Invest More, Risk Less in Asian Funds

NEW YORK ( TheStreet) -- Asian mutual funds have soared 68% this year, leaving some investors in a quandary.

They want to bet on Asia's long-term growth but fear the rise has been too fast, too soon. One solution may be to invest in relatively low-risk funds. Top choices have delivered above-average long-term returns and only suffered limited losses in downturns. By investing gradually into one of the best performers, shareholders can tap into Asia's boom.

While Asian markets remain volatile, the case for investing in the region is intriguing. Based on estimates for 2010, Asian stocks sell for a price-to-earnings ratio of 14, about the same as that of the S&P 500 Index of U.S. shares. For Asia, that's slightly richer than in the past, but the stocks deserve to sell at premiums, argues Frederick Jiang, manager of Ivy Pacific Opportunities ( IPOAX).

Jiang figures Asian gross domestic product will grow at a 7% annual rate for the next five years. Corporate earnings tend to increase at double the pace of GDP, so Asian earnings should climb about 15% a year. U.S. GDP may grow only 2% or 3%. "Returns in Asia should be much higher than in the U.S.," Jiang says.

Is Jiang too optimistic? Perhaps. But after suffering only limited damage from the global downturn, Asia seems to be powering ahead. Helped by a government stimulus, retail sales are climbing at double-digit rates in China. Auto sales are soaring in Indonesia, Korea and Taiwan. While banks in the U.S. struggle with toxic loans, Asian lenders remain on sound footing. Loan volume is climbing in China, encouraging sales of cars and consumer goods.

Among the steadiest choices specializing in the region is Matthews Asian Growth & Income ( MACSX). The fund owns dividend-paying stocks and convertible securities. Those tend to hold up relatively well in downturns. During the decline of 2008, the fund lost 32% of its value, outpacing its average competitor by 21 percentage points, according to Morningstar. Limiting losses, Matthews returned 14% annually for the past decade, outdoing 90% of its peers.

Matthews favors companies with strong balance sheets that seem poised to grow for years. Once it buys, the fund holds for the long term. The average annual turnover is a low 25%. "We focus on companies that will be around 10 or 20 years from now," manager Robert Horrocks says.

A longtime holding is HSBC Holdings ( HBC), the global bank that has roots in Hong Kong and is rapidly expanding into China. "This is a well-run bank that managed to avoid most of the subprime problems," Horrocks says.

Another fund that outperformed most competitors last year was Ivy Pacific Opportunities, which returned 8.9% annually during the past decade. The fund holds growing companies that sell at modest prices. Manager Frederick Jiang limits losses by holding cash and selling short during periods when the market is sinking. In 2008, the fund had more than 12% of assets in cash, which helped shield shareholders.

As Asian consumers have been leaving farms and entering the urban middle class, many have been opening bank accounts and using charge cards. That has encouraged Ivy Pacific Opportunities' Jiang to overweight financial-services companies that serve domestic Asian markets. A big holding is China Life Insurance ( LFC), the dominant player in the country. So far, few Chinese people hold life insurance, but that is changing fast. "China Life will have tremendous growth rates for the next 10 years," Jiang says.

He also holds Axis Bank ( AXBC.L), an Indian bank. The company has a strong balance sheet and is expanding, making loans to consumers and corporate customers.

To own a diversified mix of large and small stocks, consider AIM Asia Pacific Growth ( ASIAX), which has returned 9% annually during the past decade. The fund looks for companies with high returns on equity that dominate niches. Manager Mark Jason avoids high flyers, preferring stocks with modest price-to-earnings ratios.

The fund owns Parkson Holdings ( PRKN), which operates department stores in China. "Same-stores sales are increasing, and the rapid growth should continue," Jason says.

Jason also likes Industrial and Commercial Bank of China ( 1398.HK). The bank has a strong balance sheet and high returns on equity.

To focus on Chinese stocks, try Guinness Atkinson China & Hong Kong ( ICHKX), which has returned 10% annually during the past decade. Manager Edmund Harriss looks for growing companies that have high returns on invested capital. But he doesn't chase expensive shares. The fund's portfolio has a price-to-earnings ratio of 11, below average for the category.

Harriss is emphasizing companies that are benefitting from the Chinese government's stimulus package. Holdings include oil companies, such as CNOOC ( CEO) and PetroChina ( PTR). With car sales booming in China, demand for oil is climbing. Harriss says auto sales in China have topped 1.1 million a month, outpacing the rate in the U.S. "The Chinese stimulus package is proving effective, and that should help oil companies for some time," Harriss says
Stan Luxenberg is a freelance writer who specializes in mutual funds and investing. He was formerly executive editor of Individual Investor magazine.