Matthews: Income from Asia

by Mark Salzinger, editor The No-Load Fund Investor

With 34 portfolio managers, analysts and traders concentrating solely on Asian markets, Matthews Asia likely devotes more resources toward understanding Asian markets than any other American fund company.

The fund family offers a forward-thinking approach emphasizing domestically focused midsize (and some smaller) companies that represent the future of Asia.

In addition, performance has generally been excellent. And the expense and turnover ratios are relatively low, so the funds are generally run very efficiently, compared to other funds that emphasize emerging markets.

Among its 13 funds, Matthews Asia Strategic Income (MAINX) is the company’s lowest-risk fund, and should be the top choice of low-risk investors.

Strategic Income holds mainly Asian government and corporate bonds, with a smattering of dividend-paying equities (recently about 10%). Launched in late 2011, the fund is managed by Teresa Kong.

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.

Though it currently has only about $25 million in assets, Strategic Income is a welcome addition to the Matthews lineup and to the world of emerging market bond funds.

That’s because emerging market bond indexes and even most emerging market bond funds  emphasize Latin American and Eastern European markets, even though developing Asia represents a larger share of the global economy and offers intriguing opportunities for fixed income investors.

In terms of yield, so far the fund has managed to outpace intermediate-term U.S. Treasuries by between one and two percentage points. The current yield is about 3.5%. Year to date through Oct. 31, the fund produced a total return of 12.0%.

Kong and her team engage in extensive research to identify individual securities that provide attractive potential return for the risk taken.

As of September 30, corporate bonds accounted for more than half the fund’s assets, with government bonds (sovereigns) claiming about a third.

Though Kong invests the vast majority of fund assets in developing Asia, she also can buy Japanese and Australian bonds for tactical reasons.

As of Sept. 30, the fund had its largest country exposures to China/Hong Kong (30%), the Philippines (16%), South Korea (12%), Malaysia (12%) and Thailand (11%).

The fund’s duration was 5.2 years, which is on the long end of intermediate. More than 40% of the fund’s holdings were investment grade, with another 22% “unrated” (could still be of investment-grade quality). The rest was rated in the top rankings of ‘below investment grade.’

Matthews eschews currency hedging. However, because Asian companies tend to issue bonds denominated in dollars, 47% of the assets of Strategic Income are in U.S. dollar investments.

It is likely to have a lower risk profile than most other emerging market bond funds. And over time, it is likely to produce the highest yield of all the diversified Matthews funds.

Learn more about this financial newsletter at Mark Salzinger's The No-Load Fund Investor.

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