A few good Net companies. That's all it took to put some long-suffering small-cap funds back in the black. Of the 660 small-company funds tracked by
, only 99 show positive returns over the last 12 months. Those at the top of the heap have embraced the Internet; those on the bottom have not. It's that simple.
"The Internet has been one of the few areas in small-caps that's been working," says Will Bales, one of three managers of the small-cap
Janus Venture fund. "And we've got a bunch of choices there these days," he says.
Here's a look at how two fund companies used Internet stocks to improve their small-cap funds' fortunes.
The $1.4 billion Venture fund, which had trailed its peers for several years, is a dramatic example of how Internet stocks can turn a small-cap laggard into a leader. After anemic 8% and 12.6% returns in 1996 and 1997, the fund outpaced the average small-cap fund by more than 23 percentage points in 1998.
Over the last 12 months the fund has returned 27.6% while the average small-cap fund has lost more than 15%, according to
. (The fund has been closed to new investors since 1991.)
Managers Jonathan Coleman, Jim Craig and Bales say that when shopping for new ideas they follow three basic themes: Internet business-to-business, infrastructure and niche players.
One recent addition is
, an Internet e-commerce facilitator for the computer industry that allows suppliers, resellers and users to buy and sell computer products online. "It will enable other PC companies to compete more effectively vs.
and other companies that have strong footholds," says Bales.
, which owns and operates industry-specific communities in which companies interact, is another business-to-business e-commerce play on which the Venture managers are betting. So is
, an Internet service provider and Web site host.
All three companies have gone public in the last year. Through Wednesday, Verio was up 197% since its May 12, 1998, initial public offering; VerticalNet was up 564% since its Feb. 11 IPO; pcOrder.com was up 240% since going public Feb. 25.
A favorite infrastructure play for the Venture fund is
, which enables consumers to pay bills electronically. "CheckFree is basically pioneering the electronic bill payment industry," says Coleman. "Initially they signed up banks to offer e-billing, but banks have been notoriously slow to adopt to the Web as a way to work with customers," Coleman says. "So, they've gone out and signed at least one unannounced portal company which is widely speculated to be
, which would give them immediate access to 40 million consumers."
(CheckFree will neither confirm nor deny the Yahoo! rumor. "As soon as the company with whom CheckFree has partnered is ready to roll out their service to the market, then we'll announce it publicly," says spokeswoman Laurinda Wilson.)
The e-biller is up 116% in the last 12 months.
The Venture team's favorite niche players include
, which builds Web sites that cater to women's interests, and
, owner of the Monster.com job site. Through Wednesday, iVillage was up more than 300% since going public March 18. TMP has gained 184% in the past 12 months.
When choosing Internet stocks, investors need to put aside conventional measures of value, like profits, and focus on market share, say the Venture managers. "We are at such an early stage in the industry that the number of people using the Internet is exploding," says Coleman. "Successful Web sites are experiencing exponential growth in readership," he says. "That's what you have to go on."
Van Wagoner Funds
Garrett Van Wagoner's Net strategy has helped propel his two small company funds to the top of the small-cap charts after a miserable 1997 and a rebuilding 1998. His $425 million
Emerging Growth fund ranks No. 2 among all small-cap funds in 12-month returns, up 74%; his $85 million Van Wagoner
Post Venture is No. 1 for the same period, up 102.5%.
Van Wagoner invests heavily in communications. "A theme in the portfolio is getting people connected," says Peter Kris, managing director at Van Wagoner. "We talk to a lot of telecom companies involved in the development of wider bandwidth and making efficient use of voice, data and video as a means of communication."
With so much of the emerging technology tied to the Internet, Kris says the firm is constantly bumping into companies involved in Internet strategies. "We end up learning what's happening in the Valley," he says.
Unlike the Janus managers -- whose fund's charter dictates they buy companies either at their IPO or in the after-market -- Van Wagoner has the flexibility to invest in Internet companies before they go public. And he often does. "It's not really a big part of our strategy," says Kris. "It's a product of our research."
Van Wagoner took stakes in high-speed equipment maker
and iVillage before they became public. Com21 is up 173% since its May 21, 1998, IPO.
, a wireless broadband access play, is yet another emerging firm on which Van Wagoner is betting. The San Jose-based company is targeting the automatic teller machine market with a product that would enable the machines to use wireless data transmission. The company is still private.
Buying Internet firms before they go public is a strategy that may seem risky to some small-cap managers. But getting in on the ground floor of fast-growing firms is what small-cap investing is all about. One thing's for sure: While others continue the Net-investing debate, those managers with a little Web bravado are making peers pale by comparison.