Stellar Performance Makes Asian Stocks Enticing Despite Risks
Investors who don’t mind a few thrills and spills along with high profits would have loved the Taiwan Fund in the past year. Shares of this closed-end mutual fund, which invests in stocks traded on the Taiwan Stock Exchange, fell 53% in the two weeks following the October crash on Wall Street, but still rose 114.5% for 1987 overall.
In January, following the death of Taiwan President Chiang Ching-kuo, the fund dropped 27% in a four-day period only to rally 80% between the end of January and mid-February.
Such a roller coaster ride isn’t typical of all closed- or open-end funds investing in stock markets in Japan, South Korea, Taiwan, Singapore and other Asian countries. But it does show a measure of the gains that many Americans have experienced in recent years by investing in these funds. (Shares of closed-end funds are traded on major exchanges, while the more common open-ended funds create new shares on demand.)
‘Fastest-Growing Area’
The number of such funds has ballooned as investors noticed the superior performance of Asian stocks in the 1982-87 bull market. They outperformed the U.S. market, fueled in part by Asian nations’ phenomenal growth and by the rising Japanese yen, which boosted the value of Japanese securities when converted into dollars.
Such stellar performances have generally continued after the October crash in the United States. Japanese stocks, for example, weathered the crash better than U.S. equities and now are easily outdistancing their American counterparts. While U.S. stocks on average are up about 5.7% this year, Japanese equities--which account for about 90% of the market value of all Asian stocks--are up about 25.6%, surpassing pre-crash record highs, according to Morgan Stanley Capital International. South Korean stocks didn’t even fall after the U.S. crash and have been at or near record highs.
“Unquestionably Asia is the most dynamic and fastest-growing area in the world,” says Christian Wignall, senior vice president at G. T. Capital Management, a San Francisco firm that manages two high-performing mutual funds investing primarily in Asian stocks.
Americans’ growing interest in investing in Asia in part reflects a realization that the United States no longer dominates world equity markets. U.S. stocks only account for about 32% of worldwide equity values, second to Japan’s 41%, says G. D. Rothenberg, a vice president of the Korea Fund, a closed-end fund. “You are missing out on two-thirds of the world if you confine yourself here,” he says.
But U.S. investors interested in international funds need to be aware that not all Asian markets are the same and not all funds share the same risks or volatility, experts say. Some diversified open-ended funds that invest in markets throughout Asia, Europe and North America have been considerably less volatile than closed-end funds like the Taiwan Fund that invest in one country.
Also, investors should be wary of the possible risks of major collapses. Some investment advisers, while bullish on Asia for the new few years, worry in particular that the Japanese market is overvalued and carries the characteristics of the U.S. stock market in the 1920s.
“You can’t ignore the opportunities there but you have to also realize like our markets last year, there’s some risk,” says William E. Donoghue, publisher of Donoghue’s Moneyletter, a Holliston, Mass., newsletter that recommends investors put 15% of their investable funds into international stock mutual funds, including those investing in Asia.
Another pitfall is that share prices in many Asian markets are highly volatile, due in part to the small number of investors. Prices also can be rocked suddenly by political instability, currency devaluations or capital controls.
These complications are a main reason why individual investors generally prefer to invest in funds in Asian markets rather than in individual stocks. In some cases they have to: Taiwan and Korea markets are largely closed to foreign investors. Japan, Singapore, Hong Kong and Malaysia are open to foreigners, but obtaining information on companies is often difficult and commissions, currency conversion expenses and other transaction costs can be very high if shares are bought directly on Asian exchanges.
The open-ended funds with Asian stocks have been consistently among the strongest performers among all mutual funds in recent years. For example, all of the 10 top performing open-ended funds in the past five years, through March 31, were invested at least partially in Asia, according to Lipper Analytical Services, a Summit, N.J., firm that tracks fund performance.
They included Merrill Lynch Pacific, up 361.10%; Japan Fund, up 359.71%; Vanguard World-International Growth, up 280.81%; BB&K; International, up 279.05%, and T. Rowe Price International Stock Fund, up 210.54%.
By contrast, closed-end funds, particularly those investing just in one country such as the Taiwan Fund and Korea Fund, have been more volatile because they issue only a limited number of shares, which are traded on a stock exchange such as the New York Stock Exchange or American Stock Exchange, says Thomas J. Herzfeld, president of Thomas J. Herzfeld Advisors, a Miami firm specializing in closed-end funds.
Thus, shareholders gain or lose not only from movements in the net asset value of the portfolio, as in open-ended funds, but also from movements in the price of the fund’s shares on the exchange. Like stocks, those price movements may be subject to investor psychology and other unpredictable factors.
For example, two of the most prominent closed-end funds, the Korea Fund and the Taiwan Fund, are selling at 92% and 97% premiums above their net asset value, respectively. That means their stock prices are nearly double the value per share of their portfolios. This high premium reflects the higher demand for their shares because both South Korea and Taiwan markets are largely closed to foreign investors.
By contrast, closed-end funds that are more invested into open markets are trading at discounts to their net asset values. For example, Scudder New Asia Fund, which is invested primarily in Japan, is trading at about a 19% discount from its net asset value. Investors generally are better off buying closed-end funds selling at discounts, Herzfeld says.
Perhaps the biggest question clouding these and other Asia funds are how long they can continue their strong performances.
Worry Over Crash
Concern is particularly high about Japan, given its dominant role among Asian markets. The average price-earnings ratio (price per share divided by earnings per share) on Japanese stocks is near 60, more than triple the U.S. market and high by Japanese historical standards, says Richard M. Allison, a vice president at Rowe Price-Fleming International, which manages the T. Rowe Price International Stock Fund. Accordingly, the proportion of the fund’s assets invested in Japanese stocks is lower than that’s nation’s share of the worldwide equity markets, he says.
Some investment experts fear that when the markets finally do peak, the fall could be as dramatic as the October U.S. market crash.
Another fear: that the dollar may have bottomed out, thus eliminating the favorable currency translations for Japanese stocks. (Currencies of most other Asian nations generally move closely in line with the dollar.)
But other experts minimize these fears, saying there are few signs that the rapid growth of these nations will subside enough to cause their stocks to crash. Japan, for example, shows no signs of the rising interest rates and rising inflation that helped spark the American stock crash, says Wignall of G. T. Capital Management.
TOP MUTUAL FUNDS INVESTING IN ASIA
Total return for periods ended March 31, 1988.
Fund 1st Quarter 5 Years Merrill Lynch Pacific 14.75% 361.10% Japan Fund 16.42 359.71 Vanguard World-International Growth 6.96 280.81 BB&K; International 6.26 279.05 T. Rowe Price International Stock 6.32 210.54 Putnam International Equities 3.92 202.81 G.T. Pacific Growth 16.15 185.12 Scudder International 9.25 182.01 Transatlantic Growth 8.78 178.35 Alliance International 11.39 174.08 Average of all equity funds 7.43 72.84 S&P; 500 (dividends reinvested) 5.69 105.99
Source: Lipper Analytical Services
