Internet-Focused Funds Ride the Next Growth Trend
But are online companies solid, long-term investments -- or risky flavor-of-the-day trades that must be jettisoned before they succumb to an inevitable market meltdown?
Ryan Jacob, chairman and chief investment officer of the Jacob Funds, believes that companies with business strategies that focus on the Internet can be some of the best investments for the future -- so much so that he created the Jacob Internet Fund (JAMFX) to invest solely in such firms.
Flourishing Through Ups and Downs
The fund includes mostly technology companies "that derive a large majority of their revenues either on or from the Internet," says Jacob. Such companies reap some of the benefits of 24-hour online sales opportunities and lower overhead and customer-service costs thanks to virtual storefronts and automated operations. The companies in the fund are generally dominant players in their industries with demonstrable potential for future growth -- great characteristics for any type of investment.
When Jacob talks about Apple (AAPL), Google (GOOG) and other holdings in the fund, he's quick to point out that many of these firms have flourished during this difficult economic downturn and nascent recovery. "They're growing their market share in the areas they operate even though the overall markets may be contracting because of the weak economy," he says.
For example, Apple's iPhone and iPod businesses have been expanding during both recession and recovery, and the potential for iPad sales keeps the company's revenue forecasts strong. And although online advertising rates have fallen drastically in recent months, Google continues to be a market leader, relinquishing very little market share to would-be competitors.
"Google has been weak lately, but we think fundamentally it is very strong and still very well positioned," says Jacob.
Services Likely to See Increased Demand
Other holdings in the fund, like Earthlink (ELNK), which offers broadband services, and Shutterfly (SFLY), a personal publishing and photo-sharing business, represent opportunities to reach audiences with services that analysts expect to surge in demand in the future.
As of the market's close on April 28, the Jacob Internet fund was up 11.8% in 2010, beating the tech-heavy Nasdaq, which was up about 9% and the S&P 500, which was up about 7%. Although some of those returns are reclaimed ground lost during the market collapse of 2008, Jacob expects the growth of Internet-focused companies to continue.
"As long as we stay in a low interest-rate environment and these companies continue to execute in their particular markets, valuations still look attractive to us," he says.
Risk Is Significant
With about $36 million under management, the Jacob Internet Fund is on the small side. The fact that it invests in some well-known names like Apple and Google is comforting, but since the technology sector is considered very volatile, investing in Internet stocks carries significant risk.
Another Internet-focused fund is the Munder Growth Opportunities Fund (MNNAX), which has $405 million in assets. It focuses on large-cap technology companies with strong ties to the Internet. Yahoo (YHOO), Microsoft (MSFT), Google, Baidu (BIDO) and Apple were its top five holdings. Munder Growth Opportunities is up 7.2% since the start of the year.