Value Added


Profit From Asian Dividends

Steven Goldberg

Matthews Asia Dividend Fund offers a lower-risk way to invest in emerging-market companies that share their wealth with shareholders.



Asia and dividends? At first blush, the words don’t belong in the same sentence. But Jesper Madsen, co-manager of the four-year-old Matthews Asia Dividend Fund (symbol MAPIX), makes a compelling case for investing in Asian companies that share the wealth with their stockholders.

His fund probably won’t deliver all the upside potential of Asian stocks. But it will likely spare you some grief during bear markets. And with nervousness mounting about China’s economy overheating, that’s a comforting notion. “If you’re worried about risk, why not take some income off the table each year?” Madsen says.

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Unlike the case in the U.S., fast-growing Asian companies often pay healthy dividends, Madsen says. In fact, dividends accounted for more than half the total return of the MSCI Asia Pacific Index since 1987. For instance, fast-growing China Mobile (CHL), the Matthews fund’s largest holding, pays a semiannual dividend rate of 85 cents. At the stock’s April 26 closing price of $50.78, that results in a yield of 3.3%. China Mobile trades in the U.S. as an American depositary receipt.

Asia Dividend has delivered stellar results. Over the past three years through April 26, it returned 10.6% annualized. That includes a 61% gain over the past year and a loss of 26% in 2008 -- about half the loss of the MSCI Emerging Markets Index that year. Based on the dividends it pays to shareholders, the fund yields about 3.7%.

The fund’s holdings in dividend-paying stocks help dampen volatility. Its returns tend to bounce around from month to month at about the same rate as Standard & Poor’s 500-stock index. That’s unusually low for an emerging-markets fund. Indeed, the fund exhibits less than two-thirds the volatility of the MSCI Emerging Markets Index. Contributing to that low volatility is a 20% stake in Japanese stocks. Japan still faces severe structural problems, Madsen says, but some companies are well managed. Japan also benefits from its proximity to China.

Is China a bubble?

If you’re not a little worried about Asia, you’re probably not paying enough attention. In the year that ended March 31, producer prices in China surged 5.4%. Real estate prices in some areas have gone crazy -- with luxury condos changing hands for as much as $45 million in Shanghai. The MSCI Emerging Markets Asia Index tumbled more than 10% between January 15 and February 8 this year before bouncing back. As of April 26, the index was up 5% for the year, while Matthews Asia Dividend rose 11.9% so far this year. (Asia Dividend’s annual expense ratio of 1.30% is higher than I’d like to see but not egregious considering the fund’s mission.)

The long-term bullish case for emerging markets -- in Asia, as well as throughout the world -- remains compelling. The U.S. and other developed nations simply can’t compete in supplying cheap labor -- and much of that labor force in emerging nations is now performing sophisticated work. What’s more, many emerging nations are financially as strong, if not stronger, than most developed countries.

China’s government is attempting to bring down inflation without cutting off growth. Authorities have already tightened the rules for real estate buyers and banks. Mortgages require down payments of 20% to 30% of a home’s cost. More steps are expected. India is also battling inflation.

With developed nations expanding slowly, if at all, the Asian growth story is changing. Madsen and others at Matthews -- probably the best fund company specializing in Asia -- see the development of a large consumer class in China and other fast-growing Asian economies. They expect tighter credit in China to affect exporters far more than fast-growing companies that are producing goods and services for the country’s burgeoning middle class. For instance, Indian auto sales in January soared 50% over the same month a year ago. And KPMG Consulting recently projected that China will become the world’s largest diamond market next year.

Indeed, the U.S. and the rest of the developed world need emerging markets to begin consuming more and exporting less. Established nations, meanwhile, need to import less and export more. That’s the only way the global economy can regain its equilibrium.

Emerging markets will continue to encounter the problems that rapid growth brings. But I wouldn’t bet against them. The MSCI Emerging Markets Index skyrocketed 76% last year after plunging 43% in 2008. As a result, valuations are no longer dirt-cheap. But neither are they particularly rich either -- especially when you consider the growth potential. On average, Asian companies (excluding those in Japan) trade at about 15 times estimated 2010 earnings and yield about 2.9%. “China, India and smaller Asian markets offer a good growth vehicle for years to come,” says Sharat Shroff, co-manager of Matthews Pacific Tiger (MAPTX), the firm’s best stock vehicle for investing in Asia outside Japan.

As always, no one can say what will happen next. But if you’re a long-term investor, I think this is a good time to increase your holdings in emerging markets. And Matthews Asia Dividend provides a refreshingly low-risk way to play Asia during a challenging period.

Steven T. Goldberg (bio) is an investment adviser.



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