Pacific Funds Look Rosy--at Least in Long Term

Westerners have been dreaming about the riches of China since before the days of Marco Polo. Last year, they got a nice little payoff.

Pacific region mutual funds leaped 63.8% in 1993, with almost half the gain coming during the final three months of the year. Next to gold portfolios, it was the best performance of any mutual fund category, Lipper Analytical Services reports.

Although most of the Pacific funds held little, if anything, in the way of stocks from China proper, the country’s move toward capitalism was an important reason behind their success.

Numerous corporations from elsewhere in the region are doing business in China, lured by the potential of operating in the world’s most populous nation--which features low wages, tremendous pent-up consumer demand, a long mercantile tradition, double-digit economic growth and other advantages.

“China is definitely a big part of the investment story for the region, but it’s certainly not the whole story,” says George Murnaghan, a vice president at Rowe-Price Fleming International, which serves as investment adviser to the T. Rowe Price international funds in Baltimore, Md.

Excluding China and Japan, other nations in the region will probably log economic growth of 6.5% to 7% this year, Rowe-Price Fleming predicts. China’s growth could be closer to 11%, while Japan’s will come in at an anemic 1% to 1.5%, the firm believes.

Such superior economic growth for the region (aside from Japan’s) is the reason Pacific funds appear to have a bright long-term future. But the more timely question is whether they are currently overpriced given the surge in 1993.

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Thomas R. Robinson, chief international equity strategist for Merrill Lynch in New York, says he is concerned about the region’s stock markets today after the sharp rallies of the past few months.

“Certainly the (positive) long-term story is intact, but I’d exercise caution right now,” he says.

As a sign that the road could be bumpy, Hong Kong’s Hang Seng index--which doubled in 1993--tumbled 6% on Thursday, Robinson points out.

Other high-fliers include the stock markets of Indonesia and the Philippines, whose major market indexes more than doubled during the year, and those in Malaysia and Thailand, where indexes nearly did so.

Another voice of caution comes from Mark Mobius, who runs two emerging-markets funds for the Franklin-Templeton family and heads Templeton Investment Management in Hong Kong.

He considers the East and Southeast Asian markets to be vulnerable to corrections, although he hastens to add that it’s hard to say when these might come.

Stock prices in the region have been fueled by low interest rates, a surge of investment cash from outside the region, a changing view of the risks of investing in Asia--especially China--and “simple greed,” Mobius says.

“People who don’t want to miss the boat have a tendency to forget the fundamentals,” he says.

Mobius and Robinson say another emerging-market region, Latin America, looks more promising from a near-term perspective. In particular, Mobius says he has been finding more individual bargains in Brazil, which has largely been overlooked due to its economic and political uncertainties.

Another lukewarm outlook is given by Mark Headley, director of international investments for the No-Load Fund Analyst newsletter in Orinda, Calif.

For people who had Pacific fund investments last year, Headley recommends staying put.

“These remain the most attractive growth stories in the world,” he says of the Southeast Asian economies.

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But for people thinking about jumping in now, Headley suggests waiting for a pullback or putting in money gradually through a dollar-cost averaging strategy. Headley, who has lived in Hong Kong, says stocks there are especially vulnerable given that they have advanced fourfold in the past half a dozen years.

He predicts that China will eventually have to apply the brakes to its surging economy to keep inflation in check, and that could cause the Hong Kong market to tumble.

Murnaghan takes a more optimistic short-term view of the Pacific region. He points out that many other stock markets around the globe are also trading near record highs, despite much slower economic growth in their home countries.

“It’s dangerous to try to time these (Pacific) markets on a short-term basis,” he says.

But to mitigate the risks, Murnaghan also urges interested investors to follow a dollar-cost averaging strategy.

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T. Rowe Price Associates of Baltimore has introduced a separate group of bond and money-market funds featuring lower expenses and higher investment minimums.

The six no-load Summit portfolios will carry expense ratios ranging between 0.45% and 0.60% annually--lower than most competing funds. The minimum investment will be $25,000 per fund.

Boston-based Fidelity Investments and the Vanguard Group of Valley Forge, Pa., are two other no-load groups that have special high-minimum, low-expense bond and money-market funds.

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How much do mutual funds pay to trade stocks? Not much, according to information compiled by Morningstar Inc.

The Chicago-based research outfit says the average stock fund pays about 0.31% annually in brokerage commissions--equivalent to $3.10 on a $1,000 investment. Including other operating expenses, fund costs amount to 1.63% on average.

“The fact is that most mutual funds are cost-effective investment vehicles, even when their trading fees are taken into account,” writes Morningstar Analyst Amy C. Arnott.

Certain investment categories are more expensive than others, of course. Precious-metals funds have the top brokerage costs of 0.79% a year on average, followed by foreign-stock funds at 0.60% and health-care portfolios at 0.54%.

Equity-income funds are cheapest at 0.19%. Other penny pinchers include financial-services and utilities funds, both at 0.20%.

A fund reveals its brokerage costs in its Statement of Additional Information, a prospectus-like document available on request.

Adding Asia

If you own a global or international mutual fund, you probably already have a stake in the hot western Pacific stock markets. On average, broadly diversified foreign funds have 15% to 20% of their assets in these markets.

For a more concentrated play, consider some of the following funds. They enjoy better-than-average track records and have large if not dominant positions in Asian countries other than Japan.

Fund charge Focus Phone Dean Witter Pacific Growth 5% Asia (212) 392-2550 Fidelity Emerging Markets None Asia, Latin America (800) 544-8888 GAM Pacific Basin 5% Asia (212) 888-4200 G.T. Pacific Growth 4.75% Asia (800) 824-1580 Lexington Worldwide None Asia, Latin America (800) 526-0056 Merrill Lynch Dev. Cap. 4% Asia, Latin America (800) 637-3863 Smith Barney Intl. Equity 4.5% Asia, Europe (800) 544-7835 T. Rowe Price New Asia None Asia (800) 638-5660 World Funds/Newport Tiger 5% Asia (800) 776-5455