Asia's Dividend Harvest

03/12/2009 12:00 am EST

Focus: GLOBAL

Jesper Madsen

Portfolio Manager, Matthews Asia Pacific Equity Income Fund

Jesper Madsen, manager of Matthews Asia Pacific Equity Income Fund, sees many advantages in buying dividend-paying Asian stocks now.

Q. Why should income-oriented investors consider Asia now?

A. The constituents of the MSCI Asia Pacific Index paid out US$244 billion in 2007, compared to US$253 billion for the Standard & Poor's 500. From 2002 to 2007, the pool of dividends grew at a compounded annualized rate of 24%, compared to 10% for the S&P 500. Lastly, the dividend yield offered by shares of Asian dividend-paying companies has tended to be higher than that in the US, even while offering higher rates of growth.

While most investors continue to overlook Asia in the context of dividend investing, I think the recent slew of dividend cuts by the likes of GE (NYSE: GE), Citigroup (NYSE: C), Bank of America (NYSE: BAC) and Pfizer (NYSE: PFE) should prompt investors to consider diversifying their income stream. The Asia Pacific region offers a basket of Asian dividend-paying companies that generate income in 14 different countries and currencies, reducing the reliance on any one company, economy or sector.

Q. Your mandate for the fund is equity income. What percentage of the portfolio is dedicated to stocks paying dividends?

A. For the most part, the Matthews Asia Pacific Equity Income Fund is invested in companies with a history of dividend payments and those that we believe will be able to grow the dividend on a three- to five-year view. The fund can and does also hold other asset classes, such as preferred shares or convertible bonds.

Q. The primary make-up of the portfolio is financials, consumer discretionary/staples, and telecom. How did these sectors perform in the last year, and where do you think they stand now for the longer term?

A. While we believe in the long-term prospects of the Asian financial services sector, it was one of the worst-performing sectors in the MSCI Asia Pacific Index in 2008.

However, it is a broad sector that encompasses banks, insurance companies, brokerages, and real estate investment trusts. While the sector is likely to face short-term headwinds as economic growth slows in the region, we believe a thriving financial sector, acting as an intermediary for capital allocation, will be a necessary cornerstone in the region's ongoing economic development.

Consumer staples outperformed the consumer discretionary sector in 2008 as investors worried that slower economic growth may impact Asian consumer spending. We aim to invest in companies tied to the long-term rise in Asian domestic household wealth. As such, consumer-related companies continue to feature highly in the portfolio, especially as valuations have become less demanding.

The telecom sector provides stable cash flows with good support for ongoing dividend payments even when economic growth slows. This partly explains the outperformance of this sector in 2008 relative to the index. In Asia, it is possible to invest in a wide range of telecommunications companies.

A Taiwanese telecom company operates in an environment where wireless penetration is already high, resulting in lower growth potential but stable cash flows. On the other hand, in India, where many people have yet to own their first phone, a telecom company is considered a growth company because of the potential for higher subscriber growth.

Q. In hindsight, after a devastating 2008 stock market, would you have done anything differently?

A. In 2008, the portfolio was relatively defensively positioned, with a high degree of exposure to more defensive business models and companies with the ability to continue to pay dividends during the current climate. We have a policy of staying fully invested [based] on our belief that we cannot predict when the market will bottom.

Instead, we remain focused on investing in companies that we believe will benefit from the long-term evolution of the Asian economies, while navigating the portfolio through various market conditions. In hindsight, the extent to which the financial sector in Asia was impacted by the US and European financial meltdown was surprising given the relative strength of the companies in Asia.

As a result, the portfolio could have been better off in the short term with a smaller allocation to this sector. (The fund lost almost 26% in 2008, but dramatically outperformed its fund category and ranked first among its peers-Editor.)

Q. Are you considering making any significant changes to your portfolio make-up for 2009?

A. A market sell-off presents investors who have longer-term horizons with the opportunity to acquire shares in companies with good growth prospects at better valuations. While it is tempting to stay defensive given the uncertainty in the marketplace, we are continuously looking to selectively increase the exposure to companies with the potential for solid growth in dividends over the coming three to five years.

This was exemplified by the addition of several Chinese companies toward the end of last year. Due to their longer-term growth potential, these companies were previously trading at lofty valuations and, as a result, depressed dividend yields. However, with valuations contracting, these companies now offer attractive dividend yields, especially in relation to the potential for growth in the dividend.

Q. Thank you.

Editor's Note: The top five holdings in the Matthews Asia Pacific Equity Income Fund, as of December 31, 2008, were as follows:

Taiwan Semiconductor Manufacturing Co. (NYSE: TSM)
Globe Telecom, Inc. (OTC: GLTMF.PK)
SK Telecom Co., Ltd. (NYSE: SKM)
PT Telekomunikasi Indonesia (XETRA: PTCA.DE)
Chunghwa Telecom Co., Ltd. (NYSE: CHT-WI)

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