NEW YORK (CNNfn) - With triple-digit percentage gains, many Internet mutual funds are in line to win the "Fat Cat Prize” of 1999, although their ride to the top has been marked by wild winds and wicked dips along the way.|
Once considered gimmicks, there are now 13 Internet funds and even more in registration. Half of the funds debuted in 1999, and three were among the top performers of the year. And, like everything Internet, the stature of the funds has grown rapidly as some issues captured the attention of institutional investors.
The oldest of the funds is less than four years old, and the best performer in 1999 -- with a gain of 251 percent -- was the one-year-old Monument Internet Fund, according to Lipper Analytical Services.
But as with all prodigies, the question persists: "Will the young stars burn themselves out?”
To hear Monument Fund manager Alexander Cheung tell it, the stars will continue to burn brightly in 2000, but probably not as brightly as this year.
"So far ... the absolute return has been quite stellar. (That’s) not likely to be repeatable soon,” Cheung said.
Even the biggest Internet bulls have predicted a steep correction in the sector. Alberto Vilar, manager of Amerindo Technology Fund , says he expects a correction of about 50 percent in the first half of 2000.
Cheung, too, anticipates a downturn at some point -- though he declines to predict when, how long it will last or how deeply it will go. Nevertheless, he said, "The overall performance will (fare) pretty well relative to the market as a whole.”
Back to basics in 2000?
If reality bears out Cheung’s expectations, the correction may be fueled in part by a more stringent focus on fundamentals. Some fund managers anticipate dot.com lust will be tempered in 2000 by greater attention to individual company performance and potential for profitability.
The Internet "will become a much more stock-selective market” in the coming months, said Peter Doyle, chief investment strategist of The Internet Fund. The fund soared 206 percent in 1999, Lipper said.
Doyle said he looks for businesses with "some kind of sustainable advantage ... a proprietary product or service, or very deep pockets.”
Doyle also keeps his eyes on companies that may not be pure Internet plays, but whose Internet businesses and investments are burgeoning.
"There are a number of companies that are highly profitable today and have a large presence on the Internet, but they’re not being recognized,” he said. For example, the fund owns technology management services provider Comdisco (CDO) and Cognizant Technology Solutions (CTSH).
Going mainstream may cost
Despite the riskiness of Internet stocks, the sector caught the attention of leading institutional investors in 1999. Among the favorites were America Online (AOL) and Yahoo! (YHOO), which are both seen as proxies for Internet growth, said Ryan Jacob, founder of the newly launched Jacob Internet Fund
In 2000, a number of names could be added to that list, including eBay (EBAY) and priceline.com (PCLN), Jacob said.
While Jacob owns some big names, he thinks the upside of some institutional darlings is limited. His main focus will be small and mid-cap Internet firms that have proven management, a strong business plan and high revenue growth. Among his fund’s top 10 holdings are Ask Jeeves (ASKJ) and Drugstore.com (DSCM).
So you want to invest ...
While the performance of the funds might be tempting, investors should be aware of the strong potential for losses in the near term because of the sector’s volatility. Investors who buy at the top will miss most of the profits.
Even if you’re invested in a sector bellwether such as Internet company funder CMGI (CMGI) -- which has risen more than tenfold in the past year and is a top holding at the Internet Fund, Monument Fund and others -- plan to ride out some white-knuckle days.
What’s more, added Morningstar senior analyst Scott Cooley, you should assess, then cap, your allocation in the sector.
"A lot of people who own growth funds already have a lot of Internet exposure. (They should) try to figure out how much exposure they have” before investing in an Internet fund, Cooley said.
And while Cooley says it’s hard to go wrong in the sector, investors should make Internet funds a small part of their portfolios. He believes the sector will remain very volatile not only in 2000 but for the next five years.
"The ups and downs will be tremendous,” Cooley said.
So should you choose to put your money in an Internet fund, prepare to stay there for the long haul -- at least two to three years, but preferably five, fund experts say.
And be sure to pick a fund that has a manager with a good track record for picking winners in emerging technologies.
"Management skill is just so key,” Cooley said. "All performance will come from a handful of big winners.”