Look to Asia for Growth

Funds that focus on Asian markets excelled last year and could do well in the future

If you’ve read the newspapers or looked at broadcast news lately, you might not think Asia is a great place to invest. Think again. Yes, the Japanese economy remains in recession. And true enough, the region’s economies — including South Korea, Indonesia, Taiwan, and others — took a bath in 1998 when “the Asian Flu” and its financial troubles sent practically every government in the region reeling.

Still, focusing on those past troubles may be shortsighted. Japan’s woes are well documented but haven’t brought down the entire region. The island nation’s Nikkei index — the Tokyo market’s equivalent of the Standard & Poor’s 500 index — sputtered to a 31.7% loss last year, but elsewhere, things weren’t as grim. In fact, other countries in the region were busy rebounding from 1998′s fiasco with a vengeance. South Korea ended the year up a whopping 47%. Taiwan’s stock market rose 24.9%, while Thailand logged a 29.3% gain. Indonesia and Malaysia both saw their indexes rise 5% or more in 2002.

Overall, Morningstar Inc. of Chicago reports mutual funds investing in Asia outside of the Japanese market finished an average -4.7%. That figure is far better than the numbers turned in by other overseas fund categories. Morningstar reports foreign stock funds were down an average 21.9%, while portfolios combining U.S. and foreign stocks averaged -17.6% in 2001.

Over the long term, there are compelling reasons to invest in Asia. For one, over the past 20 years, the region has averaged gross domestic product growth of 4.4% annually, compared to 3.2% annually for the U.S. and 2.3% for Europe over the same stretch. And since 1998, many economies in the region adopted financial reforms to trim government deficits and make their exports more attractive to the world market.

“I think economies in the region are headed toward a lower-growth, yet more-stable period ahead,” says Mark Headley, president of Matthews International Capital Management, a fund company that specializes in Asian securities in san Francisco. “Instead of the 5% to 10% annual GDP growth you might have seen from 1985 to 1997, we may likely see 3% to 5% gains, compared to 1% to 2% for the U.S. and Europe.” Headley thinks that could translate into 15% annual earnings.

Such potential led us to Morningstar, looking for funds with strong track records over the last three years, a sampling that spans both the 1998 debacle and the region’s recovery afterward. We focused on Pacific Rim and Asian funds that excluded Japan, given that nation’s stumbles over the past decade. Finally, we decided to include both country-specific offerings and regional plays in our screen for a wide array of options.

At the top of our list were funds run by Matthews. First place went to the Matthews Korea fund (MAKOX), which focuses on shares trading in South Korea. Thanks to a strong year by the semiconductor manufacturer Samsung and financial outfits such as Kookmin Bank, the fund generated a total return of 75.3% in 2001. Over the past three years, Matthews Korea gained an average 30.6%.

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