Internet Funds:
Wild, Zany,
Potentially Wicked
Internet Funds:
Wild, Zany,
Potentially Wicked
by Norman Fosback
Mutual Fund Forecaster
Equity
mutual funds are without question the most consistently reliable way for
the average investor to build capital over the long term. Notwithstanding
that fact, it is a very rare year when a fund any fund is able to double
its money. Last year, there were, remarkably, five. Two of them, ProFund
Ultra OTC and Potomac OTC Plus are highly leveraged portfolios.
The other three Internet Fund, Grand Prix, and Berkshire Capital
Growth & Value owed most of their success to big bets on Internet
stocks.
But
all that pales next to the current market. Thanks to the Internet bubble,
funds can now double in a matter of weeks. In less than four months, for
example, from the October 8 market low to the end of January, Internet fund
broke every industry record, soaring 268%. In the entire history of the
mutual fund industry, there's never been anything quite like it. Not in
the roaring `20s, nor in the soaring `60s, nor even in the great bull market
of the 1980s and 1990s. It may be crazy, it may not last, but you no longer
have to play the stock market to make a fortune just head straight tot he
Internet funds.
There
are four, one of which, Monument Internet (888-420-9950), has virtually
no history to speak of, having debuted only in November. The three other
main players are Internet Fund (888-386-3999), WWW Internet
(888-999-8331), and Munder NetNet (800-438-5789). Their gains since
the market low last October: +268%, +199%, and +175%, respectively.
At
this stage of the game, the Internet needs little introduction. It is generally
perceived on Wall Street to be the next great area of commerce. Nearly every
publicly-owned company in America has an Internet site (also called a "Web"
site) or is building one. It's an ideal medium for selling, and buying,
almost any product or service that does not have to be touched to be appreciated.
Even
the most successful of the Internet stocks, however, have not had to cope
with three great risks that they will all confront eventually. First, Wall
Street has been willing to value these stocks based on hopes and dreams,
and is completely forgiving of massive net losses derived in the pursuit
of product/service development and future growth. Assuredly, that will not
forever be the case. Second, the stocks have not had to cope with a bear
market. The worst they've seen was last year's modest correction, which
caused the three Internet funds then in operation to lose approximately
a third of their value. That modest dip is the tip of a looming iceberg.
Stocks of companies in a developmental stage have no fundamental underpinning
to support them in a bear market, and can easily lose half, three-fourths,
even 90% of their value (and those are the survivors). Third, and
most important from a long-term investing perspective, the market barriers
to entry for the Internet are remarkably thin. The business is not all capital
intensive; reduced to its essence, it's little more than a business plan
and a computer program, and the latter is remarkably easy to decode. In
fact, underlying every screen you see when you visit Web sites on your PC
is the very computer code that creates it. Press a couple of buttons and
it will all pop up, letting anyone use it as the base for producing a better
mousetrap. Since the Internet is so young, most creative entrepreneurs have
set out in different directions, trying to create and exploit a niche market.
But as time passes, the most successful sites will draw the eyes of envious
emulators, and competition will become intense.
Notwithstanding
the risks, there are still those giddy returns as Internet funds soar, buttressed
by flying initial public offerings of new Internet companies and billions
of dollars of market value added daily to the most popular Web stocks already
trading. When we last reviewed the group, we observed that Internet Fund
was, uniquely, focusing on classic pure-play Internet companies (it still
is), and that WWW Internet and, to a lesser extent, Munder NetNet made liberal
portfolio commitments to large companies like AT&T, Motorola, Intel,
and Microsoft who are developing major Internet presences, but whose total
business dwarfs their Internet operations. As a result, WWW Internet, in
particular, woefully lagged its competitors on the performance charts. Well,
it learned its lesson. Now, Internet Fund and WWW Internet are tracking
a nearly identical path as they hop aboard the greatest and purest Internet
plays. Munder NetNet has also sharpened its focus, but is still a touch
behind on the "swinging scale."
Internet
funds are the best way to play the boom. Individual stocks may soar more,
but the ones that do may also fall fastest without notice. Look for volatility
in the funds, too, but the risks will be mitigated by the expertise of the
portfolio managers and the funds' diversified portfolios. It's a wild, zany,
and prospectively wicked game. These funds are your best options.
Editor's Note: Norman Fosback is editor of the Mutual Fund Forecaster,
2200 SW 10th St., Deerfield Beach, FL 33442, 1 year, 12 issues, $100.
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