Top Asia Fund Turning to Volatile Stocks: Riskless Return
Jesper Madsen, manager of the Matthews Asia Dividend Fund, beat rivals over the past five years with companies whose earnings are less vulnerable to economic slowdowns. Now, he’s turning to riskier stocks as investors are bidding up shares of stable companies.
The $4.5 billion fund run by Madsen advanced 3.4 percent since 2008 through March 25 after adjusting for price swings, the top gain among 14 U.S.-traded funds with more than $1 billion that invest at least half of their assets in Asian stocks, according to the BLOOMBERG RISKLESS RETURN RANKING. The Matthews Asia Dividend fund had the highest absolute return and the lowest volatility among peers, which include offerings from Fidelity Investments and Franklin Resources Inc.’s Mark Mobius.
Madsen, 37, bet on companies such as Chinese auto-parts maker Minth Group Ltd. (425) and Bangkok-based brewer Thai Beverage Pcl (THBEV), whose shares more than tripled during the time that he held them as investors sought predictable income streams and dividend payouts in the aftermath of the global financial crisis. Rising valuations of such companies have prompted Madsen to turn to fast-growing companies that are more dependent on the economy, such as Cheung Kong (1) Holdings Ltd., the Hong Kong developer owned by Asia’s richest man Li Ka-shing, and PT United Tractors, Indonesia’s largest heavy-equipment seller.
Investors globally have been seeking “dividend-paying companies to the point where in some areas of the market they now run the risk of overpaying,” Madsen, a portfolio manager at San Francisco-based Matthews International Capital Management LLC, said in an interview. “More cyclical businesses are selling at significant discount.”
The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
Madsen’s fund rose 60.7 percent in the five years ended March 25 on a cumulative basis, more than triple the 15.6 percent average gain for the 14 funds included in the ranking and more than five times the 10.8 percent advance for the MSCI Asia Pacific Index (MXAP), according to data compiled by Bloomberg. The fund’s volatility was 17.9 in the period, compared with an average volatility of 29.3 for all funds.
Matthews International, which specializes in investing in Asia, also had the second-best performer in the ranking. The $7.2 billion Pacific Tiger Fund, run by Richard Gao and Sharat Shroff, had a cumulative return of 44 percent over the past five years with lower-than-average volatility for a 1.6 percent risk- adjusted return.
The $1.6 billion Fidelity China Region Fund, run by Robert Bao, had a risk-adjusted return of 0.7 percent to rank seventh. The $1.1 billion Templeton China World Fund, managed by a team led by Mobius, returned 1.1 percent after adjusting for price swings to rank fifth, according to data compiled by Bloomberg.
Madsen seeks companies that increase their dividends. His fund has a dividend yield of 3.27 percent, compared with a 2.5 percent yield for the MSCI Asia Pacific Index, according to data compiled by Bloomberg. His fund has an average price-to-earnings ratio of 12.3, compared with 16.97 for the index, the data show.
“Unfortunately, successful investing may not be just about finding good companies, but also about buying future dividend payments at attractive prices,” Madsen wrote in a fund commentary for investors. “We believe there is nothing safe about buying overvalued assets; stable or not, gravity applies.”
The biggest contributors to the returns posted by Madsen’s fund over the past five years were Ningbo, China-based Minth, Top Glove Corp. (TOPG), the Malaysian company that’s the world’s biggest rubber-glove maker, and Thai Beverage, the brewer controlled by billionaire Charoen Sirivadhanabhakdi, according to data compiled by Bloomberg.
Madsen, who has managed the fund since its inception in 2006, has pared back some of his top performers as share prices soared, while adding to what he considers cyclical or economically sensitive stocks.
“New additions to the strategy during the past year were generally businesses exposed to the economic cycle that held a strong competitive position within their respective industries,” Madsen said.
Madsen raised the weighting of real-estate companies to the third-largest through the purchase of Cheung Kong shares in September last year. Property-related companies as a group were the largest contributor to gains in the five-year period, led by CapitaRetail China Trust, a Singapore-based operator of shopping malls in China, and the Link Real Estate Investment Trust, Hong Kong’s biggest property trust.
Cheung Kong shares gained 1.2 percent as of 1:43 p.m. Hong Kong time.
The fund also increased its holdings in capital goods companies such as Itochu Corp. and United Tractors. Capital goods companies are now the second-largest weighting in the fund at 9.9 percent, compared with less than 4 percent five years ago.
United Tractors has good management and a policy of paying out “attractive” dividends, Madsen said.
In the past year, Madsen also bought Dongfeng Motor Group Co., which produces cars with Nissan Motor Co. in China, and China Shenhua Energy Co., the nation’s biggest coal producer. Dongfeng climbed 2.7 percent in Hong Kong, the most since Feb. 28, while Shenhua added 1.1 percent.
Dongfeng Motor paid HK$0.18 ($0.02) per share in dividends in 2012, more than three times the level in 2008.
“We believe it can grow its dividend,” Madsen said. “It’s a long-term, very stable, well-positioned business within the automobile and manufacturing business.”
Madsen said he likes China Shenhua (1088) because of its diversified businesses, including the ability to transport the coal it produces. Shenhua’s dividend payout in 2012 was five times higher than in 2008, according to data compiled by Bloomberg.
The Matthews fund has more than tripled its stake in Chinese companies since the end of 2007 to 22 percent as of the end of 2012, according to data compiled by Bloomberg. Hong Kong companies accounted for an additional 12 percent of the portfolio as of year-end.
Madsen avoided buying Chinese shares amid a rally in 2007, when the MSCI China Index (MXCN) jumped 64 percent. He instead bought China shares when they got cheaper in 2008, as the MSCI gauge slid 52 percent during the global financial crisis.
“Focusing on what looks attractively priced in China and deriving a great deal of total return via that dividend -- that had buffered a great deal of volatility and allowed us to generate a very strong positive return,” Madsen said.
Japanese shares accounted for 22 percent of the portfolio after Madsen reduced holdings over the past five years. Itochu and Orix Corp. (8591), which operates leasing and insurance businesses, were the fund’s two biggest holdings at the end of last year.
The fund is “starting to have a second look” in Japanese equities, especially exporters, Madsen said. Japan is seeing some “very interesting movements for the first time in a very long time,” he said.
The Topix Index (TPX), the country’s broadest equity measure, has climbed 45 percent since Nov. 14, when elections were announced that brought Prime Minister Shinzo Abe to power on a platform of increased stimulus and monetary easing from the central bank.
MSCI’s Asian gauge has a dividend yield of 2.54 compared with 2.12 for the Standard & Poor’s 500 Index. China’s economy, the world’s second largest, may grow 8.5 percent this year and expand 8.9 percent in 2014, the Organization for Economic Cooperation and Development said March 22.
Asia is “a very fertile environment when it comes to investors that are looking for some kind of yield,” said Madsen. “And you are in one of the fastest-growing regions in the world. Those two combined are what people need to care about when they think about their allocation in their portfolios.”
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