Some Contrarians Favor East Asian Securities
With Europhoria the rage, and even the U.S. stock market hitting new highs lately, many people seem to have forgotten the investment potential of East Asia.
It didn’t help that Japanese stocks tumbled 26% during a two-month span earlier this year--a plunge that rattled nerves in neighboring countries, too. “When Japan collapsed, many Asian markets moved down in sympathy,” says Andrew Economos, portfolio manager of the Scudder New Asia Fund in New York.
Some of these markets have bounced back nicely, however. Stock indexes in Hong Kong and Singapore, for instance, are comfortably above where they stood at the start of 1990.
More to the point, the region still offers plenty of investment opportunities. Several economies in East Asia, including Japan’s, continue to grow at healthy rates. And stocks in many places are trading at reasonable prices. “This is a good time to be in Asia for investors with a contrarian bent,” Economos says.
Probably the best way to participate is through a fund that focuses on Pacific-region securities. Compared to trying to buy individual stocks, funds offer greater diversification. They also benefit from professional management--an important consideration in places where business practices and accounting standards sometimes differ markedly from the American norm.
Lipper Analytical Services counts 17 Pacific-region mutual funds, only five of which have been around five years or more.
You can also choose from among more than a dozen Pacific “closed-end” portfolios, which operate much like regular mutual funds except that they don’t issue or redeem shares on a regular basis. Closed-end funds trade on exchanges, like stocks, with supply and demand setting the price. In fact, closed-end portfolios will usually sell at either a discount or premium to their “net asset values,” the per-share worth of their holdings.
For investment purposes, the Pacific region comprises about a dozen nations with great ethnic and economic diversity. Besides Japan, the prosperous camp takes in South Korea, Hong Kong, Singapore and Taiwan. Up-and-comers include Thailand, Malaysia, the Philippines and Indonesia. Many Pacific funds also hold securities in Australia, New Zealand and India.
Here’s how the investment outlook is shaping up in some of these nations:
* Japan--Even after this year’s crash, the stock market valuations of Japanese companies outweigh those of all other countries in the region combined. As a result, most diversified Pacific funds have 20% to 50% of their assets in Japanese securities.
The Fidelity Pacific Basin Fund has about a 49% weighting in Japan. Portfolio Manager John Hickling predicts that the market as a whole will be flat for the rest of 1990. Rising interest rates in Japan--double last year’s--dampen Hickling’s outlook. On the other hand, he’s encouraged by the yen’s slide against the West German mark. “That will improve Japan’s competitive situation,” he says.
Hickling looks for long-term growth in industries such as housing, tourism and computer software. “There are still opportunities to make money in Japan, on a stock-by-stock basis,” he says.
Economos agrees. He has 37% of Scudder New Asia’s assets in Japanese stocks, almost entirely in smaller corporations. Favored industries include retailing, restaurants and biotechnology.
Some second-tier companies are showing annual earnings gains in the 20% to 30% range, yet many have been neglected by Japanese brokerages. “They’re just starting to wake up to the potential of smaller growth stocks,” he says.
However, Alston “Mac” Barrow, publisher of the Favorably Positioned Stocks/Funds newsletter in Tampa, Fla., still considers the Japanese market overpriced. He recommends staying away from funds with large weightings in Japan.
* Singapore and Malaysia--These countries were a single state before they split in 1965. Even today, their economies and stock markets remain intertwined.
The G. T. Pacific Growth Fund, the leader of its category during the one- and five-year periods ending March 31, 1990, has its largest position in Singapore-Malaysia.
“Both countries went through a deep recession in the mid-’80s,” explains Christian Wignall, chief investment officer for G. T. Global Funds in San Francisco. Both countries are now in the early stages of their business expansion cycle, Wignall says, with low inflation and interest rates.
Singapore has had a relatively advanced economy for years, and Malaysia is heading in that direction. Malaysia’s manufacturing output is growing at a 16% annual rate and now outranks agriculture in importance. Both countries have been recipients of a lot of Japanese direct investment, which bodes well for future growth, Wignall adds.
Malaysian stocks soared 60% in 1989, and the Singapore market has risen about 19% since last July. Despite these gains, stock prices in both countries are playing catch-up to other world markets, from a longer-term perspective.
* Hong Kong--How’s this for a bargain hunter’s paradise--a place where the average stock pays a 5% dividend and trades at a price/earnings ratio of 10? “Hong Kong jumps out as the best value of the region,” Hickling says.
Of course, the value results from high anxiety over Hong Kong’s future. The market has been unsettled since China cracked down on pro-democracy protesters last June. China will take control of the British colony in 1997.
“Everyone’s worried about the political situation,” Hickling says. “My bet is that practical, pragmatic and realistic policies will prevail in the mainland’s relation with Hong Kong.”
Economos, too, believes that the political risk is worth taking. “In the past, political uncertainties have led to good buying opportunities in Hong Kong stocks.”
The Hong Kong market faces another problem--low growth. The economy, which had expanded at double-digit rates in ’86 and ‘87, is expected to log just a 3% gain this year. “The economy has slowed down, but the long-term trend is for quite high growth,” says Wignall, whose fund has a 20% weighting in Hong Kong, its third-highest concentration.
