A year ago, a lot of ordinary, average mutual fund investors were clamoring to get into Internet funds.
Today, many of those same investors have sold out or are considering it.
Some of the Internet funds may soon go away, too.
It’s the latest example, and possibly the best, of what happens when investors focus more on fancy performance numbers than on the underlying substance of a fund.
Investors who flocked into Internet funds seemingly forgot two key bits of conventional wisdom: 1) Returns never tell the whole story. 2) Any fund that puts up great numbers one year is capable of losing money at an equally terrific clip the next.
It’s easy to be blinded by a sector that’s hotter than the sun and shining twice as brightly.
The industry’s first four Internet funds were mega-winners last year.
Monument Internet finished 1999 up 270 percent, with Kinetics Internet up 215 percent, Munder NetNet up 175 percent, and WWW.Internet gaining 170 percent.
But all four of those funds are off roughly 50 percent this year, ranked among the worst 1 percent of all stock funds.
Ryan Jacob, who managed Kinetics Internet to two unbelievable years in ’98 and ’99, started his own fund in January and drew in thousands of investors who bet his success would continue. His Jacob Internet fund is down about 75 percent since.
“When you see the fund industry start a whole bunch of new funds in an industry or sector, it’s probably just about the time that what has been hot is now ready to implode. This is probably the best example of it yet,” says Stephen M. Savage, editor of the No-Load Fund Analyst newsletter.
The question for investors is how to view Internet funds now.
Monument has renamed its Internet offering Monument Digital Technology.
In a press release it announced that “a narrow focus on dot-coms is no longer justified as the Internet now reaches into virtually all aspects of the business world.”
Cynics will translate that to mean “We’re down 50 percent and need to branch out or we’ll never do better,” but it also may be that the Internet fund critics who said the sector was too thin and volatile were right all along.
The market has saddled Internet funds with a bad set of circumstances.
In the Net’s boom times of ’98 and ’99, stocks were overvalued; just being an Internet company made it easy to sell shares, raise money and generate huge stock gains.
Today, Internet stocks are struggling to raise the money needed to grow and profit; the equity markets have stopped fawning over tech stocks that lack a solid balance sheet.
The result has been some big-name washouts among Internet stocks, with the likelihood that more are coming.
Concentrating narrowly on the Internet (or any other sector) creates the possibility of big returns, but it doesn’t look so great in light of the 2000 market downturn.
There is a hope-springs-eternal/declines-make-for-buying-opportunities crowd clinging to Internet stocks (and they could be right), but there’s also the potential for Internet funds to face the same fate as emerging markets funds did in the mid-1990s.
At first, emerging markets funds, which invested in stocks based in countries with developing economies, boasted huge returns. But once the fund industry created all sorts of new offerings and investors rushed in, those markets cratered.
“There was so much optimism, but investors didn’t fully understand the risks of a new asset class,” recalls Russ Kinnel, director of fund analysis at Morningstar Inc. “Emerging markets funds have been pretty much a loser ever since.”
Experts suggest that from now on Internet funds will be only for the bravest investors who want to make a highly concentrated bet on performance. Furthermore, they should remain no more than a small part of an investor’s portfolio.
“It takes a strong stomach to invest in this sector, even when things go well,” says fund manager Jacob. “If people have learned this year that they don’t have that stomach, then they need to invest in a way that’s more diversified, even if they still believe in the long-term potential of the Internet.”
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Chuck Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at jaffe@globe.com or at The Boston Globe, Box 2378, Boston, Mass. 02107-2378.
