Keeping Tabs on Your Global Tech Fund

So, you’ve got a tech fund with "global" in its name. What does that mean?

Out of the 100 or so technology funds in Morningstar’s database, 13 have "global" in their names, and there are more on the way. But fund companies seem to have radically different takes on the word’s meaning. While some of these 13 offerings rarely venture off the continent, others have a significant level of exposure to overseas names. Those global-tech funds that carry a good deal of non-U.S. stocks may not provide investors with a less volatile ride than their more provincial peers, but there are still compelling reasons to opt for them.

What "Globe" Are You On?
Fund shops such as Seligman and Dresdner RCM Global Investors were pioneers in the mid-1990s when they launched globally focused technology funds. But while the early success of their offerings drew other entrants, not all of the funds that followed in their footsteps share their global outlook.

Based on the most recent portfolios we have received, the percentage of assets that the 13 so-called global-tech funds are storing in overseas tech names varies widely. With nearly three fourths of its assets in non-U.S. stocks, tiny Kinetics Internet Global Growth  has the most overseas exposure of the bunch, but the group averages a more modest 27% stake in non-U.S. stocks.

That average is being pulled down by offerings, such as Merrill Lynch Global Technology  and Ivy Global Science & Technology (IVTAX), that devote less than 10% of their assets to international stocks. Only two of Merrill Lynch Global Technology’s top-25 holdings at the end of June 2000 were domiciled outside the U.S.--Nortel Networks  and Nokia (NOK).

Of course, there are funds that are pinning more of their future on firms based outside of North America. Both Seligman Global Technology (SHGTX) and Janus Global Technology (JAGTX), for example, have placed a greater emphasis on looking abroad for investment opportunities. The Seligman offering was last seen with 40% of its assets in non-U.S. stocks, while Janus Global Tech had 29% of its assets in such names at the end of March 2000.

Does Overseas Exposure Mean Anything?
With many of these funds posting gigantic gains last year this group hasn’t suffered from a shortage of attention. But despite big performances from funds such as Nicholas-Applegate Global Technology Fund , Dresdner RCM Global Technology Fund (DRGTX), and Janus Global Tech, the 13 so-called global-tech funds haven’t made a compelling case for themselves as a group over the trailing 12 months ending September 2000. Of the eight funds that have a record over that short stretch, half have bested the average for all tech funds and half have not.

It isn’t just the hope of dazzling returns that is fueling the tech-fund craze, though. Part of the theory behind giving tech funds a global mandate is that their non-U.S. holdings will zig when the Nasdaq zags. But it isn’t clear that investors are gaining much in terms of diversification by opting for a global tech fund over any other tech fund. A global emphasis certainly didn’t help last spring when investors fled from tech shares regardless of their country of origin: The average tech fund in Morningstar’s database shed 27% of its value from March through May 2000, while the subset of 13 "global" funds posted a similarly harrowing loss.

Over longer spans of time, the diversification argument doesn’t look any stronger. After comparing the average monthly returns of all the domestic and foreign tech stocks in our database over the three years ending August 2000, we found an extremely high degree of correlation between the two groups. In fact, when we equally weighted all these stocks, we found that approximately 90% of the international tech stocks’ monthly returns could be explained by those of their domestic counterparts.

The high degree of correlation between domestic and international tech stocks may reflect the globalization of investor sentiment, but it also reflects the globalization of the sector itself. Domestic firms are relying on relatively untapped consumer markets abroad to fuel their revenue growth, but they are also depending on overseas firms as suppliers. Last year provided an acute example of this interdependence as an earthquake in Taiwan caused investors to worry about the ability of domestic PC makers to meet their production goals

The interrelationships between U.S. and foreign tech firms is a fact that hasn’t been lost on fund companies. Seligman Global Technology was formerly called Seligman-Henderson Global Technology, and Seligman relied upon Henderson for the fund’s international picks. Seligman severed that relationship earlier this year in favor of forming an in-house analyst team that would research industries on a global scale. The firm now argues that "the notion of separate and distinct U.S. and international investment teams [is] outdated." Firsthand Funds used a similar rationale when launching Firsthand Global Technology in September. Lead manager Kevin Landis sees the new fund as a natural extension of the firm’s lineup, since its staff is already researching international names as part of their work for the firm’s domestic-focused funds.

Evaluating the Covey of Global Tech Funds
Regardless of what is motivating your interest in the wave of global tech funds, it certainly pays to focus on the degree to which funds you are interested in invest in overseas names. This sort of portfolio information for established funds such, as Dresdner RCM Global Technology Fund, is readily available on Morningstar.com in the Quicktake report. But many new funds have broadly written prospectuses that don’t impose any restrictions on their management. That means investors who are interested in how much exposure a new fund, such as Firsthand Global Technology Fund or T. Rowe Price Global Technology Fund, will have to non-U.S. names will need to wait until these funds make their holdings public.

Investors shouldn’t have any delusions about gaining a great deal of diversification with a global-tech fund, but that doesn’t mean that these funds don’t make sense. In fact, investors can expect the level of correlation between domestic and foreign tech stocks to increase over time with the globalization of the sector--a trend that points to the need for more globally focused research. Unfortunately, the existence or absence of "global" in a fund’s name doesn’t shed any light on whether such a research effort is in place. Investors who find the globalization argument compelling should seek out those firms that have the analytic resources to bring a global scope to their research process and have a record of successfully investing abroad.