If the Internet is a revolution, the army of Net funds have been the casualties.
Of the more than 20 Internet funds launched before Jan. 1, none are above water for the year, according to
. While the Net-fund pack is suffering en masse, its returns range widely from a slim 0.6% loss for
Strong Internet to
Jacob Internet fund's jaw-dropping 51% freefall. The reason for the disparity: Varying definitions of a "Net stock."
Just a few years ago it was simpler. Net-fund managers focused on a thin band of "pure play" or business-to-consumer (B2C) shops like
. But the Net's inexorable expansion into the bricks-and-mortar world has clouded the picture a bit -- and where fund managers drew the tech subsector's boundaries pretty much decided how their funds performed this year. The below chart shows the year-to-date performance of Net funds launched before Jan. 1 where data was available; many small Net funds fly below the radar screen.
"Looking at the top five and bottom five it's pretty clear that the less 'pure play' Net companies like portals and dot-coms you owned, the better," says Morningstar senior analyst Chris Traulsen, a tech-fund specialist.
"Anyone who thought Net meant e-commerce got their ears torn off and anyone who thought Net meant Cisco did OK," says
, manager of the tech-heavy
Indeed, mammoth networker
was among the top-five holdings for this year's five top-performing Net funds, according to Morningstar. Other top picks include big companies that maintain networks or write software behind the scenes like
Jacob Internet's top-five holdings at the end of June, on the other hand, included smaller pure-play stocks like
, down 66.2%, 89.5% and 72.2%, respectively, this year.
In 1996, when the first four Net funds launched, Net stocks were sizzling firms that strictly did business on the Net, like America Online, Yahoo! and Amazon.com, down 26.2%, 51.4% and 42.8%, respectively, this year. But with so many bricks-and-mortar companies using Web technology to do business with consumers, corporate customers or vendors, the pure play Net-stock definition is looking about as cutting-edge as a
opens a Web site does it become a Net company? Are PC-makers Net companies? It's hard not to think any company isn't a Net company in one way or another," says Luskin.
Even within the tech realm, the Net-stock definition has undergone a seismic change.
"Four years ago if you said Net stock, people though Yahoo!, Lycos or Excite. Now if you say Net stock people think Cisco,
or Sun Microsystems," says Bob Turner, chief investment officer of
and co-manager of the
Turner B-to-B E-Commerce
fund, up 16.6% since its June 30 launch.
Rather than try to figure out which portals or retailers will win out in those competitive, low-margin businesses, he prefers networkers and other infrastructure companies that will have strong demand no matter which e-retailers, news sites or portals win out.
"Over the years, we've thought the best way to play the Internet has been with infrastructure companies like Cisco and also emerging companies like
. It's like they say, if you don't know which side will win the war, buy the guys that sell the weapons," he says.
The downside of sticking with smaller pure-play Net stocks this year is illustrated by some Net funds' performance. Ryan Jacob, manager of the Jacob Internet fund, racked up a chart-topping 198% return on the Internet fund in 1998 primarily by holding the pure-play Net stocks of the day. Now his old fund, which he left in June 1999, is down more than 32% so far this year and his fund is down more than 50%.
One manager says he had to accept the end of the Net's first go-go days when his fund launched at the start of this year.
"When we started our fund on Jan. 1, we felt like the first wave was over, the winners were AOL, Yahoo! and Amazon.com," says James Houlton, manager of the Strong Internet fund. His fund can invest in a company that derives at least half its revenue from the Net and that's led him to look beyond the big B2C names. That said, he thinks they might be an intriguing investment before the fourth quarter when the holiday season typically buoys the B2C sector.
There's no shortage of funds that will probably be faced with the same dilemma. By Traulsen's count there are now more than 41 Net funds out there and more on the way.
Though many new Net funds are focusing strictly on business-to-business Net stocks -- like the
Amerindo Internet B2B
and the new Turner B2B fund -- many think Net funds will start to look like generic tech funds as the Net becomes even more ubiquitous.
"I think you'll see Internet funds start acting a lot more like tech funds in general," says Turner. In a recent
interview he said that companies such as oil and natural-gas outfit
will be in his B2B fund.
With that in mind, some financial planners have steered their clients toward more diversified tech investments.
"Last year we successfully talked clients out of
Net funds. We satisfied their tech appetite by putting them in a broad tech fund like
T. Rowe Price Science & Technology," says Ron Roge, a financial adviser based in Bohemia, NY. The fund is down 2.9% so far this year, according to Morningstar.
Morningstar's Traulsen wonders if investors don't already have enough tech exposure since the average growth fund has
more than 40% of its assets invested in the sector. Given the
record number of tech funds that have launched over the last 18 months, Net funds might start disappearing like struggling dot-coms.
"I wouldn't be surprised if we saw some mergers and liquidations a year from now. If a fund company has a
generic tech fund, they might merge a Net fund into it," says Traulsen.
Even Turner admits, "There will probably be fewer Net funds out there" down the road. Strong words from a manager who just launched one.