A Growth Trifecta

By investing in stocks that pay dividends in foreign currencies, Matthews Asia Pacific Equity Income gives you three ways to win.

One way of assessing an investment is to count the ways you can win. If you buy a growth stock that pays no dividend, your profit potential is confined to a capital gain. If you purchase a dividend payer, your total return comes in the form of growth and dividend income. If you invest in dividend-paying stocks in foreign currencies that appreciate against the U.S. dollar, then you can win in three different ways (actually four if the dividend stream continues to grow).

Matthews Asia Pacific Equity Income (symbol MAPIX) has benefited from this investing trifecta. Over the past year through June 3, this unusual fund, which launched in October 2006, returned 8.5%. That put it in the top 1% of all diversified Asia Pacific funds, according to Morningstar. And, as befits a dividend growth fund, the gains have come with relatively low volatility.

Matthews International, headquartered in San Francisco, specializes in Asian markets: all nine of its funds are Asian-oriented. When investors think of Asia, with all of the continent's turbocharged economies, they think of growth investing. Matthews, which has been investing in Asia since 1991, thought the time was ripe for an income fund. The firm was correct.

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Take the case of Japan, where economic growth has decelerated sharply, the population is rapidly aging and ten-year government bonds, reflecting the sluggish economy, recently yielded a miserly 1.6%. That sounds like a nice backdrop for substantial increases in dividend payouts by Japanese companies -- which is happening. "Before 2004, dividend policies didn't exist in Japan," says Jesper Madsen, portfolio manager of Equity Income.

Now, Japanese companies are getting religious about paying dividends and increasing them. Japanese stocks now yield 2%, the same as the U.S. market. "Dividends are growing faster than earnings in Japan," says Madsen. "There's been a paradigm change."

As of April 30, the fund had 22% allocated to Japan, its largest weighting. For example, two of the top five holdings were Lawson, a leading convenience-store chain, and Sumitomo Trust & Banking. The Japanese economy has essentially stopped growing -- hence the willingness to retain less earnings and increase the distribution to shareholders.

Elsewhere in Asia, Madsen is finding high-yielders that are able to boost their dividends smartly. Matthews calculates that from 2002 through 2007 dividends in Asia Pacific compounded at 18% annualized, compared with just 6% for companies in Standard & Poors 500-stock index. Part of this disparity is the U.S. predilection for share buybacks, which are often of questionable merit. Share buybacks are almost unknown in Asia and barred in a number of countries.

Take the example of Taiwan Semiconductor Manufacturing Co. (TSM), the world's largest chip foundry and the fund's biggest holding. TSM yields 4%, which is most unlike a U.S. tech company. Overall, the fund's holdings tend toward domestic businesses such China Light & Power and Singapore Press Holdings. That's just as well since most of the Asian currencies in which revenues and profits are booked are steadily gaining in value against the ailing greenback.

Matthews Asia Pacific Equity Income requires a $2,500 initial minimum investment. The fund levies no sales charge. Its annual expense ratio of 1.39% compares favorably with the 1.56% average for all diversified Asia Pacific funds.

Contributing Writer, Kiplinger's Personal Finance