While the wild and woolly days of Internet investing appear to be waning in the U.S., prospectors see glimmers of gold in the Old World.
“We, in Europe, are two years behind the U.S. in terms of Internet usage . . . and what we are facing now is that Europe is catching up very fast–Internet use is starting to explode,” said Thierry Roussilhe,the Paris-based lead manager of the Monument EuroNet Fund, which launched Wednesday.
Clearly Roussilhe is trying to round up investors for his Bethesda, Md.-based mutual fund, which will invest primarily in companies engaged in Internet or Internet-related businesses in the European Union.
But even more-neutral observers see potential on the continent, particularly in companies involved in bringing the Internet to wireless devices such as cellular phones and hand-held, computerized personal organizers.
“Over the next five years, hundreds of billions of dollars will be spent on the mobile Internet, and in that area, the European companies are pretty dominant–Nokia, Ericcson, Sonera, Siemens, Vodaphone–and in Asia, too, with NTT DoCoMo,” noted Mark Bell, a fee-only investment adviser based downtown. “They are way ahead of us in piping the Internet to mobile devices.”
And, he added, “the demand is unstoppable, absolutely unstoppable, so you want to get in front of that trend.”
But, step gingerly, observers say, because the emerging Internet landscape in Europe is rife with uncertainty, much like the landscape in the U.S., where Internet-focused mutual funds lost between 40 percent to 60 percent of their value within a month during the tech wreck this spring.
“You shouldn’t devote more than you can afford to lose in a short time,” warned Christopher Traulsen, a senior analyst with investment research firm Morningstar Inc. in Chicago.
Spotting winners among startups with unproven business models is just as difficult among European firms as it is here, and even picking winners among established competitors is no easy task.
“Investors are not taking into full consideration the threat that foreign companies face in a globalized world,” said George Nichols, a stock analyst at Morningstar. “A lot of American Internet titans that have overcome the learning curve here are [starting] localized extensions overseas.
“Yahoo! Japan, for instance, quickly became the leader in portals in Japan, as opposed to other Japanese portals,” he said.
And while tech-stock valuations tend to be cheaper in Europe than in the U.S., they are hardly at bargain-basement prices.
“Already a lot of the optimism is priced into them,” Nichols said. “The growth prospects are no big secret.”
And it is often difficult to assess whether the market’s price for a nascent firm with an evolving business model is reasonable, noted Rajesh Gandhi, global equity analyst with Deutsche Asset Management in New York.
Still, a good many observers see the potential for strong stock performance, even if it’s not of the meteoric variety experienced by U.S. Internet stocks last year.
“The bubble won’t get as big, but there is a lot of opportunity in front of infrastructure, software and the dot.coms,” said Michelle Espelien, an analyst on the Denver-based Invesco Technology Fund, whose international holdings comprise 13 percent of the portfolio.
Hoping to capitalize on such opportunities are the first three international Internet funds to crop up in the states, all since year-end ’99: Monument EuroNet Fund; Kinetics Internet Global Growth Fund; and Munder International NetNet Fund.
In rolling out the Monument EuroNet Fund last week, the Paris-based investment firm Financiere Rembrandt, which will co-manage the fund, released a research report spelling out why it thinks European Internet stocks are ready for takeoff.
It points to falling costs for personal computers and Internet access; explosive growth in e-commerce; increasing private equity support for Internet companies; and increasing government support of individual investing.
“We are facing a huge number of [initial public offerings] coming to market,” Roussilhe, lead manager of the fund, said in an interview. “If you only take the pure players in France, there are about 35 Internet stocks listed, and it’s forecasted that before the end of the year, there will be about 80.”
And the European Internet market may prove to be less risky and volatile than the U.S. market, he argued.
For starters, he noted that many Internet companies are spin-offs of established companies, and many are already profitable.
“In Europe, not many very small Internet companies are listed,” he said. “It is not so easy for them to have access to the market.”
As well, many European exchanges have so-called up-and-down rules that halt trading in a stock if the swings surpass certain limits in a given day, he said.
Nonetheless, a number of observers are unconvinced that a fund focused on foreign Internet stocks is the best way to gain exposure to Internet stocks overseas.
“It seems a little too specialized for me,” said Traulsen, of Morningstar.
“If you specifically want international exposure, consider a global tech fund first, such as Dresdner RCM Global Technology or Janus Global Technology,” he said, noting these types of funds offer a more diversified array of holdings and often, a longer track record to evaluate.
“You get Internet exposure, but there are other areas to fall back on,” he said, noting diversified tech funds fared better through this spring’s convulsions than did pure Internet funds.
The average tech fund was up 7.53 percent for the year, as of midweek, he said, while the best-performing Internet fund was down 1.19 percent.
When Internet stocks were flying high last year, Bell recalls that his clients were clamoring to get in, and he held them off.
“I was adamant that the Internet both here and abroad was a bubble, and ultimately, when it burst in April, I said, `You were clamoring before, and now that it’s about one-third cheaper, you should begin to initiate a position.”
But he advises a go-slow approach, and recommends use of mutual funds or exchange-traded funds, rather than trying to cherry-pick winners.
“No one knows if Nokia or Motorola will dominate,” he said, “so my view is, spread the bets.”
