Investors have gotten used to associating the Asian equity markets with growth, but dividends are often an overlooked and potentially rewarding opportunity.
"There is a large subset of companies that are growing dividends faster than their earnings," said Jesper Madsen, lead manager of the
Matthews Asia Pacific Equity Income Fund (MAPIX). "This fund is not just looking at current yield but also growth in the dividend yields."
The $80 million fund was launched in October 2006 by
Matthews International Capital Management LLC.
The San Francisco-based firm manages $12.5 billion across nine mutual funds, all of which are designed to give U.S. investors pure-play exposure to the Asian markets.
Mr. Madsen said that managing portfolios involving primarily direct investments through local Asian exchanges from an office in California is part of the strength of the company's strategy.
"We have the right kind of distance from the Asian markets because we can step back from the daily volatility and keep our focus on the long-term picture," he said.
Of course, it helps that representatives from various companies based in Asia regularly visit Matthews' offices and that everyone on the firm's investment team makes quarterly research trips to Asia.
"We have all the access we feel like we need," Mr. Madsen said.
The case for a dividend-focused fund is grounded in a decade-long run during which Asian companies nearly tripled their dividend payout rates.
One exception is Japanese companies, where dividend payouts on average have doubled over the past 10 years.
Asian companies also have shown the ability to maintain dividend payments even during periods when profit margins have narrowed, such as during the regional financial crisis of 1997 and 1998.
On a country-weighting basis, Japan represents 20% of the portfolio, reflecting the investment strategy with regard to dividends.
The Morgan Stanley Capital International All Company Asia Pacific Index has a 47% weighting in Japan.
The extreme disparity between the fund and its benchmark illustrates how the management team views and values dividend income. "Japan still has one of the lowest dividend payouts in the region at between 25% and 30%," Mr. Madsen said.
From his perspective, the dividend potential in Japan is strong, but not as strong as in other Asian countries.
The management of most Japanese companies started recognizing the value of linking dividend payouts to earnings only over the past four or five years.
"We have seen a change in the way management teams in Japan approach minority shareholders," Mr. Madsen said. "Earnings in Japan since 2003 have been strong, and that has given them the room to increase dividends. And Japan is one of the only countries in the region where companies have started using share buyback plans."
Australia, at 4.5%, is another country that is wildly underweighted in exposure to the benchmark, which is 14.5%.
Ironically, it is Australia's unique structure of not taxing its citizens on dividends that makes the country less appealing to the manager of a fund that seeks rising dividends, according to Mr. Madsen.
"We try to focus on countries that will benefit from rising wealth," he said. "The companies in Australia are already paying out a significant portion of their earnings in the form of dividends."
On the overweighted side, Taiwan stands out with a 16% country allocation in the fund, which compares with a 6% index weighting.
"Clearly, Taiwan has not performed well relative to the region, but it has some of the highest dividend yields in the region," Mr. Madsen said.
The largest position in the fund, at 5.3%, is Hsinchu, Taiwan-based telecommunications firm
Taiwan Semiconductor Manufacturing Co. Ltd. (TSM).
"This is a company that has started paying dividends in the last three years," Mr. Madsen said. "But it has lots of cash, with the capacity and willingness to pay dividends."
The fund holds 52 stocks and maintains a cash position of about 1%. The average annual turnover rate is about 25%.
Over the 12-month period through last Thursday, the fund was up 11.3%, which compares with a 5.6% average return for those funds tracked by Morningstar Inc. of Chicago in the Diversified Pacific/Asia category.
Questions? Observations? Stock tips? E-mail Jeff Benjamin at [email protected].
