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"We Were Never a Dot-Com Fund"

Running a mutual fund that focuses mostly on Internet companies can't be easy these days. With a few notable expections, such as online travel service Expedia (EXPE), many Internet-related stocks are still in the dumps.

Yet Paul Cook, manager of the $1.2 billion Munder NetNet A Fund (MNNAX), has been tilting his portfolio more toward Internet stocks, particularly those that derive revenue from advertising. His reasoning: Ad dollars tend to lead spending out of a recession. That's why DoubleClick, Yahoo, AOL, and Overture are among the fund's top 10 holdings.

Munder NetNet, launched in 1996, achieved outsized returns of 98.1% in 1998 and 175.4% in 1999 as investors poured money into high-technology stocks. Then the tech bubble burst, sending the fund down 54.2% in 2000 and 48.2% in 2001. Rick Micchelli of Standard & Poor's Fund Advisor recently spoke with Cook about the fund's investing strategy, top holdings, and portfolio moves. Edited excerpts from their conversation follow:

Q: 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?

A: A lot of our clients are trying to make sure that we're not changing our stripes. I think there's some concern out there that we may adopt a different strategy, and that's not something that we intend to do anytime soon.

Q: A lot of so-called dot-com funds have been liquidated or have merged into broader-based funds. How do you define Munder NetNet's approach?

A: 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.

Q: What are the two other components of Munder NetNet?

A: The first is what we call the offline component. We've never had a big allocation here, but at times we've held companies such as Gap (GPS) or Home Depot (HD). Today, you might consider offline 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 offline environment and turning it into a higher-margin business in an online environment.

Q: What is the third component of the fund?

A: 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 VeriSign as a dot-com. Microsoft (MSFT) I think of [as enabling technology], as well as probably Check Point Software (CHKP).

All of these companies go to the enterprise of the Global 3000 [Cook's list of the largest companies] and try to sell their wares to help those companies become more competitive and to take market share. Over time, the value of these companies 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'll do battle through the efficient deployment of technology because it's 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.

Q: How do the three segments of the fund break down?

A: The offline component represents 10% to 12%. The pure Internet, or born-on-the-Web component -- recognizing that there are fuzzy lines since Microsoft 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% to 50% in enabling technology companies. We try to keep cash under 5%. We're about 2% now.

Q: What are the top holdings in the fund?

A: DoubleClick (DCLK), Yahoo (YHOO), Cisco, Veritas Software (VRTS), AOL Time Warner (AOL), VeriSign, Oracle, Microsoft, eBay (EBAY), and Overture Services (OVER).

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

Q: Many of your top holdings seem fairly cyclical.

A: Technology stocks weren't supposed to be cyclical. We've found out that they are supercyclical. It used to be that you could look at technology as a sector that marched in lockstep. That isn't 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 (INTC) and Microsoft, and that's just not the case any more because there are so many different opportunities out there, or subsectors that have their own characteristics.

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

A: 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. Information-technology spending lags a little in an economic recovery as IT managers get up the nerve to start spending again or request to spend, whereas advertising dollars tend to lead out of a recession -- at least that's what we can infer.

If that's the case, it makes sense for us to look at the companies we think are best positioned to garner some of those advertising dollars. That's why you see DoubleClick, Yahoo, AOL, and Overture -- again advertising-driven -- in our top 10. The business models, of course, are different.

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