So maybe the Internet is the future (see lead story). But it's not the whole future. Wired magazine's editors have created their own 40-stock index intended to reflect their broader vision of the technological world and where it is headed. A considerable number of the index's constituents are in the computer and Internet industries, but companies like DaimlerChrysler AG and Walt Disney Co. firmly set it apart from the proliferation of indexes that focus strictly on the trendiest and highly volatile market sector.
Rather the Wired Index has been labeled the 'bellwether for the new economy' by its creators. Named for the magazine that caters to the cutting-edge cybercrowd - and which brought us the 'Long Boom,' a provocative piece published in the summer of 1997 that made the case for a 25-year global economic expansion driven by technological advancements - the Wired Index seeks to tap into trends that are transforming the economy. The future as seen by its creators: an eclectic mix, heavy on networking and telecommunications (Yahoo; Cisco Systems; America Online; Cable & Wireless; MCI WorldCom) but with a dab of multinationals that include an airline (AMR), a steel outfit (Nucor) and an insurance company (AIG). There's a smattering of small companies to complement the large, as well as a solid mix of old but highly adaptable companies and young, innovative upstarts; all are supposed to represent the best in globalism, innovation and strategic vision.
For those who want in on the action, the folks at Guinness Flight Investment Management introduced a fund in mid-December based on the index: The Wired Index Fund was up almost 12% near the end of February. It's already gathered more than $25 million. Financial columnist James Glassman of the Washington Post, enamored with the concept, plugged it as one of his favorite funds for 1999. Yet despite the enthusiasm and recent success of the index, its creators write in an essay on the Wired web page that 'the Wired Index is not an investment fund designed to beat the market - it is the market, or, more precisely, an informed guess at what the market increasingly will be.'
Inspired, they said, by the humble beginnings of the Dow Jones Industrial Average more than a century ago, two ink-stained types - John Browning and Spencer Reiss - formulated the index in what they refer to as 'seat-of-the-pants' fashion.
'In looking at the new economy, we felt we knew it when we saw it,' says Browning, a former journalist with the Economist, describing how the pair winnowed a list of hundreds of possibilities to a mere 40. Reiss is a former writer at Wired, now working in an editorial capacity with George Gilder, the social commentator and supply-sider. Drawing again from the spirit of the Dow, Browning and Reiss don't plan to tinker with the index unless forced to by some surprise event such as a merger or bankruptcy or a shift in business strategy.
Says Browning: 'I'm eager to keep it as unchanged as possible. You want to track these companies over a long period of time.'
The two relied on input from Wired editors, as well as from two economists Paul Romer, a productivity guru at Stanford University; and Hal Varian, at Berkeley, who along with fellow professor Carl Shapiro co-authored Information Rules: A Strategic Guide to the Network Economy. Last but not least, Nicholas Negroponte, director of the Media Lab at the Massachusetts Institute of Technology, threw in his two cents.
The index is market-weighted but includes a market-cap ceiling of $10 billion in an effort to keep the biggest companies such as Microsoft from unduly influencing performance. That means, when the portfolio is re-balanced once a year, the top 30 stocks are equally weighted. At the start of this year, the top 30 each represented 3.075% of the index, and the 10 small-fry made up the rest, based on their market caps.
But the Wired Index fund is an expensive fund; costs are 1.35% of assets. Even if you can justify the still-outlandish valuations of Yahoo and AOL, it's tough to find an excuse for that kind of price on an index fund. At those levels, it may as well be actively managed.
Indeed, to some, it feels like an actively managed fund.
'Is it really an index when there's so much selection going on?' asks Russ Kinnel, a fund analyst at Morningstar. 'It feels more like an actively managed, but low-turnover, fund. Part of an index fund is low cost. Over 40 basis points, it becomes a very hard sell.'
James Atkinson, an executive at Guinness expects the expense ratio to fall as assets grow, but he notes that the costs of 'specialty index funds tend to be higher.' S