A Broad Buy-in to Korea

04/13/2010 12:00 am EST

Focus: FUNDS

John Christy

Founding Editor, Forbes International Investment Report

John H. Christy III, editor of Forbes International Investment Report, finds an actively managed mutual fund beats the ETF alternative in this Asian Tiger.

The recent sinking of a South Korean naval vessel immediately rattled markets, even though it’s still unclear exactly what happened. But investors tend to assume the worst given North Korea’s often mysterious and unpredictable behavior.

As important as this development may be from a geopolitical perspective, it’s important for investors to remain focused on South Korea’s long-term investment potential.

South Korea is one of the few markets, along with Israel and Taiwan, which have successfully made the transition from emerging to developed market status. In the span of just a few decades, South Korea has gone from being one of the world’s poorest countries to one of Asia’s great success stories.

Today Korea is roughly on par with countries like Israel or New Zealand on a per-capita GDP basis, and companies such as Samsung and Hyundai are now household names.

Trouble is, there aren’t many Korean ADRs available in the US, so it’s hard to pick your own stocks. For investors who prefer index funds, iShares offers the iShares MSCI Korea Index ETF (NYSE: EWY), which gives you a low-cost way to track the market.

But there’s an even better option: the Matthews Korea Fund (MAKOX), a relatively smallish fund (assets: $129 million) with a great long-term track record. San Francisco-based Matthews has specialized in investing in Asia since the firm’s inception in 1991.

Its track record in Korea has been particularly impressive. Since the fund’s launch on December 31, 1994, it has returned a compound annualized 4.3% versus 0.9% for the Kospi, the local Korean benchmark.

The fund’s heaviest weighting is in consumer discretionary names, with 21.5% of assets versus 13.6% for the benchmark, including stocks such as LG Electronics (2.3%) and Hyundai Mobis (2.3%). The latter is an auto parts outfit, not to be confused with Hyundai Motor, the fund’s second-largest holding at 3.7% of assets. Samsung Electronics is the fund’s largest holding at 10.6% of the portfolio.

While Samsung has become a household name worldwide thanks to its sleek cell phones and flat-screen televisions, there are plenty of companies in the portfolio that are little-known outside Korea. These include Dongbu Insurance, Shinhan Financial, and Amorepacific, Korea’s biggest cosmetics company. The fund’s average price-to-earnings multiple is a reasonable 11x estimated 2011 earnings.

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