Sept. 3, 2004 — The Matthews Asian Technology Fund (MATFX) could be a considered a sector within a sector fund.
Lead manager Mark Headley invests in technology companies in Asian Pacific nations, including Japan. While the fund is typically concentrated with about 50 stocks, Headley seeks to diversify by holding a broad range of tech-related companies, including computer and software manufacturers, Internet service providers, wireless telecoms, and semiconductor producers. Headley can invest in large-cap global leaders like Samsung Electronics and Nintendo, as well as smaller companies like Internet Auction.
The $40.1-million portfolio has delivered some impressive returns since its inception in late 1999, at the tail end of the global tech boom. For the one-year period through August, the fund gained 12.4%, while its benchmark, the MSCI/Matthews Asian Technology Index, rose 0.6%. For the three-year period through August, the fund climbed 11.4%, on average, versus a 3.6% gain by the index.
Reflecting the considerable volatility of foreign tech investing, the fund has a high standard deviation of 27.8%, versus 23.0% for its international equity fund peers, although it boasts a significantly lower turnover of 72.0%, compared with its peers’ 116.1%.
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Patricia Higase, an analyst on the fund, estimates the universe of investible Asian tech stocks with a minimum market cap of $100 million is about 770 stocks, for a total market cap of $1.4 trillion. A year ago, the comparable number was 640 stocks, with a $1.2-trillion total market cap. Using a bottom-up, growth-at-a-reasonable price approach, Headley and his team consider this universe to build a concentrated portfolio of 45 to 50 holdings.
The fund’s five largest holdings show the fund’s diversification: Samsung Electronics Co. Ltd., the Korean consumer and industrial giant, which accounts for 30% of the Korean market’s total capitalization, 4.4% of the fund; Internet Auction, the Korean version of eBay Inc. (EBAY), 4.0%; Nintendo, the Japanese home video-game manufacturer, 4.0%; NIWS Co. Ltd., a Japanese financial software firm, 3.7%; and Hon Hai Precision Industry Co., a Taiwanese cable assembly maker, 3.6%.
These five holdings represent nearly 20% of the fund’s assets.
The fund is dominated by stocks in information technology, 57.5% of the fund as of July 31; followed by telecommunications services, 20.9%; and consumer discretionary, 14.3%.
Headley cites Korea’s Internet Auction as an example of newer, smaller companies he likes. “When we first invested in Internet Auction, it was not profitable,” he said. “But we liked their management team, and we knew that Koreans have the highest level of broadband penetration in the world and adopt new technologies very easily. Thus, the environment was good for this company. For these money-losing start-up techs, the quality and honesty of management is very important. Internet Auction has been very successful, maintaining its domination of the domestic auction business, and delivering high profitability. It has done so well that eBay owns 50% of the company’s shares and is seeking to swallow it up entirely.”