Asian Internet Investing for the Wary
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AsiaWise Data Feed
June 26, 2001
The days when Softbank Corp. was a darling of growth-oriented foreign mutual funds are long gone. But while many fund managers have reduced or eliminated their positions in the Japanese holding company and other former Internet bellwethers, they haven't abandoned all hope that the Internet has a very bright future in Asia. They are seeking Internet exposure by investing in mainstream companies that have launched promising online ventures.
A pair of funds run by the AIM Management Group illustrate the new approach quite well. Andrew Callender, manager of the $48 million AIM Japan Growth Fund, sold all of his stake in Softbank last year, bailing out of a position that was worth $4.7 million last June. He kept small positions in a handful of Internet-related companies, including the Web portal Yahoo! Japan Corp., Net One Systems Co. Ltd., which designs and installs networks, NextCom K.K., another vendor of network systems, and Trend Micro Inc., a global provider of integrated anti-virus software and management solutions. But overall, Callender slashed his fund's exposure to the computer networking, software and services sector by nearly two thirds in the second half of last year.
Meanwhile, Barrett Sides, manager of the $77 million AIM Asian Growth Fund, has been increasing his fund's exposure to another group of companies on the strength of their Net endeavors. He "favors banks which have been actively building their IT and Internet capabilities," he explained in a report last year. At the time, Dah Sing Financial Group was the largest bank position and the ninth largest holding overall in the fund. This spring, Dah Sing launched its MEVAS Bank unit, an online bank supported by customer service staff available round-the-clock by telephone. The move evidently met with Sides' approval. By the start of June, Dah Sing's weighting had nearly doubled from a year ago and it had become the second largest holding in the Asian Growth Fund.
At least one mutual fund is still risking a sizable chunk of its assets on pure Internet plays. The $10 million Matthews Asian Technology Fund has had two Korean dotcoms among its top holdings this year, and the gamble has paid off handsomely so far. NCsoft Corp. Ltd., the developer of an online medieval-themed multi-player game called Lineage, and Internet Auction Co. Ltd., a Korean auction Web site in which U.S.-based eBay holds a 51% interest, together accounted for 6.5% of the fund as of June 1.
Both stocks surged more than 35% in April, prompting the fund's co-managers, Paul Matthews and Mark Headley, to remark that the fund's performance that month "could easily be characterized as 'The Revenge of the Internet'." In May, "Internet Auction reprised its role as one of the largest positive contributors to the Fund's performance," rising an additional 20%, Matthews and Headley wrote. NCsoft, which launched Lineage in the U.S. market on May 1 after a promising eight-month trial run, also had another strong month, gaining 8%.
Both stocks have slipped this month. But the Matthews fund managers plan to stick with the same theme that led them into those winning positions. And that theme is "entertainment and consumer technology adoption." As they explained in their latest monthly commentary: "We believe that the entertainment industry may be an attractive place in which to invest over the coming years, as entertainment applications are likely to be the 'hook' that drives individuals online." Their faith in that theme is strong enough that they have taken a sizable position in beleaguered Chinadotcom, which accounted for 2.7% of the fund at the start of June.
High hopes for the Internet in Asia were underscored by comments June 19 by an executive of Cisco Systems Inc., the world's largest maker of data networking equipment. "Asia is a tremendous Internet opportunity, as it is forecasted that by 2004-2005, there will be more Internet users in Asia Pacific than all of the U.S.," Gordon Astles, president of Cisco's Asia Pacific operations, told Reuters in an interview at a technology conference in Singapore.
But the lingering wariness toward Internet stocks that still grips most Asia-Pacific fund managers was illustrated by another development last week: the tepid reception with which institutional investors greeted the market debut of Sony Communication Network. The tracking stock floated by Sony Corp. to represent the performance of the its So-Net Internet service, ended its first day of trading last Wednesday more than 10% below the initial offering price.
Fund managers complained that the size of the offering, at 3.1 million shares, was too small and said they didn't have enough information about how Sony would use the proceeds. Several fund managers said they might consider buying later, after they've had a chance to figure out whether SCN's business model will lead to profitability. In other words, it could be quite a while before the tracking stock sees any of those skeptics' money.
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