On the technology front, Asia already ranks as an export powerhouse. More recently, gearheads have started talking about the potential for innovation in emerging markets like China and India. But Michael Oh, the San Francisco-based lead manager of the (MATFX) Matthews Asian Technology Fund, sees things from an investor's standpoint."I think the most important story about Asia is Asian consumers," says Korean-born Oh, a former research analyst at Matthews Funds who was promoted to head the seven-year-old, $96 million fund in January. There's no reason Asian tech firms shouldn't follow inthe path of their U.S. counterparts, he says. "One of the key reasons why U.S. tech companies have been so successful for the past fifty years or so is that they have had the world's biggest consumer market as their home market. They could test new technologies that would then become basically the standard for the global market." The rising middle class in China and India offers similar growth potential for Asian technology outfits, Oh maintains. "We tend to like companies that are domestically oriented and have very broad exposure to domestic consumers. You can find some very interesting companies that have such exposure, especially in the telecom and Internet sectors." It's been a profitable approach so far: Over the past five years, the fund has averaged annual returns of 19.7%.
TheStreet.com caught up with Oh to ask him about regional tech trends, favorite investment sectors, and his take on a couple of portfolio holdings. As of the third quarter, his fund's top 10 holdings included tech stalwarts such as Samsung, Taiwan Semiconductor ( TSM), China Mobile ( CHL), Infosys ( INFY) and The9 ( NCTY). TheStreet.com: As of the third quarter, your fund was overweight wireless-telecom services. What do you like about this sector? Oh: In China and India especially, the wireless industry is still growing, unlike the developed markets where wireless growth has been pretty much stable. So China Mobile is a play on that trend? China is already the fourth-largest country in the world in terms of GDP (gross domestic product), and even at that size, I think the wireless market is still under-penetrated. It's hard to guess how long this growth will continue in the future, but I think the valuation remains reasonable and the growth prospects in China are still brighter than many other countries you can find. In a country like China, there's a fair amount of regulatory risk in a sector like telecom, but the industry also offers a lot of exposure to the domestic consumer market. How do you balance the two? The regulatory risk in Asia tends to be very high, especially in China and India. It's very important to be fully aware of that risk. But you can find good companies within that framework that cooperate with the Chinese government. The gaming sector, which has been relatively free from regulatory headaches, has been a good area. I know you have a holding in The9, the gaming company. But there have been a couple of government crackdowns over the past year to try to discourage young people from playing so many hours of online games in Internet cafes. Are these kinds of new regulations a worry at all? That happened in Korea, too, about two or three years ago when gaming started to get really popular. It's a problem, but not a big concern for us.
You also have a holding in Baidu (BIDU). What do you like about it? Baidu is the leading online Chinese search company through specialized Chinese search. It has been gaining more market share recently. I think the online-search industry is very competitive in China and competition will probably get fiercer in coming years, but the online-search industry in China is still relatively small compared to the U.S. So I think all the companies
in this sector will benefit, but the company with the leading position will probably benefit the most as the industry expands. You're overweight Indian equities, but they still only account for 9% of your portfolio, compared with 17% for China. Why the gap? Is the pool of Indian stocks just shallower than China? There's a smaller population of companies in India, and it's hard to find high-quality companies there. The industries are very narrow, though you could find some pharmaceutical and services companies. In China it's very broad, ranging from the Internet to telecoms to the manufacturing sector. But we're seeing more and more companies coming out of India, especially some of the telecom and Internet segments. What are some technology trends that began in Asia that you think could migrate to the U.S.? Wireless-telecom services might be a good example of technology trends that have emerged in Asia migrating to the U.S. For example, music on demand is becoming popular in the U.S., and it's been very popular in Korea and Japan for some time. The mobile-music segment is much bigger than the PC download segment. In the U.S., I believe the opposite is the case, but mobile music is taking off here. The company behind that service in Korea, WiderThan, is now providing music-on-demand services to some of the U.S. telecom companies. (WiderThan, which Oh held going into the third quarter, is now being acquired by RealNetworks ( RNWK), the U.S. Internet media firm.)
Would you expect to see more M&A like the WiderThan acquisition within Asian technology? M&A activity has definitely picked up in Asia -- not only are U.S. companies buying Asian companies, but within Asia itself there's more M&A. In Korea, some of the big telecom companies have been very keen on acquiring good content, so they're buying up small gaming firms, small Internet portals. People in Asia use technology in different ways than in the U.S. Where do you think we might see new business models developing in Asian technology? We've seen some cases of how a new market could provide companies with new opportunities. For example, the broadband penetration rate in Korea is at a very high level, and Korean companies have really created an online-gaming business model. They've been able to commercialize and export that model to China, and to some extent to the U.S. as well. I think we'll see more examples of that, creating a new business model for servicing Asian consumers and possibly exporting that. But the bigger story is within Asia.