Matthews Asian Growth & Income fund calms the volatility of investing in emerging markets. By Steven Goldberg, Contributing Columnist December 9, 2008 Foreign stocks have lost much more than U.S. stocks in the bear market -- and emerging markets have suffered most of all. But the economies of many emerging markets are still growing faster than those of most developed countries. When stocks recover, emerging markets, particularly those in Asia, could well lead the charge.Trouble is, the extreme volatility of emerging-markets funds, especially those that focus on Asia, often provokes investors to sell at the wrong times -- and lures them into buying at the wrong times, too. Take the "Asian contagion" crisis of 1997-98. The MSCI Emerging Markets Stocks index lost 43% in 1997, then tumbled another 23% in 1998. By the time the index surged 59% in 1999, not many investors were around to realize the rewards. Matthews Asian Growth & Income (symbol MACSX) seeks to lessen the risks of emerging-markets investing. "The goal of the fund is to mitigate the volatility of Asia ex-Japan yet to provide some participation in the growth of the region," says co-manager Andrew Foster. The fund, launched in 1994, is just a little more volatile than Standard & Poor's 500-stock index. By comparison, Matthews Pacific Tiger (MAPTX), another excellent Asia fund, is twice as volatile as the S&P 500. Matthews Asian Growth & Income, which recently reopened to new investors, has more than accomplished its goals. In 1997-98, it lost only 24%. Year-to-date through December 8, it lost 36%. Obviously, that's nothing to brag about, but consider that both the MSCI Emerging Markets and MSCI Emerging Asia indexes plummeted 57%. Against other funds that invest everywhere in Asia but Japan, the Matthews fund ranks in the top 1% so far this year, according to Morningstar. And, for what it's worth, the Matthews fund has lost one percentage point less than the S&P 500. Advertisement But the fund plays pretty good offense, too. Over the past five years, it has returned an annualized 7.2%, putting it in the top 30% of its peer group. Over the past ten years through November 30, it returned an annualized 13.7%, putting in the top 1%. The fund cuts risk by sticking to income-paying securities. At last report, it had about 70% of its assets in dividend-paying stocks and the remainder in convertible securities. Convertibles are hybrids-sort of half bond, half stock. Like bonds, they pay interest, but they can be converted into shares of stock at a preset price. Thus, they offer some of the risk reduction of bonds and some of the growth potential of stocks. Foster, 34, has been co-manager since 2005, but the other co-manager, firm founder Paul Matthews, has been with the fund since its inception. From then through December 8, the fund returned an annualized 9% despite Asia's booms and busts. Matthews' professionals -- the firm employs 18 managers and analysts altogether-spend most of their time investigating companies. "We're company aficionados," Foster says. But unlike some bottom-up managers, they study the bigger picture, too. "The micromanager who doesn't realize there's a major currency implosion is going to get burned," Foster adds. Advertisement Foster has been finding a lot of value in beaten-down financial stocks as well as in real estate. "Asian financials have been hurt by the U.S. subprime crisis, but not nearly as badly as U.S. financials," he says. "Asia isn't the epicenter of the crisis, and countries and companies have record levels of cash." The fund has about 25% of its $1.1 billion in assets in financials, 18% in consumer-discretionary companies, 18% in telecom and 11% in technology. Geographically, the fund has 35% of its assets in China, 13% in Singapore, 9% each in South Korea and Taiwan, and 8% in India. Top positions include HSBC Holdings PLC (HBC), the British-based banking giant that has a huge business in Asia; SK Telecom (SKM), South Korea's largest wireless-phone-service provider; and Taiwan Semiconductor Manufacturing. TSM's American depositary shares yield about 6%. The fund doesn't trade a lot. Stocks typically stay in the portfolio four or five years. But turnover has increased recently because of the opportunities -- and dangers -- presented by the financial crisis. Advertisement Like the rest of the world, Asia is struggling to cope with its effects. Foster expects Asian countries to move aggressively to spur growth; most run trade and fiscal surpluses, and banks and other corporations are awash in cash. "Most economies are in strong fiscal positions to spend money," he says. Ditto for consumers. China has already unveiled a $586-billion infrastructure-spending plan to boost its economy. Foster sees Asia's economies continuing to grow, albeit at a more moderate rate than before the financial crisis. I think these economies will continue to provide the world's fastest growth for a long time to come. And Matthews Asia Growth & Income provides a terrific, low-risk way to profit from that growth. Steven T. Goldberg (bio) is an investment adviser and freelance writer.