Asia’s Most Unlikely Growth Story

07/05/2011 10:21 am EST

Focus: GLOBAL

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

While most of the press is equating “Asia” with “slowdown,” there's one fund that is taking advantage of all the good that remains in Asia, notes Benjamin Shepherd of Personal Finance.

A little more than three months after a 9.0-magnitude earthquake and massive tsunami devastated Japan’s Tohoku region, the nation’s manufacturers have partially repaired their disrupted supply chains.

In fact, industrial output increased by 1% in April after a record decline in March. Meanwhile, consumer confidence in the country ticked up in May, rebounding from a record low in the disaster’s immediate aftermath.

Despite these signs of progress, Japan’s gross domestic product (GDP) shrank by 0.9% in the first three months of 2011. Capital expenditures fell by 1.3% in the quarter, as companies in the hardest-hit prefectures have been slow to invest in rebuilding.

Although GDP growth is expected to remain weak in the second quarter, most economists predict that Japan’s economy will grow 2% in the back half of 2011, buoyed by manufacturers’ efforts to return to full production.

That’s welcome news for Matthews Asia Dividend (MAPIX), a fund that allocates more than 20% of its investable assets to Japanese equities. Small-cap Japanese stocks account for about 9.5% of the fund’s portfolio.

This exposure to Japanese names has weighed on the fund’s returns, which are essentially flat thus far in 2011. Based on the geographic breadth of their operations, large-cap companies were more likely to suffer business disruptions from the disaster, while investors dumped small-cap stocks amid liquidity concerns.

But Japanese equities have recovered steadily, and most of the fund’s positions have clawed their way back pre-quake levels.

Despite these headwinds, Matthews Asia Dividend still ranks within the top 5% of diversified Asia-Pacific funds. Its 1.6% total return so far this year is well ahead of the 0.2% gain generated by its average peer. The mutual fund also continues to rank at the top of its category on a trailing three-year basis.

This outperformance stems from the fund’s broad investment mandate. Manager Jesper Madsen has the leeway to invest almost anywhere in the region, and has often ventured into less-explored markets, such as Thailand, Singapore, and Malaysia.

Madsen’s investment strategy also limits volatility. Instead of looking for the next hot growth stock, he focuses on companies that have consistently grown their dividends and have the wherewithal to continue that track record.

That’s not the only wrinkle that sets Matthews Asia Dividend apart from its peers. Madsen also devotes almost half of the fund’s investable assets to small- and mid-cap names, providing superior leverage to local growth and consumption stories. Most of Madsen’s contemporaries limit exposure to small- and mid-cap names to about a quarter of assets.

With its unique investment strategy and an attractive 3.2% yield, Matthews Asia Dividend remains a buy if you’re seeking growth and income.

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