NEW YORK -- The reversal of fortune for many so-called pure play Internet funds has been startling in the first four months of 2000.
Their fall from grace is hardly surprising, however, given investors' sudden distaste for technology stocks, especially those of new and unprofitable Internet companies.
The investment landscape has changed dramatically in the past six weeks, and that shift is reflected in the performance of funds that focus on companies whose main source of revenue is derived from Internet operations. Such funds are referred to as pure plays because they don't hedge their bets by investing in a diverse group of companies.
The potential gains are tremendous, but so are the risks.
Consider that five of the 10 worst performing funds year-to-date through April 20 fall into the pure play Internet category, according to Lipper Inc., a New York firm that tracks mutual fund performance.
Performance figures for 1999 show just how far the tables have turned for these funds.
As a group, science and technology funds rose an average of 135 percent last year. But those returns paled in comparison to a handful of standalone Internet funds, some of which doubled the average returns of their broader focused peers.
The Monument Internet fund, for example, posted a 273 percent gain in 1999, its first year in existence. The fund is down 27 percent -- and falling -- in 2000, placing it just outside the list of 10 worst performers, according to Lipper.
The fortunate investors were the ones who got in early on one of the high flying Internet funds that have been around a few years. For those who were able to ride the wave upward, the recent technology selloff merely shaved off some of their profits accrued in recent years.
Others who jumped on board late didn't fared as well. The Bible says ''He who hesitates is lost,'' and that was definitely the case with Internet mutual fund investors.
Hoping to capitalize on the online craze, New York-based Potomac Funds opened the Potomac Internet Plus index fund last December.
The fund, whose goal is to outperform the Dow Jones composite Internet index, jumped 70 percent in its first month, then fell into free fall with the rest of the technology sector. It's now down 43 percent for the year, giving it the dubious title of worst performer so far in 2000, according to Lipper.
Another fund to jump aboard the Internet ship just as it was approaching the iceberg was the StockJungle Pure Play fund, which also opened late last year and is now down 33 percent in 2000.
Other Internet funds on Lipper's list of the 10 worst performers of the year are Amerindo's Technology fund, the Internet 100 fund and ING's Internet fund.
''Certainly our timing has been awful,'' said Daniel O'Neill, managing director at Potomac Funds. ''But the fact that the Internet has been killed over the last month doesn't mean it's not a viable sector.''
O'Neill noted that Potomac's Internet Plus fund employs an aggressive strategy that contributed to its swift decline. Five to 7 percent of the fund's assets are invested in complex financial products known as derivatives that magnify investors' gains as well as losses.
In any case, O'Neill said any pure play Internet fund should only represent a small part of an investor's overall portfolio given the uncertainty and volatility inherent to the sector.
Those sentiments have been echoed by numerous analysts who have cautioned investors against putting all of their eggs in one basket, so to speak.
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