One of the knocks on investing in Asia is that you acquire stomach-wrenching volatility with all that giddy growth. The capital markets in Asia outside Japan are generally inefficient. Bond markets are underdeveloped, the stock markets tend to depend on capital inflows from abroad and liquidity is often poor.
Matthews Asian Growth & Income (symbol MACSX), launched in 1994, is designed to deal with that volatility. In addition to investing in common stocks that pay high dividends, this unusual fund allocates a quarter or more of its assets to income-producing instruments such as convertible bonds, preferred shares and real estate investment trusts. Its strategy is to participate in much of the upside of Asian growth while limiting the downside through holding income-generating assets.
The strategy has worked well. In the ten years through July 31, Asian Growth & Income returned an annualized 18%, an average of seven percentage points better than an index of Asian funds (excluding Japan)—and it achieved this performance while taking much less risk than average. Over the past year through August 15, a period marked by huge market swings, the fund eked out a 1% gain, 11 percentage points ahead of the index. Its performance put it in the top 1% of Asian funds, according to Morningstar.
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Growth & Income, which has been shuttered to new investors since 2003, is re-opening to next month. Andrew Foster, lead manager and chief investment officer of Matthews, a San Francisco-based Asia specialist, says one reason for reopening the fund is that the universe of convertible bonds, especially those denominated in local currencies, is rapidly expanding. The bond markets are finally deepening.
Foster notes that yields on blue-chip Asian stocks tend to be higher than on comparable issues in the U.S., where these days companies prefer to repurchase their shares rather than raise dividend payouts. For instance, shares of TSMC (TSM), a semiconductor maker based in Taiwan, yield 4.7%, and banking giant HSBC (HBC) yields 5.8%.
Foster holds his stocks for four to five years on average and looks for investors who appreciate a game of strong defense. “The goal is not to capture the entire upside of Asia but to provide a more stable profile that investors can stay with over time,” he says.
If you have a healthy appetite for risk, then maybe Matthews Pacific Tiger (MAPTX) is the ticket. Launched in 1994 and shut to new investors since 2006, this growth fund will also reopen next month. Co-managed by Richard Gao and Sharat Shroff, Pacific Tiger looks for companies with sustainable growth over five years. The fund returned an annualized 20% in the decade through July 31, but lost 4% over the past year through August 15.
Asian Growth & Income comes with annual expenses of 1.15% and Pacific Tiger charges 1.10%.
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