If you want more foreign punch for your investment dollar, you have to think about the growth of the technology sector overseas. American companies already have. It's hard to find a big U.S. tech firm that doesn't get a big chunk of sales and profits from international operations, with much of the growth coming from emerging markets.
"That means a lot of people already have a great deal of exposure to overseas tech," says Karen Dolan, a mutual fund analyst at Morningstar. Large-cap funds typically hold big stakes in major U.S. tech firms such as chipmaker Intel, which derives more than 75 percent of its revenue offshore. Foreign sales are one reason the tech sector may better withstand a slowing U.S. economy than it has in the past.
But for investors with an appetite for more overseas tech—hungering for its growth prospects and able to stomach its volatility—specialty funds can extend their reach. Dolan likes T. Rowe Price's $180 million Global Technology Fund, which favors large-cap stocks and has about 30 percent of assets in companies based outside the United States. Its top foreign holdings include Hon Hai Precision, a Taiwanese components maker that helps make Apple's popular iPhone, and Finnish cellphone giant Nokia. Another approach might be the $204 million Wasatch Global Science & Technology Fund, which is half-invested in overseas equities, largely in smaller and even micro-cap companies. (Top holdings: Latin American wireless company América Móvil and Weg, a Brazilian electrical parts maker.) That can lessen the overlap with big tech companies typically found in other funds.
But Dolan's favorite mutual fund for overseas tech is the $1.4 billion Allianz RCM Technology. Its managers, Huachen Chen and Walter Price, have more than 20 years' experience in running a tech fund together. Foreign companies account for nearly 40 percent of the fund's holdings.
A major reason for the foreign flavor is China, which suffered its own tech bubble of sorts bursting in 2004. That's when China Mobile, which controls most of the cellphone market, moved into content services like ringtones and started squeezing a number of thriving start-ups. Allianz RCM lost money that year and reduced its China holdings, but it has raised them lately to about 10 percent of assets, Price says. "It's a more durable environment now."
He likes Internet-related stocks, including Baidu, China's largest search engine, and Sina, its largest portal. Those stocks have risen sharply, with Baidu selling at what Price estimates is 40 times 2010 earnings. He pegs the market value of China's Internet stocks at about $50 billion, only about an eighth of U.S. Internet companies' market cap. "China should be worth at least a couple hundred billion," he says.
Room to run. Many analysts agree that the tech sector worldwide has room for more gains, despite an impressive run over the past year in which tech companies have helped spur global stock indexes to new highs. For one, several tech sectors typically lead the market in the year after a Fed rate cut. And to a great extent, their run-up in the past year has merely regained some of the ground that tech shares lost after the Internet bubble burst in 2000, says Philippe Gijsels, senior equity strategist for Fortis Global Markets in Brussels. Despite their gains, tech stocks carry almost no premium in price compared with the rest of the market, he says. "And I think the sector is now very close to breaking out to the upside."
Gijsels particularly likes semiconductor stocks, which typically swing higher when the tech sector overall is gaining, though also lower when it's falling. He's also high on Nokia and its strong presence in smartphones, a market that a number of analysts agree is poised for fast growth. Another favorite is SAP, a German company that develops business software.
Foreign tech shares, though, don't necessarily immunize investors from travails in western markets, still the sector's largest for sales. Two PC makers, Taiwan's Acer and China's Lenovo, are in a fierce battle for new markets in the West. Lenovo bought the PC business of IBM a couple of years ago to enter the United States. Then the company announced recently that it was buying Packard Bell, a Dutch brand that is strong in Europe. A few weeks later, Acer trumped Lenovo's bid—after having also bought Gateway in the United States. Asian tech companies have grown up amid intense global competition. "These are the typically bold moves that we've come to expect," says Matthew Wilkins, who tracks global pc sales for market research firm iSuppli. "This is not a market for the meek."