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Kip 25

An Asia Fund that Goes Against the Crowd

Matthews Asia Dividend, a member of the Kip 25, is moving away from consumer stocks and toward more economically sensitive companies.

Jesper Madsen's strategy of investing in well-managed Asian companies that pay steady dividends gets results. Over the past year, Matthews Asia Dividend (symbol MAPIX), the fund he manages, returned 23.0%. That outpaced its benchmark, the MSCI All Country Asia Pacific Index, by 5.8 percentage points (returns are through January 16).

Madsen, the fund's lead manager, and co-manager Yu Zhang try to mitigate the risk of investing in Asia—a high-growth but sometimes volatile region—by investing in dividend payers. Over the years, the strategy has worked well: Since the fund's launch in 2006, Matthews has posted a 10.9% annualized return, compared with 2.5% for its bogey. What's more, the fund has been 18% less volatile than the index over that period.

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Helping performance over the past year was a big bet on Singapore stocks. At last report, Asia Dividend had 12% of its assets in the island nation—the fund's third-largest country allocation, after China/Hong Kong and Japan. Singapore stocks climbed an average 31.0% in 2012, according to the MSCI Singapore index. Stock in consumer companies did particularly well, as did real-estate investment trusts. Thai Beverage Public Company—a Bangkok-based coffee and food company whose stock is listed in Singapore—gained 65% over the past year. And Ascendas REIT, a real estate investment trust based in Singapore, climbed 27%.

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Singapore has a lot going for it, says Madsen. "It's amazing to see how it has changed over the years," he says. "It had almost nothing to start with. But if you go there today, you'll see casinos, a whole new downtown business district…Singapore is increasingly moving toward a service-oriented economy." Also, REITs fit nicely with the fund's strategy, Madsen says. The fund recently held three REITs; two of them, Ascendas and CapitaRetail China Trust, each yield 6%.

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Madsen and Zhang build the portfolio using a three-step process. First, they search for stocks that yield at least 2% and have a market value of at least $500 million. The pair, who are based in San Francisco, then judge which companies are likely to raise dividends over each of the next three years. Finally, they hop on a plane to engage in face-to-face visits with executives of companies they are considering adding to the fund. Madsen and Zhang traipse through countries across the region, from Indonesia, Taiwan and Japan to Australia, Hong Kong and India. All told, each spends about two weeks on the road every quarter.

Lately, yield-hungry investors have been pouring into the kinds of stable, dividend-paying consumer companies that Madsen and Zhang have favored over the past year. "People are buying stable yield. They're coming my way, and that's nice," says Madsen. "But I'm not going to sit idle and buy the same kind of companies that have worked."

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As a result, Madsen says he is increasingly turning toward economically sensitive firms, many of which trade at bargain prices. For example, the fund began investing in Indian carmaker Tata Motors in the second half of 2012; its A-class stock has climbed 39% over the past six months. "I like to lean into the wind," says Madsen. "If everybody is going in one direction, I lean the other way."

Many investors are still worried about China's slowing economy. Not Madsen, who says he is "keeping a keen eye out" for opportunities in that country. He says stock markets rarely move in line with a country's economy. China's A share market—its main domestic stock exchange—has been a poor investment over the past ten years, he says, despite "fantastic growth" in China's gross domestic product. "That's a clear indication that you cannot equate economic growth with equity return."

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