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Charles Schwab





Internet plays? Who knew?

If 1999 was the year of Internet stock, 2000 has been the year of Internet schlock, as the throngs of once-hot Web companies have taken a beating in the market. Witness the latest victim:



, whose stock skidded 43% Wednesday after the online retailer warned of lower-than-expected revenue.

Given this less-than-friendly atmosphere for pure-play Internet stocks, some mutual funds that specialize in Internet or other narrow strains of technology have taken a looser approach to high-tech investing. These funds have expanded their definition of the Web by looking at Old Economy companies that have embraced the Internet to improve existing businesses. The result: Internet funds with a broader philosophy have fared far better than their pure-play counterparts, and some of the hottest Net companies have an awful lot of bricks-and-mortar in their background.

"People are broadening their mandates so the Net funds are getting more general," says Christine Benz, senior analyst at


. "To the extent that people have de-emphasized the pure net play stocks, they have been better off. Some of the ones that have stuck with the

Internet retailers have been decimated."

Internet funds have shed an average of 19.4% so far this year, according to Morningstar, and some pure-play Internet funds have plummeted much deeper.

(JAMFX) - Get Report

Jacob Internet fund, for example, has dropped 54% year-to-date.

Meanwhile, two funds that have a broader interpretation of the Internet have help up better in the Web turmoil: The $1.2 billion

(GITAX) - Get Report

Goldman Sachs Internet Tollkeeper fund has lost 6.6% year to date, while the tiny $3 million

(WWNPX) - Get Report

Kinetics Internet New Paradigm fund is down 6.9%.

Started in October 1999, Internet Tollkeeper invests in companies its managers believe are positioned to benefit from the Internet, including those that provide access, content, services and infrastructure to Internet companies, as well as companies that use the Web for business.

As of Aug. 31, some of the fund's biggest holdings included media companies

Crown Castle International



Time Warner


, along with Web infrastructure provider

TST Recommends


(VRSN) - Get Report

and fiber optics maker


(GLW) - Get Report

. Other recent holdings include Schwab and

Sprint PCS Group



Tollkeeper senior portfolio manager David Schell says the fund's management team looks for high-growth companies that have strong franchises, especially those with dominant market share and pricing power. While Schell would not comment on specific companies in his portfolio, he said the fund believes in analyzing online companies exactly as it would their off-line counterparts.

"We need to be looking at companies and understanding their underlying fundamentals, not whatever the next hot thing is," says Schell.

That philosophy paid off during the Internet stock sell-off last spring. For the year ended June 14, Internet Tollkeeper lost 5% compared to the 20% average lost by other Internet funds, according to Morningstar.

Another self-proclaimed New Economy fund, the $32 million


MetaMarkets.com OpenFund counts

General Electric

(GE) - Get Report



(GPS) - Get Report



(WMT) - Get Report

and Enron among its holdings.

The OpenFund, which is managed live on the Internet, says on its Web site that it invests in growth companies that are "at the leading edge of technological, social and economic change." The fund has posted a 5% loss year-to-date, according to Morningstar.

"When you look at Old Economy companies, it's not just that they're using the Internet in an advantageous way, it's more technological innovations across the board," says MetaMarkets.com senior analyst Eli Neusner.

Neusner said the fund likes the way that Wal-Mart and Enron have leveraged technology to become more efficient and to improve their businesses. Enron, for example, has branched out into broadband services and also provides an online marketplace for trading in energy-related products and other commodities.

"It's an Old Economy company that's very much got its feet in the New Economy," Neusner says of Enron.

With many Internet stocks now free-falling, some analysts expect more Internet funds to branch out into other industries. The better-known funds espousing this philosophy are relatively young -- Internet Tollkeeper and the OpenFund are both about a year old, while Kinetics Internet New Paradigm, which counted Washington Post and media company

E.W. Scripps

(SSP) - Get Report

among its top picks at the end of July, was formed just last December.

"I suspect some of the funds that have been bloodied in the sell-off will take some steps to moderate the risk in the future," says Morningstar analyst Scott Cooley.

As originally published, this story contained an error. Please see

Corrections and Clarifications.