BUSINESSWEEK ONLINE : SEPTEMBER 11, 2000 ISSUE
BUSINESSWEEK INVESTOR Conquering a Slice of the World Funds are dividing the globe by industry, not country While U.S. tech-fund managers were drooling all over Yahoo! (YHOO) last year, Huachen Chen found Yahoo Japan more appetizing. The manager of Dresdner RCM Global Technology Fund had spotted that revenues for the Internet portal were growing almost as rapidly in Japan as in the U.S., yet the Japanese arm's shares were lagging far behind those of Yahoo. Pity that most tech managers were too fixated on the U.S. to notice. By the end of the year, Yahoo Japan was up 4,206%, compared with a 265% rise for Yahoo. Chen is one of a new breed of fund managers who divides the world into industry sectors, not national entities. In the past, stocks such as Yahoo Japan would have been found only in a Japan fund. But for Chen and his ilk, borders are meaningless. Yahoo Japan isn't a Japanese stock; it's a Net portal that happens to be domiciled in Japan. The approach has given Chen a much bigger choice of stocks to invest in--and the third best three-year annualized return, 82.4% (as of Aug. 25), of any fund manager tracked by Morningstar. Success breeds imitators. More than 50 global funds now invest in sectors from biotechnology to real estate--14 of them launched in just the past two years. Another 11 have filed registration statements to open soon. ''Janus, Merrill Lynch (MER), Pimco, Montgomery--everybody's launching one of these funds,'' says Morningstar analyst Kunal Kapoor. ''And even when a fund isn't explicitly global, we're seeing more fund managers willing to own foreign securities in their portfolios.'' Giant funds such as Janus Twenty and Fidelity Magellan have no qualms about holding sizable stakes in Finland's Nokia (NOK)or Canada's Nortel Networks (NT). In September, T. Rowe Price Associates (TROW) will launch a global version of its T. Rowe Price Science & Technology Fund. ''Some of the most formidable competitors are non-U.S. companies,'' says T. Rowe technology analyst Thomas Murtha. ''How can you understand Lucent in the optical transmission market if you don't understand what Nortel and [France's] Alcatel are doing?'' MISPRICED GEMS. With the rise of transnational investing, valuations are starting to converge across borders. So pricing discrepancies are uncovered sooner, and bargains are becoming scarcer. ''We have to fight harder and harder for our edge,'' laments Sam Isaly, portfolio manager of Eaton Vance Worldwide Health Sciences Fund. Even so, the best sector managers can still find mispriced gems. Isaly sees a lot of value, for instance, in the Japanese pharmaceutical company Shionogi, which has a powerful new cholesterol-reducing drug called ZD4522. European drug giant AstraZeneca (AZN) bought the worldwide rights to the drug and will be splitting profits with Shionogi when the drug is launched in 2002. But the relatively unknown Shionogi, whose $6 billion market cap is just 7% of Astra's, will get a much bigger boost from the deal. ''This drug is important to AstraZeneca,'' Isaly says. ''But if I want stock-market bang, I go with Shionogi.'' Vincent McBride of Warburg Pincus Global Telecommunications often shops in emerging markets for bargains. ''Valuations in Korea are much lower than they are in the U.S. and Europe right now,'' he says. Korean wireless company SK Telecom, for instance, trades at only 6 times revenues, compared with 19 for Vodafone Airtouch (VOD) and 10.4 for Sprint PCS Group (PCS). TAKEOVER GAME. Other managers, such as Marc Gabelli of Gabelli Global Telecommunications, prefer to play the takeover game. ''As you have more valuations that are comparable in telecom around the world, any discrepancy will cause takeovers,'' Gabelli says. Possible targets, according to Gabelli, include Britain's Cable & Wireless (CWP), Japan's DDI Group, and Spain's Telefonica (TEF). Valuation discrepancies are only part of the global investor's advantage. Companies in some countries are also often at an earlier stage in their growth cycles. ''In terms of Internet penetration for PCs, Europe is about 2 1/2 years behind the U.S.,'' says Murtha. Japan and Hong Kong ''are three or four years behind.'' In financial services, Continental Europe and much of Asia lag the U.S. in developing an investor base that favors equities. But tax cuts, deregulation, and cross-border mergers are stimulating stock investing in those regions--and mutual-fund companies and brokerage houses are starting to gather speed. For such firms, ''earnings estimates in Europe are huge,'' says co-manager Meggan Walsh of AIM Global Financial Services. European baby boomers, stuck in stodgy pension systems with little equity exposure, envy the returns Americans are getting on their 401(k) accounts, and ''they want to participate'' in the markets, Walsh says. So she's favoring Sweden's Skandia Group and France's Societe Generale, both of which have moved aggressively into the mutual-fund and annuity businesses. Instead of trying to find bargains, which are scarce in technology now, Dresdner's Chen is focusing on such market niche plays as Israel's Check Point Software. His top holding, it's the dominant player in network security. ''When we purchased the company a year and a half ago,'' Chen says, ''its revenues were growing at 30% or 40% a year.'' Now they're growing at 81%--worthy of any fund manager's attention. Of course, a sector fund doesn't need the word ''global'' in its name to have a global perspective. Energy and precious-metals funds have always invested abroad, because oil and gold have long been worldwide markets. Already, telecom funds are some 23% invested in foreign stocks. But the international components of technology, health-care, and financial-services funds still average less than 10%. HIGH EXPENSES. Finding a good global fund in these sectors isn't easy (table). A global fund requires a deep analytical team to scour the earth for bargains. Dresdner Bank's fund division, for instance, has 25 analysts in Europe and Asia--three of them covering technology--and it employs a network of 300 freelance journalists who investigate companies around the world. At Eaton Vance, Isaly oversees 11 co-managers and analysts. AIM's and Warburg Pincus' teams are equally large. ''Only the bigger fund shops have the analytical resources to run one of these funds effectively,'' says Morningstar's Kapoor. Such research doesn't come cheap. The average global sector fund has a high annual expense ratio of 1.73%, vs. 1.47% for domestic sector funds and 1.22% for diversified domestic funds. For investors who would rather let a fund manager choose sectors for them, the same fund families also offer diversified global funds. AIM Global Aggressive Growth Fund, Dresdner RCM Global Small Cap, and Gabelli Global Opportunity all have solid track records and favor sector selection over country selection when picking stocks. Over time, as markets become more efficient, the advantage of owning a global sector fund may diminish. But most fund managers expect that to take years. Differing government policies, interest rates, and exchange rates still create local variations in stock values. Until we live in a completely borderless world, you should expect to see names like Yahoo Japan popping up in your portfolio. Just hope that there's a 4,000% return next to them. BY LEWIS BRAHAM _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS The New Global Investor CHART: Global Markets Are Growing Fast...Shrinking the U.S.'s Dominance...And Internet Use Abroad CHART: The Case for Global Sector Investing Conquering a Slice of the World TABLE: Spanning the Globe All Abroad for Exchange-Traded Funds TABLE: How ETFs Stack Up against Their Rivals A Talk with a Global Strategist TABLE: Sargen's Picks VIDEO: Investing in the Global Village So Who Needs Foreign Investing? TABLE: Global Action Around the World in 80 Clicks TABLE: Going Global with the Web INTERACT E-Mail to Business Week Online

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