While Internet Fund sizzles, manager remains wary

by Andrew Leckey

Ryan Jacob is a modest, businesslike 29-year-old. Whenever I've interviewed him for this column or on television, he discusses his investment strategy in a clam manner devoid of hyperbole.
The only thing is, he happens to be standing on top of a volcano right now.
The Internet Fund, which Jacob has managed for the past year, turned in a sizzling gain of just over 93 percent in the first quarter of 1999, coming on top of last year's 196 percent return.
Both results ranked a red-hot No. 1 among all stock mutual funds.
When Jacob earlier this year discussed last year's results, he'd been cautious about the likelihood of continuing at the same breakneck pace. That careful approach led to more success in a field in which a correction often seems to be lurking just around the corner.
"We were really concerned in late December and early January when Internet stock prices had gotten head of themselves, so we built our cash position to more than 30 percent of the fund," Jacob explained, making high-flying Internet investing sound like a conservative pursuit. "this enabled us to buy after prices came down a great deal."
As is often the case, good fortune went hand-in-hand with stockpicking.
Several Internet companies among the fund's larger holdings were acquired at a significant premium by rival firms during the quarter. GeoCities, its stock up 228 percent on the year, was bought by Yahoo! Inc. Meanwhile, Excite Inc., up 233 percent, was bought by At Home Corp. Frontier Corp., up 53 percent, was acquired by Global Crossing Ltd.
Oh, and don't forget that portfolio holding Yahoo! itself was up 42 percent in the quarter, At Home up 112 percent and Global Crossing up 105 percent. Yet another impressive performer, DoubleClick Inc., was up 300 percent, while CMB Information Services Inc. was up 244 percent and Ebay up 72 percent.
"Even though many companies we own don't have positive earnings, more names we hold will break the barrier into profitability this year," predicted Jacob. "Underlying fundamentals surprisingly have been consistently strong, so I've become more comfortable with some of the dramatic price movements we've seen."
It's little wonder assets of The Internet Fund ballooned from $200,000 early last year to more than $270 million today. Started up in 1997 in North Babylon,. NY, by a Russian immigrant, a former school superintendent and a money manager the fund was recently sold to New York City investment advisory firm LePercq, de Neuflize & Co. for an undisclosed sum.
Jacob, who'd tracked IPOs at Horizon Asset management before coming on board The Internet Fund, will continue to manage it under its new owners. And the Internet craze will continue to be a turbulent voyage into uncharted waters.
"We went through a severe correction last summer and early fall, with close to a 50 percent drop, but came back even stronger," recalled Jacob. "This is a high-risk, high-return, volatile sector and fund, so we hope to compensate investors for this risk by generating superior returns."
While the average general equity fund rose less than 1 percent in the first quarter, Internet-related companies boosted science and technology funds to a 17 percent average increase, according to the Lipper Analytical Services fund-tracking firm. Yet, there remains concern that Internet investing is a bubble waiting to be burst.
"Mob psychology is human nature, and trading activity picks up as prices go higher, which does make you wonder," acknowledged Alexander Cheung, portfolio Manager of Monument Internet Fund, close behind Jacob's fund with a 91.86 percent quarterly gain. "I won't chase any stock at a price level I don't like and we haven't participated in some IPOs for that reason."
Cheung has emphasized companies that sell Internet-related computers, routers, hubs and software. Software firms Real Networks Inc., up 240 percent in the quarter, and Netgravity Inc., up 147 percent, were big winners for his fund, along with content provider C/Net Inc., up 236 percent.
"The standard valuation method for stocks that we learned in business school doesn't apply to an explosion like this because the Internet is on a par with the automobile, electricity and the railroads," contends Alberto Vilar, co-manager with Gary Tanaka of the Amerindo Technology Fund, up 66.72 percent to notch third place. "You must look at factors such as buying patterns, reach, new subscribers and gross margins."
Yahoo!, Ebay and a 63 percent gain by Amazon.com boosted his quarterly returns. A 10 to 20 percent correction in Internet stocks would be healthy because it would "scare a lot of people" and put those shares into "better hands," Vilar believes. By that, he means hands that represent less short-term faddish investing.
Overall in the first quarter, growth funds outperformed stumbling small-cap funds, Lipper found. Solid gains were posted by long-downtrodden Japanese and Latin American funds.
Top-performing stock funds in the first quarter of 1999, according to Lipper, were:

©1999 Tribune Media Services, Inc.

