1 is

ING

(INGAX)

Internet, which only launched in July and has just $36.1 million in assets.

Older funds' size may make them less nimble and more likely to focus on large companies. More than $4 billion flowed into the funds in 1999, according to Boston fund-tracker

Financial Research

.

One concern investors don't have is choice. There are 16 funds in the Internet category, and most were launched in 1999. About a dozen more are waiting in the wings, according to Traulsen.

Jacob's new fund launched Dec. 13 after raising $92 million in a six-week subscription period through the fund's Web site. The fund's new ticker,

JAMFX

, will be effective Thursday.

Hopping On the Miller Bandwagon

Investors showed they think

Bill Miller's

sterling record on $13.2 billion

Legg Mason

(LMVTX) - Get Report

Value Trust is no fluke as they stuffed $170 million into his new

Opportunity Trust

fund since last Thursday, even though the firm hasn't even started marketing the fund yet.

Chalk up the response up to star power. Miller's Value Trust has beaten the

S&P 500

each calendar year since 1991. That earned him "1998 Domestic Manager of the Year" honors from Morningstar and comparisons with

Peter Lynch

. But the new fund may not look much like the flagship where he made his name.

Legg Mason Opportunity Trust is a go-anywhere fund; its prospectus gives Miller leeway to invest in domestic or foreign stocks of any valuation or size. Value Trust typically focuses on domestic large-cap stocks. The $2.5 billion

Special Investment Trust

, Miller's other fund, focuses mainly on domestic mid-cap stocks. Company officials say the new fund's broader scope could make it more aggressive than Miller's other offerings.

"It allows him to go wherever he finds value, but he's never run this kind of portfolio before," says Jennifer Murphy, chief operating officer of Legg Mason Fund Advisor.

Investors also might consider the young fund's steep expenses. Legg Mason will cap annual expenses at 1.99% through Dec. 31. The average domestic stock fund's expenses are 1.22%, according to Morningstar. Legg Mason Value's 1.69% expenses are above large-cap value funds' 1.33% average.

More Options For Magellan

Fidelity

soon will ask shareholders of the $105.9 billion

(FMAGX) - Get Report

Magellan fund to allow portfolio manager Robert Stansky to invest up to 25% of the giant fund's assets in one stock and own more than 10% of a company's shares.

On paper, the move, disclosed in a filing last week with the

Securities and Exchange Commission

, looks risky. But most Fidelity funds already have this allowance. Stansky probably will never take a 25% position in a company, but the move gives him more flexibility in managing the nation's largest fund.

Currently, Stansky can only commit 5% of the fund's assets to a single stock. If the stock appreciates from there, he can't purchase another share until it drops below the 5% weighting. These restrictions limit how much he can bet on stock picks that are working.

Stansky also can't own more than 10% of a company's outstanding shares. This essentially ensures he can't take a significant position in a small- or mid-cap stock since a 1% weighting in the Magellan portfolio represents a $100 million investment, says Jim Lowell, editor of independent newsletter

Fidelity Investor

.

Company officials say SEC rules prohibit them from commenting on the filing, but people familiar with the situation say Stansky probably will use the allowance to take 6% positions in his top four stocks.

"I suggest shareholders vote yes. It's a question of better enabling Stansky to keep or put his money where he thinks his best ideas are," says Lowell.

Proxies will be mailed to shareholders in February. Votes are due in April, according to the filing.

Century Club Expanded

TSC's

Century Club

, the list of funds with triple-digit 1999 returns, has been expanded to include international and global funds. That brings the total to nearly 170 funds. See the entire list

here.