Insights & Advice

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Matthews Asian Growth and Income Fund–A conservative approach to Emerging Markets

For many investors, buying a dividend fund in a region noted for extraordinary growth seems, well, counterintuitive. Yet, the fund has returned 418% since inception which breaks down to a 16.54% annualized return according to Morningstar. Given that kind of performance, this may be a good way for conservative investors to invest in the hot spots of Asia.

The fund is rated five stars by Morningstar over 10 and 3 years and last year according to Morningstar, the fund (symbol MACSX) returned an eye-popping 41.44%. All this by investing in bonds, convertible bonds and dividend paying common stocks in places like China, Hong Kong, India, Japan, Singapore, Malaysia, Taiwan, Thailand, South Korea and their newest addition, Vietnam.

“Our beta is lower than our markets and we attract investors with a conservative outlook. The fund is not designed to shoot the lights out or capture all the growth in Asia,” explains Andrew Foster, the fund’s portfolio manager since 2005. Foster also helps manage Matthew’s India Fund, China Fund and Asia Pacific Equity Income Fund.

“It will lag the benchmarks on the way up as well as down but it is designed to temper the declines in Asia.”

That will come in handy in the years to come because although Foster believes the regions growth will far outpace that of the U.S. “these economies will remain volatile and some of these markets on the whole are as volatile as individual stocks in the U.S.”

How volatile? In 2008, for example, while the S& P 500 Index fell 37%, the Asia Pacific Equity Index (ex-Japan) fell 52%, China dropped 51% and India lost 63%. Foster’s Matthews Asian Growth and Income fund, in comparison, declined a mere 32%. Since then all these markets have snapped back smartly and are within arms length of their pre-2008 record highs.

As a result, Foster is fairly cautious.

“China is trading at 17 times current earnings and India trades at 20 times so I would be careful of jumping into these markets right now.”

Yet, over the long term, Foster believes that growth will continue and some of theses countries, like China and India, are just too big and important for investors to ignore.

“We will probably see higher rates and steadier rates of growth out of these markets over the next 3-5 years than in places like the U.S.,” he says, “And Asian companies that you wouldn’t have thought of paying dividends have begun to do so.”

Foster compares the $200 billion in dividends that Asian companies paid to minority shareholders last year versus the $250 billion that S&P 500 paid out.

“Most investors would be surprised at that but even more importantly, the growth rate of dividends in Asia is 18% versus 10% and decreasing for the S&P.”

China, he points out, paid practically no dividends a decade ago but today it accounts for $70 billion of the $200 billion in Asian pay outs, while Japan accounted for $56 billion.

As for investment risk in the region, he points to political instability, trade barriers and the dollar as three areas of concern. It is not China’s government but rather the potential of instability in countries like Pakistan and Thailand which worries him. The threat of protectionism also troubles him in these uncertain economic times, which could hamper trade, the lifeblood of Asian economies. Finally, he sees the end of Asian’s love affair with the dollar.

“The dollar can no longer bear the burden of Asia’s export strategies, so the region is going to have to move toward a different type of independent currency structure but I don’t think they are quite ready for that.”

As always, in the funds we highlight, The Matthews Asian Growth and Income Fund does not charge sales loads or 12b-1 fees and its expense ratio is a reasonable 1.16% according to the fund’s prospectus.

Posted in A Few Dollars More, The Fund House