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Paul Cook of Munder NetNet

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Quick Take: Amid steep losses for tech funds and heightened discrimination on the part of investors, many would be hard-pressed to find a reason to invest in an Internet fund. Indeed, many who became involved in such funds may still be looking for an exit strategy. A representative sampling of Internet funds by Standard & Poor’s found they lost 51.1% in 2000, and another 36.4% in 2001, following outsized gains in the late 90′s. As a result, the standard deviation of Internet funds — a measure of the variability of a fund’s return — is so high as to make Las Vegas seem a legitimate alternative. The statistics would help support critics of the New Economy, who point to the excesses of the late 90′s as representing a “classic bubble.”

But as Internet-focused funds have faltered badly, driving investor dollars away, Paul Cook who manages the $1.2-billion Munder Funds:NetNet/A (MNNAX) has actually tilted his portfolio toward Internet stocks of late. Launched in 1996, Munder NetNet achieved whopping returns of 98.1% in 1998 and 175.4% in 1999, only to plunge 54.2% in 2000, and 48.2% in 2001 after expectations for the sector had became irrational. Assets in the portfolio have receded to their current levelfrom a hefty $10.3 billion at the end of March 2000 and $2 billion as of March 2001. Fund Advisor recently spoke to Cook to learn about his outlook for some Internet-based businesses and his views on the sector going forward. One area he is currently focused on: Internet advertising.

The Full Interview:

S&P: Despite a good showing in the fourth quarter, the Internet has been the worst place for a mutual fund to be invested since the market peaked in 2000. Has your investment strategy changed?

COOK: A lot of our clients are trying to make sure that we are not changing our stripes. I think there is some concern out there that we may adopt a different strategy, and that is not something that we intend to do anytime soon. We have to assure people about that.

S&P: A lot of so-called “dot-com” funds have been liquidated or have merged into broader-based funds. How do you define the approach that Munder NetNet takes?

COOK: Since inception, dot-coms were always a part of our holdings, but we were never a “dot-com” fund. When I discuss the fund, I try to give a sense of the opportunities in front of the companies in which we invest, breaking it down into the three pieces that constitute this emerging digital economy, as well as the dot-com pieces with which we are largely associated.

S&P: What are the two other components of Munder NetNet?

COOK: The first is what we call the off-line component. We have never had a big allocation here, but at times we have held companies such as the Gap (GAP) or Home Depot (HD). Today, you might consider off-line companies, such as Charles Schwab (SCH), or Getty Images (GETY) or TMP Worldwide (TMPW), as old economy companies that developed a new economy lifestyle by taking what perhaps was a lower-margin business in an off-line environment, and turning it into a higher margin business in an on-line environment.

S&P: What percentage of the portfolio does the off-line component represent?

COOK: It has been 8% to 10% to 12% of the portfolio, never much more than that. That continues to be true. I think there is still not much opportunity in this segment, since we haven’t really seen a lot of real corporate strategic buy-in. We haven’t seen companies that take the Dell (DELL) approach, although I think that is coming. I hope to identify those companies as they grasp the opportunity that is out there.

S&P: What is the third component of the fund?

OOK: This is the enabling technology component. We refer to these companies as the arms dealers that supply the technology that is going to be necessary to compete. Cisco (CSCO) might be an example of that, or Oracle (ORCL) or Verisign (VRSN), even though some might think of Versign as a dot-com. We look at them as more of an enabling technology company. Microsoft (MSFT) I think of in the same way, as well as probably Check Point Software (CHKP).

All of these firms go to the enterprise of the Global 3000 and try to sell their wares to help those companies become more competitive and to take market share. Over time, the value of these firms to the Global 3000 becomes increasingly well known. Companies overall will continue to compete in traditional ways for market share, but I also think they will do battle through the efficient deployment of technology because it is going to become more and more of a margin game. Those firms that spend foolishly on technology are going to lose market share to those that deploy technology wisely.

S&P: How do the three segments of the fund break down?

COOK: The off-line component represents 10%-12%. The pure Internet, or born on the web component — recognizing that there are fuzzy lines since Microsoft (MSFT) could be seen as an Internet company since they have a significant Internet strategy — is 40%. We consider Microsoft as an enabling technology company. We are at 45%-50% in enabling technology companies. We try to keep cash under 5%. We are about 2% now.

S&P What are the top holdings in the fund?

COOK: DoubleClick (DCLK), Yahoo (YHOO), Cisco (CSCO), Veritas Software Corp. (VRTS), AOL (AOL), Versign (VSRN), Oracle (ORCL), Microsoft (MSFT), Ebay (EBAY) and Overture (OVER).

You might surmise that we have tilted the fund more towards Internet stocks of late and towards companies that derive a revenue stream from advertising.

S&P: Many of your top holdings seem fairly cyclical.

COOK: Technology stocks weren’t supposed to by cyclical. We have found out that they are super cyclical.

It used to be that you could look at technology as a sector that marched in lock-step. That is not the case anymore.

The fortunes of the component companies are divergent based on what type of innovations come on the market, how readily that innovation is going to be adopted, and how large the addressable market may be.

At one time, you could look at the market as Intel and Microsoft, and that is just not the case any more because there are so many different opportunities out there, or subsectors that have their own characteristics.

S&P: What do you like about DoubleClick, a top holding, given the state of advertising revenues?

COOK: DoubleClick is an interesting company that I don’t think is widely understood. Given an economic recovery, we think these kinds of stocks will tend to do well. IT spending lags a little in an economic recovery as IT managers get up the nerve to start spending again or request to spend, where as advertising dollars tend to lead out of a recession, at least that is what we can infer.

If that is the case, it makes sense for us to take a look companies we think are best positioned to garner some of those advertising dollars. That is why you see DoubleClick, Yahoo, AOL and Overture, again advertising driven, in our top ten. The business models, of course, are different.

S&P: On a macro level where do you think we are right now? We have had a neutral bias adopted by the Fed. People are wondering how a fund like yours might perform going forward?

COOK: I feel like I am getting off the stool for round two.

Even though it has been dismissed, the innovation continues and the economic climate favors the type of investing we do today. We don’t have concrete evidence of that, but it looks like most of the economic data flow supports a real turn in the economy: consumer sentiment, consumer confidence, unemployment perhaps peaking at 5.8%, as well as a neutral bias and the stimulus package. Inventory levels have come down on an absolute basis, in general. I am looking for granularity on where inventory levels might be low with regard to subsector.

On a more micro level the book-to-bill for semiconductor conductor component manufactures started looking better for the wrong reason. The bill number was coming down, not the book number going up. Today, I think the change in that ratio is driven by the right reason. Companies are getting more orders, and the revenue numbers are starting to pick up.


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