Goldman's Internet fund survives dotcom meltdown

Martha Slud

NEW YORK: Internet stocks have been hammered and a number of prominent funds

focused on the fledgling web sector are closing down. But Wall Street investment

bank Goldman Sachs Group Inc. says it's committed to keeping its Internet fund

alive.

"We've certainly taken it on the chin," said David Shell, senior

portfolio manager of the roughly $2 billion Goldman Sachs Internet Tollkeeper

Fund, the second biggest Internet fund in the United States. While the

Tollkeeper Fund is actually up a bit since its 1999 launch, it has lost 41 per

cent over the past 12 months after rocketing 92.5 per cent in the fourth quarter

of 1999.

"I don't like being down, but the most important thing is to do what you

told your clients you are going to do," he said.

For Shell and co-manager Scott Kolar, that has meant selecting companies

expected to benefit from Internet technology - not just so-called

"dot-com" stocks. The fund's relatively conservative portfolio, which

includes big bets on tech giants such as AOL Time Warner Inc. and Microsoft

Corp. , has helped shield it from the devastation that has struck other niche

Internet funds.

The fund holds only a handful of full-fledged Internet stocks, such as Web

portal Yahoo! Inc. and online ad firm DoubleClick Inc. It also invests in

companies such as discount brokerage Charles Schwab Corp. and broadcast media

company Westwood One Inc. . These firms fit the fund's mission because they are

using the Web to boost their rates of growth, Shell said.

"We don't believe there are any Internet companies," he said.

"In the end, the underlying fundamentals of a business are going to shine

through, not the conduit through which it delivers its service."

Internet Tollkeeper is the biggest Internet fund after the Munder NetNet

Fund, according to Morningstar. The NetNet fund recently reopened to new

investors after its assets plunged to about $2.4 billion from as high as $12

billion.

Despite the turmoil in the tech sector, Tollkeeper is up about 6.7 per cent

since its inception on Oct. 1, 1999 through Wednesday, based on the performance

of the fund's "A" shares, the fund's biggest share class, Goldman

Sachs said. That's compared with a nearly 1 percent decline in the Standard

& Poor's 500 Index during the same period and a 37.4 per cent drop in the

American Stock Exchange's Internet index .

But that's little consolation for investors who lost money after buying in at

the Nasdaq's peak early last year. The fund's assets are down as much as 60 per

cent from a high of about $5 billion. The fund was off 10.8 per cent

year-to-date through Thursday, although that's better than 75 per cent of its

peers during the same period, according to fund researcher Morningstar Inc.,

which tracks about 33 US Internet funds.

"What they did was try to take a more conservative tack than some other

Internet funds," said Christopher Traulsen, a Morningstar analyst. The

Tollkeeper fund has "lost a lot of money for people - there's no question

about that. But it's lost a lot less than other Internet funds in 2000."

The fund has benefited from its stakes in AOL Time Warner, a stock that has

risen 49 per cent year-to-date, and Microsoft, up 70 per cent. Other top

holdings include media conglomerate Viacom Inc. , computerized travel

reservation firm Sabre Holdings Corp. and Crown Castle International Corp., a

wireless equipment infrastructure maker.

Internet funds disappearing



As tech stocks soared in the late 1990s, fund companies rushed to introduce
Internet mutual funds. While the sector produced spectacular gains in 1999, the

dot-com collapse has led five Internet mutual funds to shut down or merge.

Several others have changed their strategies.

Merrill Lynch and Co. Inc. raised a hefty $1 billion for its Internet

Strategies Fund before it opened early last year. But after losing more than 65

per cent since inception, the fund will be folded into Merrill's broader Global

Technology Fund. Strong Capital Management also has similar plans for its

Internet fund.

Three funds - the Zero Gravity Internet Fund, the de Leon Internet 100 and

the Internet Index Fund - have liquidated. Others have tried to revamp by

changing their names. The Westcott Nothing But Net Fund is now Westcott

Technology, which still is down 16 percent year-to-date and off 57.6 percent

over the past 12 months.

The Tollkeeper fund is managed by a team of managers and analysts based in

Tampa, Florida who formerly were part of Liberty Investment Management, which

Goldman Sachs bought in 1997. The group manages about $20 billion in total

assets. Shell, 38, joined Liberty's predecessor firm, Eagle Asset Management, in

June 1987 after graduating from the University of South Florida.

Unlike some of its rivals, the Tollkeeper fund steered clear of many young

dot-com companies from the start. The fund avoided No. 1 Web retailer Amazon.com

Inc. , because it's unclear whether the firm has a proven franchise, Shell said.

But Shell and his team did invest in the initial public offering of E-Stamp

Corp. , which has gotten out of the online postage business and now sells

shipping products. The fund shed its stake in the stock about a year ago.

E-Stamp is now trading at about 18 cents per share, down from an offering price

of $17 in October 1999.

"The characteristics were there," of strong growth prospects, Shell

said of E-Stamp. But in hindsight, "we made a mistake."

(C) Reuters Limited 2001.