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It's Morning in Asia

In February, I wrote about Matthews International Capital Management, a firm that is based in San Francisco and runs eight funds that specialize in Asian stocks. Matthews China (MCHFX) has returned an annual average of 11 percent over the past five years, compared with a loss of 3 percent for the U.S. benchmark, the Standard & Poor's 500-stock index. In February, the fund had only $88 million in assets; now it has $363 million.

Matthews Pacific Tiger (MAPTX) is larger and, in its 10th year, more venerable. Top holdings include Thai firms, Advanced Info Service PLC, a cellular provider, and Bangkok Bank. Also high on the list are three Singapore companies -- Venture Corp., high-tech manufacturing; DBS Group Holdings Ltd., banking; and Fraser and Neave Ltd., a conglomerate with interests in beer, publishing and real estate. The fund has returned an annual average of 17 percent over the past three years, 7 percent over the past five.

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Another U.S.-based money manager with Asian expertise is Guinness Atkinson, which runs Asia Focus (IASMX), which returned 64 percent in 2003, according to Morningstar, and China & Hong Kong (ICHKX), with annual average returns since 1999 of 5 percent.

Top holding by far in Asia Focus is Samsung Electronics, the superbly managed Korean high-tech company. The fund's manager, Edmund Harriss, has about 4 percent of fund assets in each of two Hong Kong companies, Techtronic Industries Co., which makes power tools and appliances (including the Dirt Devil), and Denway Motors Ltd., a joint venture between a Chinese group and Japan's Honda.

Last spring, Guinness Atkinson outlined the difficulties in investing in China, whose "A" shares may be purchased only by Chinese citizens. Hong Kong blue chips -- which include pan-Asian firms such as conglomerate Hutchison Whampoa Ltd. and financial giant HSBC Holdings PLC, which is based in London and trades as well on the New York Stock Exchange under the symbol HBC -- appear to be safest.

But the main point of the report was simple: "Since 1978, China has grown at a compound rate of more than 9 percent per year. Its economy today is eight times as large as when reforms were introduced."

India, too, is growing like crazy, though the results of the recent national election cast doubt about the future. Still, China's gross domestic product has grown at 10 percent over the past 12 months, India's at 8 percent. Measured by "purchasing power parity" -- that is, the buying power of local currency -- China is the second-largest economy in the world after the United States, and India is fourth, ahead of Germany, France and Britain.

It's not hard to see Asia surpassing the United States and Europe in economic power in the next two decades, and it would be foolish for investors to skimp on Asia -- no matter how difficult it is to invest in companies outside Japan, which, by the way, I would include with the United States and Europe as potential areas of relative economic decline.

But put half your money in Asian stocks? That's a little extreme. My suggestion is to start leaning East but to realize that, as even TSMIE admits, "the U.S. market . . . probably has one last run." At least.

And, speaking of last runs . . .


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