Low Risk, High Yield Play on Asia

07/17/2014 10:00 am EST

Focus: GLOBAL

Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

Our latest featured idea is the lowest-risk, highest-yielding fund at Matthews Asia, perhaps the leading Asia-focused US investment firm accessible to no-load fund investors; the fund’s current yield is 4.4%., observes Mark Salzinger, editor of No-Load Fund Investor.

Matthews Asia Strategic Income (MAINX) holds mainly Asian government and corporate bonds, with a smattering of dividend-paying equities. Launched in late 2011, the fund is managed by Teresa Kong, who is assisted by two co-managers.

Prior to joining Matthews Asia in 2010, Kong was head of emerging market investments at BlackRock, where she founded the firm’s Fixed Income Emerging Markets Group.

Strategic Income currently has about $51 million in assets. The fund deserves more popularity.

Its performance has been noteworthy, especially as compared to that of most other emerging market bond funds during tough times. Its 7.7% return over the past 12 months leads the return of the average emerging market bond fund by more than a percentage point (using Morningstar data).

Equally impressive, it has exhibited less volatility. In only one quarter since its 2011 inception has Strategic Income lost money—a 5.4% loss in 2Q13, during which time its average peer lost 6.8%. Also, while the average emerging market bond fund lost 7.2% for all of 2013, Strategic Income lost only 0.5%.

Though Kong invests the vast majority of assets in developing Asia, she also can buy Japanese and Australian bonds for tactical reasons. The fund has its largest country exposures to China/Hong Kong (26%), Indonesia (18%), India (9%), and Singapore (9%), with less than a percentage point in Japan.

The fund’s duration was recently 3.3 years, which is on the shorter end of intermediate. More than 40% of the fund’s holdings were investment grade, according to major ratings agencies, with another 16% unrated and the rest below investment grade.

Matthews eschews currency hedging. However, because Asian companies tend to issue bonds denominated in dollars, 51% of the assets of Strategic Income are in US dollar investments. Other significant currency exposures include those of Indonesia (8%), Singapore (8%), South Korea (7%), and Sri Lanka (6%).

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