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Net funds: Time to get in
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June 15, 2000: 2:48 p.m. ET
Despite Nasdaq's rocky ride, managers are upbeat about the long term
By Staff Writer Parija Bhatnagar
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NEW YORK (CNNfn) - Internet funds, once the darlings of Wall Street with triple-digit returns, have lost as much as 60 percent of their value this year as the Nasdaq has plunged.
But beleaguered Internet fund managers are seeing signs of hope in spite of rising interest rates, record volatility and the prospect of a traditionally slow summer for technology.
"In the last few days, most Net funds were up 20-to-25 percent," said Bob Grandhi, manager of Monument Internet Fund. "The Internet is a good long-term prospect with great growth opportunity."
 The 10 Internet funds tracked by mutual-fund researcher Morningstar have lost 3 percent to as much as 36.53 percent year to date as of June 9. But in the week ending June 9, the funds gained 1.23 percent to 8.26 percent.
The Nasdaq is down about 280 points, or 6.6 percent, year-to-date as of June 14, and the Federal Reserve last month raised short-term interest rates by half a percentage point to slow the economy down and keep inflation at bay. Technology shares have been bruised by massive swings.
Monument Internet Fund, with $150 million in assets, is down 20.98 percent this year as of June 9. Higher interest rates will make the funds more volatile in the short term, the funds will be long-term winners, he said.
 "Investors should take a long-term view and diversify," said Grandhi. "Invest a small amount in a basket of stocks, and hold them for at least two years."
Analysts also point out that in spite of the recent nose-dive on Wall Street, where Net funds lost an average of 40 percent-to-60 percent, the number of funds investing in Internet stocks has skyrocketed. In early 1999, there were only a handful of Internet funds, but now there are about 35.
"The underlying growth opportunity of the Internet is enormous," said Grandhi. "We have only about 40 percent penetration in the U.S., and maybe close to 15 percent abroad. So there's lot of room to grow."
Lawrence Sterne, chairman of the ISDEX Index Committee at internet.com, agreed the Internet isn't going anywhere. The Index tracks the 50 top internet stocks that represent about 70 percent of the market capitalization of the sector. 
Consolidations in the industry will continue, and the winning companies will come out on top, Sterne said.
"There's all kinds of merger activities happening in this sector, and it looks to me like the strong are going to get stronger and the weaker companies are going to get merged out," Sterne said. "I think we've taken a lot of froth out of Internet stocks and we're going to be getting value in a very healthy environment."
Kinetics Asset Management, whose flagship Internet Fund delivered the best returns among Internet funds in 1999 with gains of 216.4 percent, is so upbeat that it introduced four new Net funds this year.
Internet Fund, with about $1 billion in assets, is down about 24.98 percent as of June 9, Morningstar said.
 "The fundamentals in the overall Internet arena are strong, and Internet traffic is still doubling every 90 days," said Fred Froewiss, portfolio manager of one of the new Kinetics funds, Internet Infrastructure Fund. The fund invests in stocks that are helping to build the Internet community such as RCN Corp. (RCNC: Research, Estimates).
Kinetics also introduced Internet Global Growth Fund, focusing on overseas companies; Internet New Paradigm Fund, focusing on large-growth stocks with greatest Internet potential; and Internet Emerging Growth Fund, investing in IPOs and venture capital startups, Froewiss said.
"Every investor should have some Net representation in the portfolio," Froewiss said. "And the younger investor, with a longer time horizon, may want it at a higher level, as compared to someone closer to retirement."
Still, Froewiss acknowledged Net funds are looking to steady themselves after a roller-coaster ride.
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"I think for short-term, the next 60-to-90 days, we're going to go sideways," Froewiss said. "Until the Fed stops raising interest rates, we're still under pressure. I can't see multiple expansion from this until we get a firmer handle."
Some investment analysts don't quite see a silver lining for Internet funds going into the summer - a typically sluggish period for technology stocks.
"I don't think I can predict if the future will be any different from the recent past," said Vaugh Weimer, managing director and chairman of the Investment Policy Committee. "I don't see anything on the horizon that indicates the current disparate feelings between exuberance and pessimism are going to change."
Weimer, did however, offer pointers to investors unable to resists the excitement of Net funds: Check the background, the track record, and the strategy of the managers. These will be important factors to consider since most Internet funds are less than four years old, are small and relatively untested, he said.
"Internet stocks are in a good position to appreciate."
-- David Manzler, Analysts Internet Fund
David Manzler, manager of Analysts Internet Fund, said investors should also look at the fund's stock mix as the Net sector does provide a lot of leeway to investors to diversify their portfolio. The fund, tiny with $2.5 million in assets, is down 4.2 percent year-to-date.
"Internet stocks are in a good position to appreciate," said Manzler. "And going forward, I'm not bearish. We won't have a year like last year's, but it will pick up in the third quarter." 
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