This Fund Provides Global Exposure to Cloud Computing, Gaming, and AI

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T. Rowe Price Global Technology benefits from a strong team, proven process, and low fees. Those elements have supported the fund’s stellar performance over time and back its Morningstar Analyst Rating of Silver.

Joshua Spencer took over management of the fund in June 2012, but he had worked as an analyst supporting the fund since 2004. He is backed by the firm’s considerable resources in technology. The team comprises 24 members, including 15 analysts with more than 10 years’ experience, organized by industries and regions. Such analytical breadth allows Spencer to put his convictions on full display here. He runs a focused portfolio, built upon several overarching themes within technology, such as cloud computing, gaming, and artificial intelligence. Stock-picking focuses on companies with a long-term competitive edge and durable revenue stream.

Spencer willingly invests in other sectors, mostly consumer cyclicals, when he sees companies benefiting from disruptive technology. The portfolio is also generally more exposed to foreign stocks than peers, including a heavy stake in emerging markets. The upshot is high turnover (largely due to valuation disciplines around existing positions) with higher volatility than its peers'.

Though not through an entire market cycle yet, Spencer has extended an impressive run of performance that has placed this fund in the top decile of the U.S. technology sector Morningstar Category during the past three-, five-, and 10-year periods. The higher volatility has been used to good effect, as on a risk-adjusted basis the fund beats its average rival and its MSCI ACWI/Information Technology Index benchmark in those periods.

Investors should nevertheless remain cognizant that any narrowly focused fund--57% of its assets are in its top 10 names--faces risks from a small number of holdings and exposes them to higher drawdowns. Even so, the strong culture of T. Rowe Price, showing through the deep analyst bench and low fees, makes this fund an outstanding choice for a long-term exposure to technology stocks.

Process Pillar: Positive | Thomas Lancereau, CFA 03/16/2018 This very focused, higher-risk approach is supported by strong fundamental research, earning the fund a Positive Process rating. T. Rowe Price's technology research team works to develop expertise industry by industry and company by company, with several key technology themes as a backdrop. Current themes include cloud computing, the ongoing growth of the Internet, and penetration of technology into non-tech areas and new end-markets.

Joshua Spencer runs a concentrated portfolio, and he is not afraid of having more than 50% of assets among its top 10 holdings. Stock-picking focuses on companies with a long-term edge in their field, solid franchises, good management, and the potential to compound a durable revenue stream over the long term.

Yet, in contrast to the typical fund in the category, the portfolio is less focused on pure technology names, as Spencer willingly invests in other sectors, mostly consumer cyclicals, when he sees companies benefiting from disruptive technology there. It is also generally more exposed to foreign stocks than peers, including a heavy stake in emerging markets.

Valuations are important and considered under different scenarios. They inform position sizing. Portfolio turnover is typically higher than peers, and Spencer estimates around two thirds of it relates to trading around or in-and-out existing positions.

Manager Joshua Spencer has continued to reduce further the number of holdings; by the end of December 2017, the portfolio only had 33 equity holdings against 39 one year before. While part of this increased concentration owes to valuations in the sector overall, Spencer also thinks there are secular trends at play behind this.

According to him, developments in cloud computing are creating “winners” that he owns, such as

Relative to peers, the portfolio has more exposure to consumer cyclicals (31% as of year-end 2017 versus 8% in the category average). There, Spencer maintains a sizable exposure to stocks such as

Spencer sees Tesla as a great example of a disruptor--a tech firm in a nontech industry--that offers a better product and a more defensible economic model than competitors. He bought

Performance Pillar: Positive | Thomas Lancereau, CFA 03/16/2018 This fund's strong long-term record has continued under current manager, and it retains a Positive Performance rating. It has returned close to 20% annualized during the past decade through February 2018, topping 99% of its peers. Technology has enjoyed strong growth during that period. The fund gained 80.2% in 2009 and 47% in 2017.

The fund has continued its stellar trajectory under Joshua Spencer’s leadership since June 2012 through February 2018, returning 26.9% annualized. That far outpaces the typical technology fund's 19.1% annualized return in that period. Spencer has also handily beaten the fund's MSCI ACWI/Information Technology Index benchmark, which returned 19.1% since he took over.

This outperformance has come with higher volatility than the typical technology fund. That perhaps isn't surprising given the fund's concentration and a more global focus. During the trailing five- and 10-year periods, its standard deviation was 15% and 21%, respectively—around 75 basis points higher than the category average.

On a risk-adjusted basis, the fund has done well too, posting Sharpe ratios during five- and 10-year periods, respectively, of 1.7 and 1.0, at least 20 basis points higher than the category average and the fund’s index benchmark. However, the fund’s maximum drawdown has also been higher than those two references under Spencer’s tenure.

People Pillar: Positive | Thomas Lancereau, CFA 03/16/2018 The fund manager's strong background in technology investing, combined with the depth of the analyst bench backing him, support the fund's Positive People rating. True, Joshua Spencer has run this fund only since June 2012, but he has been with T. Rowe Price since 2004, and prior to taking the helm at this fund he was a research analyst covering technology and supporting this fund. He previously spent four years as a research analyst and portfolio manager at Fidelity Investments specializing in the consumer sector.

For stock selection and industry research, he is backed by a global team of 24 research analysts covering technology. Two of them were added in the last 12 months to provide additional research on Internet and semiconductor stocks.

The analyst team averages 11 years of investment experience, including 15 members who have been there for 10 years or more. The team has stabilized following a higher-than-average turnover in 2015. It is organized by subsectors and world regions. Spencer travels with analysts and visits companies with them for this best-ideas portfolio.

Spencer invests more than $1 million in this fund, a strong mark of alignment given the nature of the fund.

Parent Pillar: Positive | 04/06/2017 T. Rowe Price is evolving but retains the strong research-focused culture that's driven its long-term success. Despite the retirements of some long-tenured portfolio managers, the former CEO, and outgoing CIO Brian Rogers, the firm's careful focus on succession planning and long transition periods have eased the process. Even with a changing of the guard, there's no lack of talent. Successful former portfolio manager Rob Sharps is now co-head of global equities and oversees five CIOs who are among the firm's top managers. The analyst team is on solid footing, and the firm has continued hiring despite the pressures facing active managers. CEO Bill Stromberg, who joined T. Rowe in 1987 as an analyst, maintains an investment focus while recognizing that the business must evolve to flourish in an industry that's gravitated toward passive investing. The firm is bolstering its technology resources and is expanding its distribution overseas, achievable goals given its pristine balance sheet. In 2017, the firm opportunistically acquired the Henderson High Yield Opportunities team, led by a former T. Rowe employee, as it addresses demand for capacity-constrained strategies that are also part of its popular target-date lineup and potentially new multiasset products down the line (several T. Rowe strategies are closed). T. Rowe is sensibly adapting, and its fundholder-first mentality and ability to attract and retain investment talent support its Positive Parent rating.

Price Pillar: Positive | Thomas Lancereau, CFA 03/16/2018 This fund's asset-weighted fees rank in the third decile, which supports its Positive Price Pillar rating. Its no-load share class makes up more than 90% of assets and has a below-average fee versus similarly distributed peers.

Its Institutional share class is much smaller, but it carries a low fee versus other institutional share classes. The fund closed to new investors on Sept. 29, 2017. This was a prudent action--the fund had close to $5 billion in assets under management as of end of June 2017, having tripled in the previous five years.