Internet Newcomers Could Force Funds to Innovate.

A new crowd of Internet iconoclasts is doing its best to keep established mutual fund firms from getting too comfortable.

On their Web sites, these upstarts offer such experiments as "naked" funds where every investment move is immediately disclosed, a fund that picks stocks from Web site visitors' suggestions, and funds that charge no fees whatsoever.

All these companies are brand new, small and speculative, in the spirit of this entrepreneurial age. They're also all based in California, which is surely no coincidence.

"The whole idea is to completely alter the traditional relationship between funds and fund investors," said Brian Levy, a former screenwriter who is president of StockJungle.com in Culver City. StockJungle describes itself as "the home of naked mutual funds."

It will take a while to determine whether these funds can achieve their grand aims. StockJungle.com, in business only a couple of months, claims just $1.5 million in assets among the four funds it sponsors.

Metamarkets.com in South San Francisco lists slightly less than $15 million of assets in its OpenFund, which started last summer. The Metamarkets Web site offers not only immediate updates on each change in OpenFund's portfolio of 65 or so stocks (including a few sold short in hopes of profiting from market declines), but also "TraderCam," providing live pictures of its trading room.

Another venture, X.com, based in Palo Alto, offers banking services provided by a federally insured bank as well as stock index, bond and money-market funds managed for the firm by Barclays Global Investors, a unit of U.K. bank Barclays Plc.

X.com Corp. was founded by Elon Musk, who at age 28 has already made his first Internet fortune through the sale of Zip2 Corp. to Compaq Computer Corp. In August, X.com hired John Story, a veteran of established fund firms Alliance Capital and Montgomery Asset Management, to run its mutual funds.

As an inducement to invest in its no-fee stock fund patterned on the Standard & Poor's 500 Index, X.com says it will add 0.01 percent to whatever return the fund achieves. In practice, that means a penny for each $100 invested.

Roy Weitz, who runs the independent commentary site FundAlarm.com (also in California), figures that sweetener on a $10,000 investment would get you enough to buy a pretty decent fast-food meal. "You get lunch, and Musk gets his IPO," Weitz wrote.

While we're discussing motives, it's also fair to ask whether the Web funds have really spotted serious weaknesses to exploit in the traditional fund business. The charge they sometimes make that established funds are overly secretive an patronizing to their clients is certainly open to debate.

Compared to, say, most banks and insurance companies, the typical fund is a regular chatterbox, disclosing its fees, investments and other information as required by law. It's also not clear that most shareholders of big, successful stock-funds think their managers' every move should be published in real time, where anybody else could trade against it.

Some of the strategems the Web funds employ are gimmicks. Metamarkets.com's TraderCam quickly proves that a TV drama set in a trading room wouldn't fly in prime time.

And a fund stocked with investments suggested by the clients? That's a bit like having the patients perform surgery, or the fans play the game.

All quibbles aside, though, the Internet upstarts stand to exert a healthy influence on established funds, forcing them to consider new ideas and, who knows, maybe even cut costs. Count on the newcomers to teach old-line fund firms a thing or two about adapting to the Internet age.

Michael Witz, StockJungle.com's 28-year-old founder and chairman, who calls himself a "reformed financial analyst," says he thinks traditional fund firms myopically view the Internet as "just another channel of distribution."

What they're missing, he says, is that "the power of the Internet could be leveraged to provide mutual fund investors with better information, lower costs and more mutual fund choices than ever before." That's a rallying cry any fund investor could get behind.

Double Whammy

Thanks to 1999's lopsided stock market, we can conduct a mutual fund research project that was never possible before.

The subject: When an exceptionally high number of stock funds double in a single year, how will they perform the following year and thereafter? By the count of Steve Norwitz, a vice president at the fund firm of T. Rowe Price Associates Inc. in Baltimore, 59 funds that began 1999 with assets of $100 million or more at least doubled they investors' money by the end of the year. Most years, no funds do that well.

What makes the 1999 profusion even more striking was the unexceptional showing of the typical fund, at least by the standards of the late-'90s bull market. The Vanguard Total Stock Market Index Fund, which tracks the comprehensive Wilshire 5000 Total Market Index, gained 23.8 percent in 1999, falling short of the 27.5 percent return it averaged over the four preceding years.

Dozens of stock funds posted losses last year, in such diverse areas as value investing, health care, real estate, utilities and financial services. Almost all the doublers got there on the strength of computer and telecommunications stocks, or the rallying Asian markets, or both.

Do, unusual numbers like these suggest that investors should make some out-of-the-ordinary response? Alas, the skimpy history of fund doublers from past years provides no easy answers. In fact, buying the previous crop of doublers in 1993 would have proved a total bust.

The fact that a fund doubles in a year by itself is no good reason either to buy it or avoid it, to sell it or to keep it.

Chet Curier is a columnist for Bloomberg News.