Q&A

Gillette Still Clipping Along

Q. My father bought shares of Gillette Co. in the 1930s. During World War II, when it supplied razors to the government, the stock mushroomed. It is now about two-thirds of my portfolio. I'm retired and have a comfortable income. Dividends are reinvested. I'm concerned that the stock isn't keeping pace with other growth companies, especially high-tech. What's your opinion of it? P.P., via the Internet

A. You're not the only one who's disappointed. After turning in flat sales and profits last year due to the overseas economic downturn and a slippage in battery sales, this giant consumer products firm went so far as to cut the cash bonus of its top executives.
Nonetheless, every day an impressive 1.2 billion people around the world use one more Gillette products, with foreign sales accounting for about 63 percent of overall sales. Gillette's flashy new triple-bladed Mach3 razor managed to rescue its fourth-quarter results. Management now expects a return to 15 to 20 percent earnings per share growth in the second half of this year.
The consensus recommendation on the stock of Gillette from the analysts on Wall Street who track it is currently a weak "buy," according to the Boston-based First Call Corp. research firm. Reflective of conflicting opinions, that includes five "strong buys," six "buys," four "holds" and one "strong sell."
Its projected five-year annualized earnings growth rate is 15 percent. To improve its future, Gillette initiated a new management structure and realigned its worldwide manufacturing, including the closing of a number of factories.
Gillette produces Sensor and Mach3 razors and blades; toiletries such as Right Guard and Soft & Dri; cosmetics; paper Mate, Parker and Liquid Paper stationery products; Braun electric shavers and small household appliances; and hair and oral care products. Seeking to improve battery sales, it recently announced 20 percent longer life in its year-old Duracell Ultra line through new technology.
Though you can't expect Gillette to equal the high-tech industry's returns (or, on the plus side, its volatility either), there are patient believers in its long-term prospects once overseas economies perk up. Warren Buffett's Berkshire Hathaway owned 8.65 percent of the outstanding shares at the end of last year and the stock's biggest holders among mutual funds are Fidelity Magellan, Fidelity Contrafund, Vanguard 500 Index and American Century Ultra.
Chairman and chief executive Alfred Zeien retired on April 15th, replaced by president and chief operating officer Michael Hawley.

Colonial Small Cap Value Fund
A Middle-of-the-Road Performer

Q. I hold shares of Colonial Small Cap Value Fund and am dismayed to see it is performing near the bottom of its class. I have a 15-year time horizon for this money that's in a company plan. Should I switch to a growth fund? S.C., Burbank, CA

A. Despite its rather specific name, this fund already mixes value with some growth and roughly follows the Russell 2000 index. Its difficulties are those that have been common to many funds taking a small-cap approach, and won't be overcome until that market segment makes a solid comeback. It probably makes sense as part of a long-term investment strategy in conjunction with other holdings.
As you've noted, the $790 million Colonial Small Cap Value fund suffered a 23 percent decline over the past 2 months, placing it in the lowest 15 percent of small cap funds that blend growth and value. Its three-year annualized return of 5 percent ranks in the lowest quartile of its group.
"This fund would do best in a market environment that was robust for small-caps in general, with interest rates declining and people very optimistic about economic conditions," explained Justin Craib-Cox, equity fund analyst with the Morningstar Mutual Funds investment advisory. "That would give smaller businesses good access to cheap capital."
Compared to other small cap funds over the long haul, the fund's performance is middle-of-the-road, Craib-Cox said. Its largest emphasis areas are industrial cyclicals, services, technology, financials and health, with the companies it holds having a median market cap of $783 million. Top holdings among its 170 stock names are Ames Department Stores, Furniture Brand International Valassis Communications, Qlogic Corp., CEC Entertainment, Universal Corp. Holding, Fremont General Corp., Semtech, Granite Construction and Medicis Pharmaceutical.
Requiring a $1,000 minimum initial investment, the fund's "A" shares require a 5.75 percent "load" (initial sales charge), "B" shares have a back-end load and "C" shares have a level load.

Holding Time for Tax Records

Q. How long should I hold onto my past income tax records. H.W., Skokie, IL

A. The statute of limitations for examining a tax return is three years from the time that you file the return, or the due dates, whichever is later. So it makes sense to hold onto your return and underlying documentation at least for that length of time.
"There is a special statute that says that if you omitted more than 24 percent of your income, there's a six-year statute of limitations," added Martin Nissenbaum, national director of personal income tax planning for Ernst & Young in New York. "So, if there is some question about whether or not you should have included some income or not, you'd want to hang onto your records six years, but that's really an unusual situation." In the case of property that you purchased and may want to sell at some future date, keep track of all documentation indefinitely, Nissenbaum said. Meanwhile, in regard to fraud, there's no statute of limitations, but one would assume most people committing fraud aren't worrying about keeping records anyway. The number of IRS audits conducted has been on the decline, largely because so much more information is computerized and reported these days. That means much less direct contact with the taxpayer in reconciling data and facts. In addition, fewer IRS staffers are now working on audits as they instead put their time and attention into internal projects concerned with the revamping of the agency.

