The Anglo File: Framlington's Global Internet Fund Revolves Mostly Around U.S. Holdings

The Framlington NetNet fund has a wide definition for Internet firms, but an infantile British market still has few pickings.
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LONDON -- Echoing the words of


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Chairman Andy Grove -- who once said that within five years all companies will be Internet businesses or they will be out of business -- the lead manager of




fund applies a broad brushstroke to what constitutes an Internet company.

But even with such a loose definition, the predominance of U.S. names in the British fund shows the rest of the world still has a lot of catching up to do.

Within the 80 million-pound NetNet fund ( -- a U.K. unit trust and its carbon-copy offshore fund -- 40% is invested in pure Internet companies, 40% in underlying infrastructure companies, and the balance in Internet-related stocks, such as retailers that are moving their bricks-and-mortar businesses online.

"There needs to be a fundamental shift in their business -- some 15% to 20% of their revenues must come from the Internet," explains Christopher Bell, lead manager of the fund. "I'm not saying I would like to own

British Airways

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, but if they achieve their aim of selling 50% of their tickets over the Internet in three to five years' time, then it might be possible to put such a stock in the fund."

Despite such interesting possibilities, the fund is still heavily weighted toward U.S. stocks, with around 80% invested in U.S. firms. The work for this aspect of the fund is subcontracted to

Munder Capital Management

, a major shareholder in Framlington. Framlington's fund is wholly separate from Munder's

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NetNet fund.

"Whilst the rest of the world is catching up and there are some quite exciting global developments, we still feel that the best companies in this space happen to be the American ones," Bell says.

With such a preponderance of U.S. Internet stocks, the fund has had a volatile summer. After swinging 18% lower and then lurching 5.5% higher, the fund is now at 50.21 pence, just a hair higher than the 50 pence it debuted at on May 10.

Yet Bell remains unperturbed and breathlessly talks of exciting opportunities in far-off places. He believes that in a year's time, the U.S. proportion could fall to 65% to 70%, although he stresses that this is only a prediction, not a target.

The principal problem with beefing up the international side of the portfolio is the ludicrous valuations being placed on some the newly floated European companies. Bell cites the example of the European online auction site


, which floated earlier this month.

"QXL was grossly overvalued for such an early stage in its life, and I own


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, so why bother with QXL?" Bell asks. Good question. QXL in the latest fiscal year ended March 31 posted a pretax loss of 2.05 million pounds on revenue of 2.55 million pounds. The shares were initially offered at 195 pence ($3.23) and closed Thursday at 202 pence.

Other high-profile British Internet IPOs have similarly suffered. The

eXchange Holdings

, a personal finance information provider, floated at 200 pence and is now trading 15% lower.

365 Corp.

, an Internet content and communications provider, is still debating when to take the plunge because its estimated market value has plummeted from an expected 500 million pounds during the summer to around half that today.

"It's still too early in the U.K. for a pure content Internet company," says Bell. Instead, he is focusing on the smaller services/infrastructure Internet companies, such as the data communications engineering firm



Baltimore Technologies

, an information security company, which listed on the


Wednesday at 29.25 and is now trading at 33 1/4.

Outside of Europe, Bell is particularly interested in Japan, the world's second-largest economy but still an Internet infant. Framlington has set up an office in Tokyo to look into opportunities there.

One Japanese Internet stock that Bell holds is

Internet Initiative Japan


, an Internet-related service provider. The company went public at 23 in August, and after peaking at 91 15/16, the shares are currently trading around 61.

"The most exciting aspect of Internet Initiative is its subsidiary called

Crosswave Communications

, which is involved in telecoms infrastructure and is successfully circumventing NTT's monopoly" of the fixed-line local network, Bell says. NTT is

Nippon Telegraph & Telephone



Indeed, Internet companies themselves are looking at Japan. Only this week, the British online sports-betting group

announced it is planning to launch a Japanese betting business early next year though a venture with


, a Japanese strategic advisory group.

Mark Blandford, founder and managing director, was quoted in a U.K. newspaper as saying that the sports-betting market in Japan is estimated at more than 100 billion pounds, so "if we were to achieve a penetration of 0.5%, this would translate into turnover of 500 million pounds and gross profits of 30 million pounds a year."

So there seems to be plenty of choice for investors interested in putting their money into Internet firms based outside the U.S. The trick is, of course, to choose the right ones.