One advantage of stocks in Hong Kong, Singapore and Malaysia, as well as a few other East Asian countries, is the relative absence of exchange-rate risk. Several of the currencies are pegged to movements in the dollar.
That’s not true of the Japanese yen, which fluctuates against the greenback. If you want to minimize risk of currency-related gains or losses, stick with funds, such as G. T. Pacific, that have low Japanese weightings.
You also need to decide how much geographic diversification you want. Most Pacific mutual funds invest in at least half a dozen nations.
Barrow suggests that you avoid funds that concentrate on a single market. “With a country fund, you’re facing questions relating to timing and selection,” he says. “I believe in broader international diversification.”
While Asian stock markets will have their ups and downs, the region as a whole remains one of the most economically dynamic in the world. Most likely, it will continue to offer good potential for a long time. “A lot of Europe’s growth is still five to 10 years away,” Economos says, “while Asia’s is here and now.”
PACIFIC REGION FUNDS
If you believe Japan, Hong Kong, Singapore and other Asian countries will continue to prosper, you might want to invest in a Pacific-region mutual fund. Some of these portfolios place the bulk of their assets in Japanese stocks. Others, however, seek broader geographic diversification.
The following table lists information on 10 of these funds. In addition, you might check into some of the closed-end funds that hold a diversified portfolio of Asian securities. These include the Scudder New Asia Fund and the Asia Pacific Fund, both based in New York.
NAME TOTAL RETURN MINIMUM SALES (PHONE) 10 YEARS 5 YEARS 1 YEAR INVESTMENT CHARGE Fidelity Pacific Basin -- -- -7% $2,500 2% (800/544-6666) Financial Strategic -- +180% -1% $250 None Pacific Basin (800/525-8085) G.T. Japan Growth -- -- +20% $500 4.75%* (800/824-1580) G.T. Pacific Growth +579% +241% +24% $500 4.75%* (800/824-1580) Pan Pacific Growth -- -- +4% $2,000 5%* IDS Strategy (800/328-8300) Japan Fund +644% +237% -4% $1,000 None (800/535-2726) John Hancock -- -- +6% $1,000 4.5%* Pacific Basin Equities (800/225-5291) Merrill Lynch +880% +225% +1% $250 6.5% Pacific Class A (800/637-3863) Merrill Lynch -- -- +0% $250 None* Pacific Class B (800/637-3863) Nomura Pacific Basin -- -- +5% $10,000 None (800/833-0018) Pacific Funds Avg. +701% +204% +4% All Equity Funds Avg. +341% +92% +13%
Merrill Lynch Pacific Class B charges a redemption fee that starts at 4% and phases down to 0% after four years. Fidelity Pacific Basin charges a 1% redemption fee.
* Fund charges an annual 12b-1 fee.
Total return numbers, for periods ending March 31, 1990, are provided by Lipper Analytical Services.
HOW MUTUAL FUNDS PERFORMED
Average total return, including dividends, in percent for periods ended Thursday, June 14
TOP 10
Fund Type Notes 12 mos. Yr. to date Week Advest Advantage Special Fund CA NL,R +18.31 +12.94 +3.45 Fidelity Select Biotechnology H LL,R +47.89 +26.08 +3.38 Kaufmann Fund SG NL,R +29.86 +14.72 +3.32 Berger One Hundred G NL +26.05 +4.76 +3.21 Twentieth Century: CA NL +12.39 +11.49 +3.15 Ultra Investors ABT Investment: CA LL +18.64 +6.81 +3.13 Emerging Growth Founders: Discovery Fund SG NL * +17.40 +3.07 SLH Small Capitalization Fund SG LL +16.52 +18.39 +3.04 Twentieth Century: Giftrust G NL +23.18 +8.82 +2.98 Oberweis Emerging Growth SG LL +23.88 +26.45 +2.97
BOTTOM 10
Fund Type Notes 12 mos. Yr. to date Week Strategic Investments AU LL -12.60 -46.56 -9.69 United Services Gold Shares AU NL +4.80 -33.15 -8.74 International Investors AU NL +5.26 -28.21 -6.85 Fidelity Select: Precious AU LL,R +0.68 -22.85 -6.07 Metals Blanchard Precious Metals AU NL -17.31 -27.20 -5.94 Keystone Precious Metals AU NL,R -8.22 -26.22 -5.64 Lexington Goldfund AU NL -1.41 -22.69 -5.55 Rushmore: Precious Metal Index AU NL * -24.98 -5.39 Benham Equity: Gold AU NL +2.13 -23.31 -5.27 Equities Index Franklin Gold Fund AU LL +8.88 -18.67 -5.18
TYPE: AU = gold, B = balanced, CA = capital appreciation, CV = convertible securities, EI = equity income, EU = European regional, FI = fixed income, FS = financial securities, FX = flexible portfolio, G = growth, GI = growth and income, GL = global-international and U.S. stocks, GX = global flexible portfolio, H = health/biotechnology, I = income, IF = international, MI = mixed income, NR = natural resources, OI = option income, PC = Pacific regional, RE = real estate, S = specialty/misc., SG = small company, TK = science and technology, UT = utility, WI = world income. NOTES: NL means no sales charge, LL means sales charge of 4 1/2% or less; L means sales charge of greater than 4 1/2%; R means redemption fee may apply.
* Fund not in existence for the period covered.
Source: Lipper Analytical Services