Campbell Soup
Mmmm, mmm, Not So Good

Q. What's your opinion of Campbell Soup Co.? Its stock has suffered a price drop. Is it good to invest in? Might the company merge or be taken over? R.C., Detroit, MI

A. Mmmm, mmm, not so good.
Since the beginning of this year, stock of Campbell Soup has slipped in the eyes of analysts from a consensus "buy" to slightly better than a "hold," according to the Boston-based First Call Corp. research firm. That includes on "strong buy," one "buy" and 14 "holds."
The slide occurred after the company warned Wall Street that its core condensed soup business wasn't growing at the rate it had planned and near-term earnings growth would suffer. Unusually warm winter weather and various company inefficiencies were blamed.
Campbell's fiscal second-quarter net income announced last month s down 27 percent on lower soup shipments and sales. Those results did, however, meet Wall Street expectations. The company's five-year annualized growth rate is projected to be 12 percent, according to First Call, about 1 percent better than the forecast for the overall food industry.
There have been rumors of potential mergers and acquisitions among food manufacturers, including domestic and overseas firms, because these defensive businesses aren't generating much growth in sales or earnings. In addition, a rapidly consolidating grocery industry with fewer players is in a position to tighten the screws on food prices.
Food manufacturers generally consider such mergers to be a last resort and instead are striving to make their firms more efficient. Dale Morrison, Campbell's president and chief executive officer, has noted that his firm is the only soupmaker to gain market share over the past year. He remains committed to increasing long-term sales by 8 to 10 percent.
Campbell holds 75 percent of the U.S. condensed soup business and a 10 percent share abroad, with overseas growth a high priority. Its other core businesses include Prego spaghetti sauce, Pepperidge Farm cookies and crackers, Godiva chocolates, Spaghettios and V8 juice. To better focus on those endeavors, Campbell spun off its Swanson frozen foods and Vlasic pickles businesses as Vlasic Foods International.

Janus Twenty Fund
Not for the Faint of Heart

Q. I need your opinion of Janus Twenty Fund, which I have $159,000 invested in. I'm a retired investor with no wife, two prosperous children and seven assorted grandchildren. I have an estate of $1.3 million, which I expect my family to inherit. Should I sell, hold or add more to this remarkable fund? R.A., Burbank, IL

A. Remarkable is an understatement.
This aggressive fund that's placed successful bets on groups such as Internet software and micro-computer stocks carrying high price-to-earnings ratios has been shooting out the lights for some time.
Hot performance attracting new investor money has led to assets skyrocketing from $6 billion to $19.5 billion over the past year. The fund is, however, not for the faint of heart and one must be willing to assume risk to ride its bandwagon.
Janus Twenty Fund gained a dramatic 86 percent over the past 12 months to rank in the top 2 percent of all large growth funds. Meanwhile, its three-year annualized return of 46 percent and 10-year annualized return of 27 percent rank in the top 1 percent of its peers.
"Janus Twenty Fund is a core growth holding with exposure to what are perceived as the best and brightest large- and medium-sized U.S. growth companies," explained Christine Benz, equity fund analyst with the Morningstar Mutual Funds investment advisory. "I would, however, suggest that the investor be sure to counterbalance this fund in his overall investments with a value fund and also something in the small-cap area."
The fund has a concentrated portfolio of 20 to 30 stocks, leaving it susceptible to unexpected downturns in some of its pet names.
Its top sectors were recently Internet software, micro-computers, health care, computer software and telecommunications equipment. Its largest holdings were America Online, Inc., Dell Computer Co., Microsoft Corp., Time Warner Inc., Finland's Nokia (an American Depositary Receipt), Cisco Systems Inc., Pfizer Inc., Warner-Lambert Co., MCI Worldcom Inc. and General Electric.
Janus Twenty is a "no-load" (no initial sales charge) fund that requires a $2,500 minimum initial investment.

Diebold Emphasizing
Worldwide Growth

Q. I'm an employee of Diebold Inc., which has a no-fee employee stock investment plan. Do you think Diebold is a good stock that would give us the best returns for the future education of our three-week-old and 10-year-old daughters. J.R., Little Rock, AR

