You'd think that
launching an Internet fund would be a giant vote for the sagging subsector's long-term growth prospects. But that conclusion might be about as clear as a Palm Beach ballot.
Here's the situation: Bob Pozen, pooh-bah of Fidelity's investment arm, publicly
eschewed the idea of launching an Internet fund in recent years. But on Sept. 21 the behemoth Boston fund shop
launched the Fidelity Select Networking & Infrastructure fund and the Fidelity Select Wireless fund with
young bucks at the helm. While many see this as confirmation that battered Net funds have a future, a closer look shows that if anything it may underscore the death of pure play dot-coms and show that a broader tech fund makes sense for even bravest Net-fund fans.
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Fidelity folks have said the networking fund, down 19% since its launch, isn't a thinly veiled Net fund, but its Web site says the fund primarily focuses on "companies that will provide the technology backbone of the Internet." The aversion to the Net label is probably a gesture to save face and distance themselves from the Net fund pack. It's understandable, since all Net funds are underwater for the year with an average 37% loss since Jan. 1, according to
. It's also a little silly -- the wireless fund is part of the firm's utilities sector fund lineup.
"There's no question that neither the networking fund, nor the wireless fund would exist today if the Net wasn't around. The reality is that the oxygen these funds breathe comes from the Net," says Jim Lowell, editor of the independent
newsletter. "To deny that they're Net funds is really just semantics."
He and others see the new funds as a signal that bonny days could be ahead for Net stocks. After all, Fidelity's tech-fund managers and analysts are some of the industry's best, and these funds wouldn't be rolling out if they didn't see blue skies ahead.
And there are reasons to buy that argument. Fido, manager of more than $660 billion in its stock and bond funds, does typically pay big bucks for the best and brightest analysts and managers. Also, you wouldn't think these funds are strictly the brainchildren of marketers, with Net funds'
cash flows and
performances dropping through the floor.
But there are good reasons to say Fidelity's grudging entrance into the Net fund game isn't a sign that good things are on the way. After all, Fidelity's just the latest of many Net-centric funds to launch, and a glut of funds focused on a sector or subsector is typically an ominous omen. A few weeks ago I pointed out that in the 1990s
no sector-fund category beat the S&P 500 the year after fund companies launched the most rookies in that category. This theme appears to be playing out in the Net pack.
Today there are some 30 Net funds, but 16 of them launched at the tail end of last year, just in time for this year's bloodbath.
Also, it's always hard to say a fund launch is clearly a bullish call in the short-term since fund companies can't just slap a fund together and roll it out. It typically takes two months or so for regulators to review a fund's paperwork before it can launch.
So instead of reading Fido's new networking fund as a good or bad sign for the Net sector, it's probably most helpful to see it as a barometer of where Net investing is today. Specifically, pros are fleeing pure play dot-coms in favor of the software and networking companies that help make all the Net's poorly monetized traffic happen. (For more details on the shifting sands in Net-land, check out our
package of stories on the topic.)
Fido's 40 Select sector funds often have a broad mandate so the Networking fund could invest in pure play dot-coms, but by all appearances that won't happen. Lowell says he can't picture Fido managers buying shares of many -- if any -- online-only shops. As an example, he imagines Fidelity managers' take on the folding
-- best known for the sock-puppet in its ads.
"Fidelity doesn't want these funds tarred with the dot-com brush, nor should they be. I can just see a Fido team of analysts on one side of the table and the sock-puppet on the other. The conversation would be two words: Get lost," Lowell says.
Mounting losses and sagging stock prices have led many other Net funds to develop a healthy dislike for the likes of even big bellwethers like Amazon.com. Just this month
Monument Internet fund manager Bob Grandhi announced that the fund, down 46.3% this year, had
given up on dot-com stocks. Consider that the
Goldman Sachs Internet Tollkeeper fund, one of the biggest and least-ravaged Net funds out there, had only about half its assets invested in tech stocks on June 30 -- the most recent data available on the fund's Web site.
A list of stocks with the biggest weighting among the 10 biggest Net funds, still includes dot-coms like
, but it's dominated by behind-the-scenes shops like software makers
Art Technology Group
Also on that list is networking giant
-- likely a holding in the networking portfolio. Given the ongoing facelift for the world's communications networks, playing the Net through networkers like
might sound safe. But steep valuations and
slowing spending on network equipment might make this a tough place to be too.
Consider that the
Merrill Lynch Internet Infrastructure HOLDRs
, an exchange-traded basket of Net infrastructure stocks, is down more than 35% since the third quarter ended on Sept. 29. Since the portfolio started trading on Feb. 25, it's down more than 61%, according to
Fidelity won't report the fund's holdings until year-end at the earliest, so we won't know for sure where the fund is putting its shareholders' money. That will be coveted information as widely touted as Fidelity's definition of the Net. I think this fund will be fun to watch, but if you're shopping for a tech fund you might be better off looking at a broader tech sector fund with a longer track record. If the Net is broadening, why buy a subsector fund? For some ideas, check out our most recent
What's the only sector fund category not to post a down year in the 1990s?
b. Financial Services
d. Health care
See answer below.
Fling the Cow
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Quiz Answer: Tech funds, but their streak will probably end this year. Since Jan. 1, the average tech fund is down 18.6%.