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Top of the tech heap
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January 3, 2002: 5:17 p.m. ET
How an Internet sector fund became the top-performing technology fund in 2001.
By Staff Writer Paul R. La Monica
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NEW YORK (CNN/Money) - So much for the new millennium.
The best performing technology sector mutual fund of 2001 was an Internet fund that included among its top holdings a British life insurer and a manufacturer of plastic films and aluminum extrusions.
The Kinetics Internet Emerging Growth Fund finished 2001 with a 16.5 percent gain and was one of only four tech funds (out of a total of 366) to end the year in the black, according to Morningstar. This strong performance is all the more remarkable when you consider that the average decline for technology funds in 2001 was 38 percent. Ironically enough, the No. 2 tech fund was the Potomac Internet/Short Fund, which rose 15.2 percent by betting that stocks in the Dow Jones Internet Index would fall. For more about winners and losers in the world of funds, click here.
Fund manager Steven Tuen started Kinetics Internet Emerging Growth in December 1999, and also runs the Kinetics Internet Fund, the best performing fund of 1998 when it was run by Ryan Jacob (it was then called, simply, the Internet Fund). Jacob left Kinetics in 1999 to start his own fund, Jacob Internet, where he has racked up losses of 79 percent in 2000 and 56 percent in 2001. Tuen's Internet Fund fared better, losing just 9.8 percent last year.
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Kinetics Internet Emerging Growth Fund manager Steven Tuen | |
Scorning brand name companies
Unlike many other Internet funds, you won't find Amazon.com, eBay or Yahoo in the list of top holdings for the Kinetics Internet Emerging Growth Fund. Instead there are many financial and services companies. The fund's number one position is in a company called Interactive Data, which supplies real-time market information to retail and institutional investors.
Interactive Data (IDCO: down $0.06 to $14.28, Research, Estimates) has no analyst coverage but it soared 304 percent in 2001 as revenue increased 11 percent in the first nine months of 2001 and earnings before interest, taxes, depreciation and amortization (EBITDA) leapt 24.4 percent.
Other financial companies in the fund are Actrade Financial and Micro General. Actrade (ACRT: up $1.71 to $31.27, Research, Estimates) has developed an electronic payment technology called the Electronic Trade Acceptance Draft (E-TAD) Program. This allows a corporate buyer to make purchases and have the cost automatically deducted from the buyer's bank account within a specified period. Micro General (MGEN: up $0.12 to $13.17, Research, Estimates) produces workflow software for the real estate industry.
On the services side, Tuen's fund was helped last year by big stakes in Kroll, a corporate security consultant and Lynch Interactive, a holding company run by renowned fund manager Mario Gabelli. Kroll (KROL: up $0.53 to $16.53, Research, Estimates) recently sold its armored-car manufacturing division and is focusing more on information security. Lynch Interactive (LIC: up $0.25 to $68.25, Research, Estimates) owns stakes in several regional telecom and cable companies.
Aluminum and life insurance in a Net fund?
Now these companies may not have the name recognition of say, a Cisco or Microsoft, but they at least have a technology component to their businesses. How then does Tuen justify the fund's holdings of stocks like Tredegar, the plastic films and aluminum extrusion manufacturer, and London Pacific, the U.K.-based life insurer?
Both companies have venture capital arms that make investments in Internet and other technology companies. While this may sound eerily like the business model that got so-called Internet incubators like CMGI and Internet Capital Group into trouble once the dot-com bubble burst in 2000, Tuen says he's not concerned since Tredegar (TG: up $0.23 to $19.20, Research, Estimates) and London Pacific (LDP: up $0.10 to $4.05, Research, Estimates) have real businesses that fund their venture capital investments and are not as beholden to the health of the initial public offering market for their success.
"The CMGIs of the world, their primary purpose is to make investments and bring them public as soon as possible. Their cash flows are dependent on IPOs and the capital markets. Tredegar and London Pacific have an operating business that can weather downturns in the cycle." Tuen says.
Picks for 2002
So what is Tuen looking at now? In the fourth quarter, he says he added shares of Register.com and MIH Limited to the fund. Tuen thinks Register.com (RCOM: up $0.58 to $10.77, Research, Estimates), a Web domain name registration site, is poised to benefit from the wave of new domain names that will be created now that extensions like dot.info and dot.biz are available.
What's more, Register.com is a member of an exclusive club for a pure play Internet company: it's profitable. Tuen also thinks the company's strong balance sheet (no debt and $188.9 million in cash) will help Register.com weather any further market turbulence.
MIH Limited (MIHL: down $0.10 to $7.00, Research, Estimates) is a Virgin Islands-based company that owns 43 percent of OpenTV, an interactive television software devloper. But the OpenTV (OPTV: up $0.22 to $8.67, Research, Estimates) angle is actually not what intrigues Tuen most.
MIH also operates cable systems in Asia, Africa and in the Mediterranean region. Tuen points out that AT&T is selling its cable business to Comcast in a deal that values AT&T Broadband at $4,500 per subscriber. MIH Limited has 2.1 million subscribers worldwide and a market valuation of just $420.5 million. So the market is valuing MIH at only $200 per subscriber.
Of course it's a stretch to think that MIH deserves to be valued at $4,500 per subscriber but Tuen thinks the discrepancy is nevertheless too wide, making MIH's shares "substantially underpriced."
Whether or not Tuen's against the grain style of stock picking works again in 2002 of course remains to be seen. It didn't in 2000 and long-time holders of the fund will need to wait a long time before they see gains since the fund is down more than 62 percent since its inception in 1999. Nonetheless, there's something to be said for Tuen's ability to thrive in a year when most other Internet funds lagged the woeful returns of overall technology funds. 
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