Research before investing in Asia funds (ZT)

Research before investing in Asia funds

By TIM PARADIS
AP Business Writer

November 15, 2006

NEW YORK — The explosive run-up in technology stocks that ended so badly early in the decade laid bare the risks in chasing performance and throwing money at any company with a dot-com in its name. Investors took their lumps and many waited patiently before essentially repeating the exercise a few years later, this time in Asia.

While the consequences of an approximately 20 percent pullback in some Asian other emerging markets this past spring weren't necessarily as widely felt in the U.S. as the high-tech bust, the tremor certainly scared off many Western investors.

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Now, as with technology stocks that have long offered some sound investments, there are strong plays in Asia. What is required is a more careful approach.

Equity funds that invest in Asia-Pacific stocks excluding Japanese companies have performed well and have a year-to-date return of 10 percent, according to Morningstar. Those whose investments include Japan are off 2.9 percent.

Market observers say Western investors need to guard against viewing Asia as a homogeneous market and need to maintain a long-term outlook so they aren't unsettled by short-term volatility as many of the markets mature.

China and India have drawn much attention in recent years with outsize returns and rapidly expanding economies.

Pauline Dan, assistant vice president and executive director of equities at Manulife Asset Management, likens China's markets to those of the United States in the early 1900s. Dan, who oversees the John Hancock Greater China Opportunity fund from Hong Kong, said those who invest in China have benefited as they have gained access to an increasing number of companies there. Also, she sees further gains as the economy broadens to cater to the world's largest pool of consumers.

So while there remains enormous potential for funds that invest there investors should be wary of getting ahead of themselves.

"For the short term investors should be aware of the risk of a correction," she said, adding "we're positive for the three-to-five-year horizon." She expects the market could pull back by 10 percent to 15 percent if a correction occurred.

She sees a similar scenario unfolding in India. "For both markets we're seeing from the technical side that the market looks fairly overbought. Both countries are benefiting from enormous fund flows from Europe as well as U.S."

The Greater China Opportunity fund, which she oversees, has assets of $111 million and has shown a 49 percent year-to-date return; Dan expects annual growth of 20 percent is more reasonable.

Dan also sees a shift in the types of companies that are emerging in China. "We're seeing a lot more opportunity in the financial industry," she said, rather than simply manufacturing and steel companies that were the mainstay of China investments three or four years ago.

Dan notes and investors would be wise to pay attention to political and other developments in Asia that could weigh on stocks. "Korea was one of the best performing markets last year but hasn't done anything this year," she said, noting that investors have grown concerned that a slowing U.S. economy will hurt Korean exports.

Also, there can be short-term drops in the markets, for example, when tensions increase with North Korea over its nuclear ambitions.

Andrew T. Foster, director of research and portfolio manager at Matthews International Capital Management LLC, contends that while opportunities exist, investors should know what type of funds they are getting into and where the funds are concentrated. "Peer under the hood a little bit."

The nine Matthews funds are solely focused on Asia and have mostly shown double-digit increases this year. The Matthews Asian Technology fund is up 12.7 percent this year, while the Matthews China Fund is up 41 percent.

He said investors should hold a long-term outlook and be clear that geographic distance doesn't necessarily equate safety from ripples in the U.S. markets.

"I don't think volatility will depart the markets anytime soon," he said of the Asian markets.

Those wary of investing outside the United States because they are unfamiliar with the landscape should guard against assuming that a history of robust returns mean an investment is prudent.

Martin Jansen, senior portfolio manager for international investments at ING Investment Management, contends investors should allocate 10 percent to 20 percent of their equities investments in emerging markets, including Asia. He sees some of the more interesting investments not in developed areas like Japan nor solely in well-publicized growth areas like China but in places like Malaysia and Thailand.

"A few years ago emerging markets were so cheap that even if there was no growth you could get in with a great degree of comfort," Jansen said. "Now that the market values have risen you need to be more selective."