Asian Funds That Can Withstand Overheating

The property boom in Asia wouldn't fizzle out as it did in the U.S., Asia fund managers say.
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NEW YORK (TheStreet) -- Stock-market bears have started betting against Asian equities. Famed short-seller James Chanos predicts the Chinese economy is about to implode.

He says speculators are borrowing too much and bidding property prices to unsustainable levels. Soon enough real estate markets will collapse, much as they fell in overheated parts of the U.S.

But some fund managers disagree. They argue that Asian economies will continue to grow, even if apartment prices in Shanghai and Beijing suffer temporary setbacks.

Real estate markets in China and the U.S. aren't comparable because the two countries are in different stages of development, says Robert Horrocks, manager of

Matthews Asian Growth & Income

(MACSX) - Get Report

. While California and Florida suffer from excess supplies of homes and offices, Asia has shortages of high-quality real estate, Horrocks says.

Metropolitan New York and Shanghai both have populations of about 19 million, but New York has 10 times as much office space as the Chinese city (109 million square meters, compared to 11 million square meters).

Horrocks concedes that construction is booming in China's major cities. But at the same time that apartments go up, crumbling old houses are bulldozed, he says. That is very different from the situation in Las Vegas where developers added residential properties to a city that already had adequate supplies of modern housing.

While the bears say that the Chinese government's big stimulus plan is overheating the economy and creating excess capacity, Horrocks argues that the stimulus isn't being wasted. Instead of building useless skyscrapers and bridges to nowhere, the government is investing in badly needed railways and medical facilities. "China is going through a massive transition," Horrocks says. "The transition will not always be smooth, but the data don't support the idea that a huge bubble is forming."

Horrocks argues that Asian stocks remain reasonably priced. The forward price-to-earnings ratio for Chinese stocks is 14.6, while the dividend yield is 2.5%. In contrast, U.S. stocks have a P/E of 14.9 and a dividend yield of 1.9%. "Some Chinese stocks are expensive, but there is no sign of a speculative frenzy," Horrocks says.

For a relatively tame way to invest in Asia, consider Matthews Asian Growth & Income, which holds a cautious mix of solid dividend-paying stocks and fixed-income holdings. The conservative portfolio tends to lag competitors in bull markets and outperform by wide margins during downturns. Avoiding big losses, Matthews has returned 13.8% annually during the past 10 years, outdoing 96% of its Pacific/Asia competitors, according to Morningstar. A big holding is

Hang Lung Group

, a developer of residential and retail properties in Hong Kong and China.

To own high-quality growth stocks, try

Invesco International Growth

(AIIEX) - Get Report

. The fund, which is listed in Morningstar's foreign large-growth category, currently has 20% of its assets in Asia outside Japan. During the past 10 years, the fund returned 1.9% annually, outperforming 70% of competitors.

Manager Barrett Sides says emerging Asia came through the global recession without suffering major damage. Now the region is poised to show strong long-term growth. To bet on the continuing health of China, he owns

Industrial & Commercial Bank of China

. "It continues to produce high-quality earnings growth," he says.

Invesco also holds

Li & Fung

, a Hong Kong operator that manages supply chains for retailers around the world. To help clients obtain goods on time, Li & Fung arranges for factories to manufacture the products. Then the company oversees shipping. Li & Fung is an extremely efficient operation that stands to grow as the global economy recovers, Sides says.

Another fund that owns high-quality growth stocks is

Harding Loevner Emerging Markets

(HLEMX) - Get Report

, which has returned 12.5% annually during the past 10 years, beating 78% of emerging-markets funds. Manager Rusty Johnson looks for companies with competitive advantages that can grow over sustained periods.

He's currently avoiding China's giant state-owned enterprises. Growth of such companies could slow as Chinese officials reduce government stimulus. Instead, Johnson favors smaller entrepreneurial companies that have strong positions in growing niches.

A favorite holding is

Shandong Weigao Group

, which makes syringes and infusion kits. Johnson says that company makes high-quality products that sell at competitive prices. "Their sales should grow because the Chinese government is spending heavily to increase medical coverage," he says.

Johnson also likes

New Oriental Education

(EDU) - Get Report

, a Beijing company that provides private tutoring in English and other foreign languages. Demand for the business should grow as Chinese parents strive to prepare their children for competitive job markets.

Stan Luxenberg is a freelance writer who specializes in mutual funds and investing. He was formerly executive editor of Individual Investor magazine.