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Internet Funds Rival Other Popular Sectors

Money managers, mostly small ones, have been registering Internet fund products with the SEC at a rapid rate.

It is no surprise given the enormous success of Internet funds this year, especially the much-heralded Internet Fund of North Babylon, N.Y. That fund was started in October, 1996 by then unknown Kinetics Asset Management and has attracted more than $600 million since its inception. It is now even sold through Schwab's OneSource mutual fund supermarket.

The first Internet fund created, Munder Capital Management's NetNet Fund of Birmingham, Mich., was even recognized recently with a four-star rating by Morningstar. It was the first star rating given to any Internet fund.

This year, there have been at least a dozen Internet fund products registered with the SEC, including a closed-end fund and an exchange-traded fund that will be bought and sold exclusively on the American Stock Exchange.

Internet funds have not been entirely embraced by the industry's pre-eminent companies. Goldman Sachs of New York, Stein Roe of Chicago and Citigroup of New York have registered Internet funds with the SEC, but other companies among the industry's leaders have been wary.

It is difficult to say whether the rest of the industry will join the growing number of firms with Internet funds, or if the sector will fizzle out when Internet stocks no longer achieve the enormous gains they have.

Other sectors have had sustained product creation over a number of years, according to statistics provided by Mike Evans, an analyst with Financial Research Corp. of Boston. But, few have had so many products created in one year as has the Internet sector, he said.

Real estate funds have been the exception. Real estate funds have been very popular since the mid-90s. In 1995, there were 13 real estate funds started, followed by a dozen in 1996. In 1997, there were 18 real estate funds initiated, and in 1998, there were 15.

Technology funds have been popular as well. Ten were created in both 1996 and 1997, and eight were created in 1998, according to FRC. Internet funds were included in those calculations. According to Evans, Internet funds made up over seven percent of all technology funds as of June.

Financial services funds have been hot during the past few years too, but only eight new funds were started in 1998 and again in 1997. Only one has been created in 1999, according to FRC.

Most major firms have been hesitant to create Internet funds because the sector is so narrowly defined and there are very few pure Internet companies in which to invest, according to Evans. Companies like Fidelity Investments of Boston have talked about starting an Internet fund but balked because the risk was too great, Evans said.

"It's kind of a limited sector at this point," Evans said.

Sector fund sales are driven by performance and should only be used to support a company's core funds, Evans said. It will be interesting to see, during an Internet stock correction, whether the smaller money managers whose core products are Internet funds, can survive, Evans said.

If there is not a correction, it is just a matter of time before other major fund companies introduce Internet funds, Evan said. That will occur especially when more companies are classified as Internet companies.