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The explosive growth in state-of-the-art telecommunications seems to be self-perpetuating. The more the market in modern media and telecoms grows, the more people invest; and the more people invest, the more the whole sector grows; the classic symptoms of the investor’s bubble.
Yet, unlike most bubbles, this latest ‘e-bubble’ shows little sign of bursting. It is based on real and, one supposes, sustainable demand for all products that facilitate remote interaction. Real, because, far from being a fad, the industry has revolutionised the way we work, and sustainable, because the trend is too far developed to be reversed.
Some dot-com companies are hugely overvalued, and some investors will get burnt, but the industry as a whole looks unlikely to implode.
Investment professionals appear to have been presented with a gilt-edged opportunity to make money. But how does a fund manager determine which of the flock of fledgling companies are the golden egg-laying geese, and which are the wing-clipped turkeys?
One German fund management team thinks it has the answers. The Deutsche Kapitalanlagegesellschaft mbH, or Deka, launched Deka-TeleMedien three years ago last month, and has seen its share price rise from x33.23 at inception to a current net asset value of Û91.27 per share. The fund’s management team of four, headed by Michael Schneider and Victor Mostakhar, has achieved an increase in share price of 145.5%, posting performance of 46% from June 1998 to June 1999 alone.
Using a bottom-up approach, Schneider and Mostakhar look for the twin grails of growth potential and commitment to shareholder value. From a universe that includes all the major media and telecoms players, along with a few lesser-known outfits, the team takes time out to visit companies and grill their executives.
Recently, for example, they spent several hours at France Telecom, asking about the firm’s international strategy and domestic approach, then related their findings to a pre-designed investment model to confirm the existence of long-term shareholder value. (They came away satisfied.)
So where are they investing? Perhaps surprisingly, given the market’s West Coast origins, US-based companies make up only 50% of the fund’s holdings. Investments in European companies make up another 40%, and Asian and Australian holdings complete the fund’s geographical profile. “There are a lot of good opportunities in Europe at the moment,” says Schneider, “Spending on multimedia is increasing for everyone, while costs are going down. The sector is driven by visible growth, and the use of mobile phones and cable penetration are both growing like crazy.”
In the future, however, this high proportion of European holdings could start to decrease. “At the moment, the value is with the infrastructure stocks – cable and internet – but in a couple of years, the value will be with the content, so maybe then the US companies such as Time Warner and Disney will look even more attractive,” explains Schneider. “I think we are well placed to take advantage of this shift in emphasis.”
Still more reasons for optimism come from the much-discussed process of globalisation. “There’s so much of it about,” says Schneider. “World Com and Sprint Corp, Mannesmann and Orange, CBS and Viacom – and every time companies merge, new ones emerge to fill the niches.”
Yet, in a country known for the conservative approach of its investing public, does it not come as a surprise that the fund – an equity fund, and one that invests in such a young industry at that – has been so conspicuously popular? It did, after all, attract Û2.2bn between June 1998 and June 1999, almost exclusively from retail investors. “It is a learning process for German investors,” says Schneider. “They are realising now that equities can be safe after all.” John Grainger

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