Time to buy? German fund
managers find some European Internet bargains --- But most of their holdings
are still in the U.S.
By Rhea Wessel in Frankfurt
The Wall Street Journal Europe
(Copyright (c) 2000, Dow Jones
& Company, Inc.)
German investors have finally hopped on the Internet fund
bandwagon. But for now, German fund managers are satisfied with hitching a ride
on the U.S. market.
The number of German Internet mutual funds has
doubled to 10 and the amount invested in them has done nearly the same since
the beginning of the year. They held 4.7 billion euros in assets at the end of
July, up from 2.5 billion euros at the end of last year. At the same time,
market capitalization for European Internet firms has blossomed to $200 billion
(233 billion euros) from $17 billion one year ago.
European-based Internet funds concentrate their holdings outside Europe, with
about 80% of portfolio shares coming from the U.S.
Fund managers say
European Internet shares are more expensive than their North American
counterparts, with similar or lower growth prospects. Their potential is
limited by a fragmented, multilingual market, and from getting a late start,
compared with their Silicon Valley peers. Also, low volumes for Internet stocks
on European bourses diminishes their appeal, since it's difficult for fund
managers to change their positions without moving markets.
roadblocks may be inconsequential for the long haul, however, making now a good
time to consider European Internet shares.
The mobile Internet lies
just around the next bend in Europe, and companies are busily positioning
themselves to benefit from it. When it arrives, analysts are betting that
European Internet shares will leapfrog American ones, becoming more attractive
as millions of cell-phone users begin accessing the Web on handsets.
That's the optimists' view. But Forrester Research Senior Analyst
Andrew Parker is much more skeptical about mobile commerce.
of mobile commerce is that it's going to be much smaller than PC commerce," he
says. "It will be 3% of total e-commerce by 2005. We see it more as a support
mechanism for commerce processes done elsewhere."
Still, he sees
potential for many European Internet shares. He singles out as "obvious
leaders" German e-finance and e-commerce firm Brokat AG, Ireland-based
information security firm Baltimore Technologies PLC, Swedish interactive
services company Icon Medialab AB, German e-commerce services firm Pixelpark AG
and Intershop Communications Inc., a German software firm that builds and sells
Walter Price, the manager for Dresdner Internet Fund,
Germany's second-biggest, has between 5%-10% of his 1.25 billion euro holdings
in European Internet stocks. About 80% of his shares are North American, and
Mr. Price says he can imagine this spread narrowing with the advent of
m-commerce. Third-generation services are expected to be rolled out in late
2001 or in 2002.
Mr. Price, who is based in San Francisco, is attracted
to Terra Networks SA of Spain, the Telefonica SA Internet Service Provider,
because of its joint wired and wireless relationships with customers.
"People want a continuum of contact -- a single portal. They want the
pieces of information to flow from wired to wireless terminals. The U.S.
doesn't have this combination," he says. "Because of their heritage, some
European companies have this potential. They aren't competing with the portal
the wireless operator is trying to develop. To me, that can add a lot of value.
That's very valuable to an advertiser or someone who's doing transactions over
Merrill Lynch has only three European Internet shares on
its long-term buy list and each is well-positioned for mobile commerce. They
are the ISPs of former telecommunications monopolies -- France Telecom's
Wanadoo with two million users, Terra, with 2.7 million, and Deutsche Telekom's
T-Online International AG with 6.4 million.
Many analysts believe these
portals, or gateways to other sites, will be the primary access points to the
mobile Internet for millions of users, since the sites cluster services and
"We think ISP portals will win the battle in Europe. The
daughters of the incumbents have additional leverage to pursue their ambitions,
plus they have huge cash piles," says Merrill Global Internet analyst Peter
Bradshaw, who is based in London.
He also likes Intershop, Baltimore
Technologies and SAP, the German maker of software for administering
Here's a closer look at the strategies of some German Internet
Volker Kuhnwaldt manages Internet funds for
Nordinvest, or Norddeutsche Investment Gesellschaft mbH, in Hamburg. As of the
beginning of September, he oversaw 1.6 billion euros in nordasia.com. Closer to
home, he manages 815 million euros in Nordinternet, Germany's fourth-largest
Internet fund. Started in January 1998, the fund holds about 10% European
shares, most of them German or French.
"About a month ago, the market
for European Internet shares turned around and now there are some good buys out
there," Mr. Kuhnwaldt says.
Without giving direct recommendations, he
says his top European holdings are companies such as Intershop, and Integra,
the French Web site operator. Mr. Kuhnwaldt says he likes Integra because of
its market leadership in building and running Web sites. He has held the share
since its IPO and plans to keep it long-term.
Mr. Kuhnwaldt owns 2.5
million shares of letsbuyit.com, the Internet site that allows consumers to bid
prices down by organizing themselves in groups. "They have one of the few
business plans that can operate only on the Web, and they're Europe-wide. I
think letsbuyit.com fits with the mentality of the Internet," says Mr.
Nordinternet had a return of 115.4% in 1998, 225.5% in 1999
and is down 7.5% on the year. By comparison, the Dow Jones Internet Index rose
168.9% in 1998, 166.8% in 1999 and is down 23.62% on the year.
Like Mr. Kuhnwaldt, Mr. Price owns Intershop and Integra.
In addition, Mr. Price holds CMG PLC, a U.K. technology-services company with
$983 million in sales in 1999; Logica PLC, a British company that earned $1
billion last year by designing and producing software and hardware systems;
Brokat; and Autonomy, a U.K. software maker.
He looks for companies
that are secure in their home markets or contenders in North America.
Intershop, for instance, recorded 41% of its sales in the U.S. in the first
half of this year.
Mr. Price held more European titles at the beginning
of the year. "But as the focus changed, U.S. companies seemed the better
value," he says. He owned Freeserve, for example, but dropped the British ISP
in favor of U.S.-based portal Yahoo! Inc.
"I got worried that the
Freeserve model is a long way from profitability," Mr. Price says. Freeserve
offers free Internet access and lets advertisers pay the bills.
Dresdner Internet Fund has earned 84.5% since its inception one year
ago and is down 9.2% on the year.
DWS Internet Aktien Typ 0
Deutsche Bank's mutual-fund management arm DWS offers the DWS Internet
Aktien Typ 0 fund, Germany's third-biggest, with 1.5 billion euros in assets as
of the beginning of September. The fund focuses on U.S. shares and has 5%
European holdings. Its manager, Andreas Kraft, also oversees a U.S. technology
fund and DWS Funds B2B.com, which holds 20% European Internet-related shares.
It's worth about 200 million euros.
His top three picks are Software
AG, SAP and German microelectronics wholesaler CE Consumer Electronics AG. He
also has a position in Gauss Interprise AG, a German software company that
Mr. Kraft sees Intershop as an interesting play. "It's
one of the few German stocks besides SAP that has had success outside of
Europe," he says. Intershop's shares were first traded on the Neuer Markt in
July 1998 for 8.89 euros. On Sept. 11, they were trading at 95.50 euros.
DWS Internet Aktien Typ 0 has risen 72.3% since it was started one year
ago, and is down 8.2% on the year.