10 Questions With Oakmark's Bill Nygren
The Big Screen: Funds' Own Not-So-Private Tech Mania
It's the morning after the
party, and fund execs are blushing.
Eager to gobble up some of the record billions that gushed into tech and tech-heavy growth funds, they rolled out a slew of new offerings. Some took a page from Barnum's book, letting shareholders pick stocks, zeroing in on slivers of the tech sector and trying to emulate tony hedge funds. Today, many look gimmicky at best.
"I think a lot of these funds show fund companies got caught up in the
Nasdaq swirl as much as fund investors did," says Phil Edwards, director of Standard & Poor's global funds research unit. "They purely reacted to consumer whim, not so much investment opportunity."
Let's look at some of these funds before mergers and liquidations sweep them all under the carpet. Like photos from a rowdy party, they might help us avoid the same missteps the next time around.
In the heady days of 1999, it seemed like anybody could run a fund and make money, so a handful of funds let investors try their hand.
The first was the
StockJungle.com Community Intelligence
fund, launched in 1999, where fund managers bought stocks from a pool of amateur picks posted to its Web site. The firm had the same arrangement with its
Pure Play Internet
funds, and the
Marketocracy Masters 100
funds have followed with similar offerings this year.
But why trust your money to other hobbyists, and why pay a management fee if you're doing the legwork? Most of the folks pitching ideas on StockJungle.com's site didn't seem to buy the funds they were running. All three have been liquidated due to sagging assets and poor performance. It won't be surprising if the Marketocracy and IPS funds vanish, too.
Subsector Tech Funds
In the mad dash to get a piece of the tech-fund pie, fund marketers opted for thinner and thinner slices.
Last year, more than $42 billion gushed into tech funds, whose number has more than tripled to 152 since the end of 1998. In hopes of nabbing fat gains and inflows, fund shops started focusing on the hottest corners of the sector in a me-too spiral.
Suddenly there weren't just tech funds. There were Internet funds (
RS Internet Age), foreign Internet funds (
Munder International NetNet), business-to-business Net funds (
Amerindo Internet B2B) and e-commerce funds (
Today, you can find funds focused on chip stocks (
), software stocks (
iShares Goldman Sachs Software Index
), wireless stocks (
Fidelity Select Wireless) and tech stocks in India (
) and Asia (
Matthews Asian Technology). These sharply focused selections often seem more like stocks than funds, and consequently most have fallen harder than their more diversified peers.
These struck a blow for clearer portfolio disclosure, but not much else.
Funds are only required to disclose their holdings in semiannual shareholder reports, so investors often have little insight on precisely where their money is. The tech-heavy
, launched in 1999, took the opposite approach: Its management team posted and discussed the fund's portfolio and trades in real time on its Web site. OpenFund even hung a Webcam in its trading room. Some firms, like
, had already made similar Web efforts, but none went this far.
Another take on the open idea was the
Allied Owner's Action
fund, launched last year. The fund would quietly buy up 5% of a sputtering company's shares and then post its position on its Web site, where shareholders could use message boards and email to pressure the company's management to clean up its act.
While both funds highlighted the helpfulness and sensibility of more frequent disclosure, neither had much success in making money or gathering assets. Both are cashed out.
Fund companies have also tried to give investors a taste of the tony hedge-fund world, typically seen by only millionaires and institutions.
Unlike mutual funds, hedge funds aren't strictly regulated. They have free rein to use risky strategies like shorting, or selling borrowed stock, and leverage, or investing borrowed money. Eager to please Main Street fund investors with champagne tastes, fund shops rolled out their own versions with varying degrees of success.
Large-Cap Opportunities funds, which can use leverage and shorting, and each has topped its average peer over the past year. But the
Paragon Dynamic Fortress fund has trailed 83% of its domestic hybrid peers. The
Invesco Advantage fund trails its average peer, too.
But these funds carry above-average expenses because of modest assets and elaborate strategies. Plus, how many investors really need things like the
meVC Fisher Jurvetson
, a closed-end tech offering that focuses on the illiquid and extremely risky private company or venture capital market?
If anything, these far-out funds do prove the value of a diversified blend of cheap, consistent stock and bond funds. To find some, check out our
Big Screen Archive. To see how they can fit together, check out our
Looking for the next ill-conceived fund concept? Check out the spate of alternative energy funds, like the
Turner New Energy & Power Technology
Munder Power Plus
Montgomery New Power
funds, all launched this year amid California's energy crunch.
The more things change, the more they stay the same.
Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
firstname.lastname@example.org, but he cannot give specific financial advice.