Three more online mutual funds quietly either closed to new investors or liquidated in January. Two of StockJungle.com's three remaining online funds as well as the Allied Owners Action Fund have joined four other virtual mutual funds that liquidated in December. The three funds failed to attract enough attention or amass enough assets. Of the dozen odd online funds created since 1999, seven remain open.
The Stock Jungle.com Market Leaders Growth Fund and the StockJungle.com Pure Play Internet Fund were closed in late January, said Brian Levy, president and chief operating officer of StockJungle.com of Los Angeles. The two funds, which were introduced in November 1999, had attracted a total of $700,000, according to Morningstar of Chicago.
The funds were closed because StockJungle.com chose to focus its energies on its community intelligence concept
and on its remaining mutual fund the StockJungle.com Community Intelligence Fund, said Levy.
"The move is consistent with the strategy for StockJungle.com [in] focusing efforts on community intelligence and the ability of an online community of individual investors to help shape and create investment product," said Levy in a statement. The StockJungle.com's Community Intelligence Fund has $2 million in assets, according to Morningstar.
The two funds were closed within days of the firm announcing its search for ten managers to run the new Hot Hands Hedge Fund, Levy said. On Jan. 29, the firm announced that it had selected the first of its managers. Each manager will manage a $1 million portion of the planned $10 million hedge fund, according to StockJungle.com. Managers are being chosen based on their success as online portfolio managers from among the 200,000 individuals SockJungle.com considers members of its online community of amateur investors. Levy said the funds were closed also because the firm decided to focus on its Hot Hands Hedge Fund.
But, performance probably contributed to at least one of the fund's closing. The StockJungle.com Pure Play Internet Fund lost 66.6 percent of its value last year when Internet stocks took a beating. Levy declined to comment on whether performance influenced the decision to close.
StockJungle.com's only other mutual fund, an S&P 500 index fund which was also introduced in November 1999, was closed just four months later because it failed to attract enough assets to replicate all of the index's stock holdings. (MFMN 4/10/00) The S&P 500 fund received initial attention because of its novel approach to existing as a "free" online fund by charging no management fee and absorbing other expenses.
The other recent online fund casualty was the $1.8 million Allied Owners Action Fund, a 12-month-old, a shareholder activist fund managed by Privateer Asset Management in New York.
The fund was closed to new investors on Jan. 31 and will remain closed indefinitely, said Aaron Brown, co-founder of Privateer. The fund is currently converting to a private corporation and has sent letters to each of its 300 investors alerting them to the fund board's decision.
The Allied Owners Action Fund was introduced March 9, 2000. It planned to take equity positions in small, undervalued companies that the fund manager believed had potential, then pressure management to take steps to increase the value of the company's stock.
Although the fund has closed, Privateer's shareholder activist website www.eraider.com, which was established in conjunction with the fund, is still operating, said Brown.
"We're making a tactical retreat with one part of our business," he said. The fund may someday be reopened, but perhaps as a hedge fund, he said.
Several factors contributed to the online shareholder activist fund's closing, said Brown. First, the fund was introduced at a poor time - when the NASDAQ reached an all-time high last March, said Brown. Since performance slid after the high, investors avoided the fund, along with many others.
Brown said he hoped to attract $40 million to $50 million in assets within the fund's first 12 months. But the fund failed to reach $2 million.
While many people expressed an interest in Privateer offering a novel activist fund, these people failed to actually invest in the fund, Brown said. Instead, Privateer took on the role of more of a consultant to other investors interested in shareholder activism. In many instances, those investors, having consulted with Privateer, invested directly in companies they hoped to influence, rather than doing so through the mutual fund, he said.
Also, the fund did not advertise and that could have helped create interest in the unusual fund, Brown said.
"A sensible advertising campaign would have made a difference," he said.
Finally, the administrative costs of the online mutual fund accounts became too high, Brown said. When the fund was introduced, optimism and a desire for credibility drove Privateer to hire the most expensive service providers. But combined service fees just before the fund closed were running to $30,000 per month, or $100 per account per month, said Brown. The fund was not large enough to support such a cost, he said.
Other online mutual funds have either closed or dramatically altered their direction. In November, X.com Asset Management of Palo Alto, Calif., the adviser to the four-fund X.com family, filed a preliminary proxy statement advising its shareholders that it would close its funds. (MFMN 11/06/00) Three of the X.com funds were introduced in November 1999. The last fund was launched in April 2000.
Then, last month, Whatifi Asset Management of San Francisco, which manages five online index mutual funds, announced it was selling a portion of its firm's stock in return for a cash infusion from CIBC Capital Partners, a venture capital firm in New York. (MFMN 2/12/01) The firm also confirmed that it was abandoning its direct-to-investor approach and instead was focusing on offering its funds to other financial services companies.
Many of the online mutual fund pioneers may have proven that online funds were nothing more than a fad tied to the frenzy of the dot.com world, said Andrew Guillette, managing director of Cerulli Associates, the research and consulting firm of Boston.
"The Internet is a distribution channel," said Dan Sondhelm, a partner with Morrison/Carlisle, a public relations and strategic communications firm in Alexandria, Va. "Investors are doing research online, but actual transactions of funds online as well as buying these online funds is still in the first inning of a baseball game. Online funds are missing out on having registered investment advisers and broker/dealers sell the funds and they are not being sold in 401(k) plans either."
While most online funds have failed to attract sufficient assets, the Open Fund of MetaMarkets.com of San Francisco has attracted $17 million as of March 12 despite losing almost 21 percent of its value from inception through that date. Open Fund shows the fund's trades instantaneously and was introduced in August 1999. The MetaMarkets IPO & New Era Fund was introduced in September.
MetaMarkets.com attributes its success to a business model that runs contrary to most of the other online mutual funds which have put the online medium and its technology ahead of the needs of a mutual fund.
"Unlike some online gurus, we are taking a fairly traditional mutual fund with classic active management and offering it online," said Donald Luskin, president, CEO and co-founder of MetaMarkets.com. "We asked ourselves, How can we use this new medium to enhance the fund?' We never tried to turn this into an online stock picking contest. They [other online mutual funds] have forgotten that they have to first have a product."
MetaMarkets also wisely branched out beyond just selling its no-load Open
Fund to online investors. In August, MetaMarkets signed an agreement with 16 distribution partners including Charles Schwab of San Francisco, Fidelity of Boston and TD Waterhouse of New York to offer its flagship fund.
