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Internet funds tumble
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August 31, 2000: 6:02 a.m. ET
Investors should proceed with caution when buying these volatile funds
By Staff Writer Jennifer Karchmer
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NEW YORK (CNNfn) - Too much of a good thing may be enough for Internet funds this year.
Funds that invest in Internet-related companies have been slammed this year, down almost 15 percent as of Aug. 29, according to Morningstar. The downturn is all the more devastating as it comes on the heels of astronomical returns in 1999 that took some Internet funds to triple-digit returns.
That was the story for the $121 million Monument Internet Fund (MFITX), which soared 273 percent in 1999. This year, however, the fund is down almost 22 percent, according to Morningstar.
But thanks to the explosion of the Internet -- an industry still getting its feet wet with brand-new companies -- Monument Funds chief investment officer Bob Grandhi says the enormous returns of 1999 in the sector just couldn't be repeated this year.
"After performing so high, it is difficult to keep going," said Grandhi, who manages the Monument Internet Fund. "The Internet is a revolutionary application. People are so enamored with its growth potential that people got carried away and attracted a lot of capital; valuations got out of control."
The Internet industry took off a few years ago when many small companies with unproven business models came on the scene, he explained. Investors rushed in to get a piece of the action, driving up stock prices.
Internet funds, which for the most part are a subset of the technology sector, were covering new ground buying into areas of business that hadn't existed before, said Morningstar analyst Christopher Traulsen. But some of the unseasoned companies consolidated after their business models failed, leaving only the strongest companies in the sector.
So Grandhi keeps his eye on what he considers companies with longevity, namely Yahoo (YHOO: Research, Estimates), Nortel Networks (NT: Research, Estimates), and Sun Microsystems (SUNW: Research, Estimates).
"As a matter of policy, I invest only in the very best companies," Grandhi said. "They should have the largest market share in that segment."
Check your mutual funds on CNNfn.com
Are you an Internet investor?
You use the Internet every day at work for research and you search for information on the Web on restaurants and movies. So you'd like to get a piece of the Internet craze too and buy a fund that specializes in this technology. How do you start?
Firstly, whenever you're considering buying a mutual fund, analysts suggest you search for a manager with a long-term track record, preferably one with a five-to-ten-year history.
But that's difficult in the Internet sector since the oldest fund, the WWW Internet Fund (WWIFX), was introduced only four years ago.
So Traulsen recommends investors look for managers who have experience running a technology or aggressive growth fund. Also, when considering an Internet fund, you should look for shops that have a strong research team.
Traulsen suggests the Enterprise Internet Fund (EIFAX), run by David Alger, and Amerindo Technology Fund (ATCHX), managed by Alberto Vilar, as two viable candidates.
Internet funds are highly volatile and suited for sophisticated investors who have a particular interest in the sector, he said. Also, you should check your portfolio carefully because you may already have more Internet exposure than you know, since the average growth fund tracked by Morningstar keeps more than 40 percent in tech stocks and a good part of that is Internet related.
And if you're thinking of chasing last year's hot funds, that's a no-no. Past performance is no indication of how a fund may do in the future.
But if you're considering buying an Internet fund, there may be some bright spots.
"I think most of the damage is behind us," Grandhi said. "We are optimistic in Q4 and that we'll get a decent rally in this group, but certainly not as powerful as last year." 
--Staff Writer Jennifer Karchmer covers mutual funds for CNNfn.com. Click here to send her e-mail.
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