Matthews Asian Technology Fund

However, geographic diversification can only go so far. The region’s region’s two biggest economies, Japan and Korea, account for more than half of the fund’s assets. The increasingly important China/Hong Kong hub represents 20% of the fund, so only three markets make up more than 70% of the portfolio’s assets.

Headley counters that the fund is underweight in Japan relative to its benchmark. “We are disappointed that the restructuring of the Japanese tech companies has been slow,” he said. “Samsung of Korea has eclipsed many Japanese tech firms, representing a failure by senior management in Japanese companies to become profitable. They have also been hurt by the weak domestic economy in Japan. But I think Japan may have turned the corner. We are currently looking for some Japanese tech stocks, particularly Internet names, that are poised to benefit from a potential recovery in Japan’s domestic segment. If and when that domestic economy recovers, it will unleash huge earnings growth for local-oriented Japanese companies.”

Headley said he believes the political risks commonly associated with South Korea have been exaggerated and are already priced into the market. “Korea has a dynamic domestic economy that has successfully integrated with both high-end Japan and low-end China,” he noted. “Korea has embraced Western-style management quicker than Japan has.”

Headley currently has relatively little exposure to the semiconductor industry, aside from Taiwan Semiconductor and Samsung, two core holdings in the fund. “The chip industry is very volatile, prone to rapid swings and prices,” he noted. “It’s difficult to make accurate forecasts about this industry.”

Headley is not overly concerned about the weak dollar and its effects on Asian tech exports. “A weak dollar will only hurt Japanese firms because the other major Asian countries are managing their currencies down with the dollar,” he said. “Many Japanese tech stocks tend to move not on fundamentals, but on the vagaries of the yen. When the currency is weak, foreign investors buy them, and then they sell when the yen strengthens.”

In either case, Headley is trying to avoid investing in companies which are overly sensitive to the U.S. economy, although he will hold onto global leaders like Nintendo, which has a large exposure to the U.S consumer market.

Headley will unload a stock because of valuations or if an industry’s outlook darkens. “But a company’s outlook is often determined by what kind of market the company serves,” he explained. “Is it a global company or is it domestically-oriented? China Mobile is a giant blue-chip which serves the domestic Chinese mobile market, whereas Canon plays in the global marketplace in several different industries. When making sell decisions, we have to consider various factors, not just valuations.”

While many Asian tech stocks are trading at depressed prices — for example, Samsung has a p/e of about 8 — Headley is ebullient about the industry. “The Asian tech sector is just as dynamic and complex as the U.S. tech industry,” he said. “Many Asian companies enjoy global dominance and are of the highest quality. Once we get through the current worries about terrorism, high oil prices, high interest rates, and the weak dollar, Asian tech stocks, particularly those in Japan, could flourish.”

Contact Bob Keane with questions and comments at: [email protected].