A. Congratulations. You're smart to get an early start on investing for your youngsters.
Remember that it's important to put together a plan that includes a number of different investment components, of which your company's stock could be one. A diversified plan is crucial, for any one single investment can encounter difficulties over time.
While it may not currently be in the most exciting business in terms of growth potential and stock appreciation, the leading automated teller machine manufacturer for which you work is a respected competitor.
The company, which has been making safes and vaults since its founding in 1859, boasts a record backlog of orders. It has lately been emphasizing worldwide growth and tightening up its cost controls.
Stock of Diebold is a consensus "buy" among analysts who track it on Wall Street, according to I/B/E/S International research firm. That includes two "strong buys" and four "holds."
Earnings at Diebold are expected to grow at a 13 percent clip this year, though that is considerably below the industrywide forecast of 35 percent. The firm's projected year 2000 earnings growth rate is 15 percent, versus 60 percent for its peer group. Diebold's five-year annualized growth rate is forecast at 15 percent.
So you can see that prospects, while solid, aren't exactly breathtaking.
"While the last three quarters have shown positive earnings surprises for Diebold, there had been decreased expectations," observed Joseph Abbott, equity strategist for I/B/E/S. "Its stock is trading at a discount to its industry and at this point seems to be going nowhere."
The company's ATMs include the "I" series made through InterBold, a joint venture with IBM. Diebold also sells portable bank offices and products that automate bank transactions, such as "smart" cards that are used as debit cards. It also produces facility security products and systems that include cameras and access-control devices.

Putnam New Opportunities
Considered A Growth Fund and
No Longer a Small-Cap Fund

Q. In one of my retirement accounts, I have shares of Putnam New Opportunities Fund. I'm considering buying more. What do you think? J.K., Bolingbrook, IL

A. The name of this enormous fund may no longer fit its strategy.
Its greatest success occurred back in the early 1990s when its small-cap holdings went on a winning streak. As new investor money poured in, it expanded to include in its portfolio large- and mid-cap stocks that can't be considered the same "new opportunities" as those earliest holdings.
The $20 billion Putnam New Opportunities gained 13 percent over the past 12 months and had an annualized three-year return of 16 percent.
Both results rank in the top one-third of the mid-cap growth category, though it fits loosely in that group. About one-third of the fund currently is mid-cap stocks, 3a7 percent large-cap, 17 percent giant-cap, 11 percent small-cap and the remainder micro-cap.
"Investors should be fully aware that while this remains a growth fund, it is no longer a small-cap fund," asserted Jeff McConnell, equity fund analyst with the Morningstar Mutual Funds investment advisory. "They should therefore reassess whether it fits properly into their overall portfolio."
One-third of the fund is currently in technology, 20 percent in consumer cyclicals, 16 percent in consumer staples and 15 percent in health care. The remainder of the portfolio is divided among capital goods, financials and utilities. Its largest holdings among its 177 stock names were recently America Online, EMC corp., Clear Channel Communications, Microsoft, Costco Companies, CBS Corp., Schering Plough, Waste Management, Warner Lambert and Home Depot.
Putnam New Opportunities is currently closed to new investors.

Analyzing Fund Overlap

Q. Having invested in a variety of mutual funds through individual retirement accounts and 401(k) plans over the years, I now have a mixed portfolio of funds. In an answer to a recent question, you mentioned fund "overlap." How do I analyze this? J.D., via the Internet.

A. It's possible to own too many of the same types of mutual funds, leaving yourself vulnerable to shifts or downturns in a specific sector or investment philosophy.
For example, if you owned just four funds and they all emphasized technology, you'd be overly concentrated in that group. It wouldn't make sense if all your funds specialized in large-cap stocks, either, or if, in terms of style, you held only growth or only value funds.
Diversity is a cornerstone of good portfolio strategy and just owning a lot of funds doesn't necessarily mean you're diversified. Carefully study the strategies and goals of all your funds to ascertain their differences.
"It is difficult to make decisions based on individual stock holdings in funds, for portfolio managers can change that very quickly," said Ed Goldfarb, director of research for Kobren Insight Management in Wellesley Hills, MA. "Since there is a real risk of making mistakes based on old data, you're better off spending more of your time looking at style and asset allocation instead."
Although some types of funds make excellent core holdings, your portfolio should be built around your own risk tolerance and personal strategy. When comparing funds, consider the size of market capitalization, objectives investment style, relative safety, international versus domestic holdings and the philosophy of the portfolio manager.
Having a greater number of funds generally adds diversity, but you can overdo it and have so many funds that you can't keep track of them all. Since a fund may change its emphasis, stay vigilant. Having professional portfolio management doesn't man that you can simply invest in funds and forget about them.
Mistakes in fund strategy often occur when end-of-year performance lists of top funds are released. Investors buy several of the top funds, not realizing that they all did well because they invested in the same areas that particular year. They'll all have the same weaknesses as well.
Editor's Note: Andrew Leckey answers questions only through this column. Address inquiries to Andrew Leckey, "Successful Investing," 98 Henry St., Dept. 183, Brooklyn, NY 11201, or by e-mail at succeessinv@aol.com.

©1999 Tribune Media Services, Inc.

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