The Kinetics Internet Fund, the top performing mutual fund in the past three years, has come of age. But will it -- and other aggressive Internet and new-technology sector funds -- catch on in traditionally more conservative institutional markets?
Steven Samson, president of Kinetics Asset Management Inc., New York, said the firm's flagship fund, the Internet Fund, has attracted attention from institutional investors since its third anniversary last October. In particular, Mr. Samson said the firm has been in talks with a 457 plan he would not identify and a New York-based bank interested in offering the Internet Fund to its network of investors."Once the Internet Fund established a three-year track record, it started to show up as a blip on the screen," said Mr. Samson.
Since it was launched in October 1996 as one of the first Internet funds, the fund has burst on the scene with record-setting returns. Last year, it returned 216.4%, and in 1998, it saw a return of 196.1%, according to Lipper Inc., Summit, N.J. This year, however, it has stumbled, down 29.6% for the year through June 1. But for the three-year period ended June 1, according to Lipper, it is the top-ranked equity fund among 4,819, with an annualized return of 96.9%.
While institutions generally have shown interest in sector-specific technology funds, few, if any, have added them to their platforms. Consultants say sector-specific technology and Internet funds were more of a topic of conversation among institutional investors prior to the technology-stock tumble that began in March. "You don't quite hear as much about them now," said Jeff Nipp, head of investment research at Watson Wyatt Worldwide, Atlanta.
Mr. Nipp said if there is a place for these funds, it's in defined contribution plans, because there may be demand from plan participants for such aggressive funds.
Broader-based technology funds have been more prevalent as a core option in defined contribution plans than those with a narrower focus, said Ravi Venkataraman, head of the Northeast investment practice at William M. Mercer Inc., Boston.
In fact, of the 100 equity mutual funds most used by defined contribution plans as of Dec. 31, only three were technology funds (Pensions & Investments, April 17).
Acceptance will evolve
Peter Starr, consultant at Cerulli Associates Inc., Boston, said the acceptance of Internet and technology sector funds will be more "evolutionary than revolutionary."
"The DC world embraces change and innovation fairly slowly," said Mr. Starr. However, he said, the movement toward defined contribution plans featuring more retail-like options is happening. If new technology sector-specific funds continue to perform well, they might pop up in more plans, he added, "but it's not going to be a tremendous amount."
Mr. Venkataraman said many plan sponsors don't believe sector funds are appropriate as part of a defined contribution plan's core option array. "Other asset classes are substantial diversified asset classes, like large-cap, midcap, value, and growth. The sector fund is on a fundamentally different level," he said.
However, he has seen more interest from plan sponsors about offering sector funds in general through brokerage or mutual fund windows to satisfy participants who want more aggressive options. "I think you'll see more in the mutual fund window than the core lineup," he said.
On the defined benefit side, Mr. Venkataraman said pension funds have expressed more interest in adding growth exposure to their plans, but most have opted to get their high octane from small-cap growth products. One client, however, did add a technology sector element to its portfolio.
Kinetics' Mr. Samson said between 6% and 8% of the Internet Fund's assets are from institutional or high-net-worth clients, up from virtually nil in the third quarter of last year. It is offered in the 401(k) plan of the Dreyfus Corp., New York, as well as through brokerage windows and self-selected fund supermarkets offered by Charles Schwab and Co., San Francisco and Fidelity Investments Inc., Boston.
In the last year, Mr. Samson said, the fund has shifted focus to holdings with stronger balance sheets. "Even with the turbulence in the last several weeks, we're very comfortable because we're not faced with the kind of companies that are running out of cash," he said.
While the top 10 holdings include recognizable technology names like Exodus Communications Inc., RCN Telecom Services Inc., and CMGI Inc., some of the new positions are in stocks like The New York Times Co. and The Washington Post Co.
"Look at the Washington Post. People don't think of them as an Internet play," said Mr. Samson, but it has made a significant investment in the Internet and develops its own content, which it can distribute over the web.
401(k)s choose NetNet
Another Internet fund pioneer, the NetNet Fund, offered by Munder Capital Management, Birmingham, Mich., has attracted interest from institutional markets since it established its three-year track record last August. The fund returned 175.7% in calendar year 1999 and 97.9% in 1998, according to Morningstar Inc., Chicago. Year-to-date through June 1, it returned -18%.
Elyse Essick, senior partner at Munder Capital, said the NetNet Fund is featured as an option in a number of 401(k) plans through the firm's partnership with Merrill Lynch & Co., New York. It has about $150 million in institutional assets. The NetNet Fund closed to new investors April 17.
Despite the market volatility this year, Ms. Essick said interest from institutional investors has not fallen. "Institutional plan sponsors have a longer time parameter than do retail investors," she said.