Rhea Wessel - freelance writer, author

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

09/25/2000
The Wall Street Journal Europe
26
(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.

Still, most 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.

These 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.

"Our view 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 e-commerce sites.

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 the Internet."

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 information.

"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 businesses..
Here's a closer look at the strategies of some German Internet funds:

Nordinternet

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. Kuhnwaldt.

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.

Dresdner Internet Fund

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 manages content.

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.