Pacific Rim Picks: Ahead of the Trends

11/20/2014 10:00 am EST

Focus: FUNDS

Benjamin Shepherd

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

Labor costs in China have been rising rapidly. Plus, the cost of land and building factories in China has also been soaring. That’s bad news for global manufacturers who depend on low labor costs to drive profits, observes Benjamin Shepherd, editor of Income Without Borders.

As a result, an astounding number of companies are actually fleeing China for cheaper countries such as Thailand, Vietnam, the Philippines, and even Mexico.

And that’s driving a virtuous cycle of business investment and development in those countries, the same kind of cycle that made China the economic success story is it today.

Matthews Asia Growth (MPACX) is well positioned to take advantage of these shifts. It has made large bets on those countries benefiting from business flight from China.

It also has positions in Indonesia, Sri Lanka, the Philippines, Malaysia, and Thailand. The managers at Matthews clearly understand which way the trade winds are blowing.

Consumers figure heavily in the fund’s investment selection, with both the consumer discretionary and consumer-staples sectors receiving more than 18% allocations in the portfolio.

The fund is also overweight in the industrial and healthcare sectors, while giving information technology, materials, and financials short shrift. So the fund’s management is clearly betting on a more affluent consumer class in the region.

The fund has its ups and downs in terms of performance, but the managers at Matthews have an excellent long-term track record of getting the broad macroeconomic themes correct.

The Matthews Asia Growth Fund ranks in the top 6% of diversified Asia-Pacific funds over the past six years and in the top 4% over the past five years.

Its 1.12% expense ratio also makes it one of the cheaper funds to focus on the region. It remains a great way to add widely diversified Asian exposure to your portfolio.

Fidelity Pacific Basin (FPBFX) has its top country allocation to Japan at 34.4% of assets, followed by Australia at 14.6%, and Hong Kong with a 12.4% allocation.

Its top holdings include heavyweights such as Samsung Electronics and Taiwan Semiconductor, as well as Commonwealth Bank of Australia, Orix Corp., and Japanese financial Softbank.

The fund’s team of ten managers play off similar themes to those Matthews uses, with consumer names accounting for nearly a quarter of holdings. However, they also include more technology names, with a 13.2% allocation.

The fund is literally tops in terms of performance, ranking in the top 1% of diversified Asia Pacific funds on a three-year, five-year and ten-year basis.

It’s also in the top 8% of funds over the trailing 15-year period. That said, it is more expensive than the Matthews fund, with a 1.21% expense ratio.

It provides the most targeted exposure to what could be one of the fastest-growing regions in the world, as manufacturing shifts to take advantage of lower labor costs.

In the process, standards of living in the Pacific Rim countries will rise, creating a whole new set of investment themes for the next decade.

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