Focus On: Asia Funds

January 3, 2008

When we watch some of our favorite funds climb over 300% in just a few short years, we know that it's time to consider downgrading our category outlook (a measure of our expected future performance of a fund category in general).

The Favorite Funds List is not just our assessment of the best funds in each major stock fund category, but also our forecast for each category as a whole. Most of your future returns – which is what we're most concerned with around here – are driven by each category's performance going forward.

From early 2002 until mid-2006, we rated Asian funds a (Interesting - should outperform the market over the next 1 to 3 years). After investors began investing in emerging markets with somewhat irrational exuberance, we downgraded this category to a (Neutral) in 2006. In the fall of 2007, after a very hot 12-month span, we finally went with a negative rating (Weak - should underperform the market) in our most recent favorite funds ratings update. Now, at the end of 2007, we’re giving the Asian offerings our lowest rating of (Least attractive).

There are many signs that the best days are now behind us in this category. Four of our five favorite Asian funds have accumulated over $4 billion dollars in assets. Fidelity Southeast Asia (FSEAX) was up roughly 60% for the year at the end of November in spite of an 11% drop in November. Its five year annualized return is just over 35%. T. Rowe Price Asia (PRASX) posted similar returns.

Positive performances attract an influx of big money from fund investors. This new money then results in stock overvaluations and sloppy investing by fund managers. This pattern's also a broader indication that there's too much money sloshing around where you're trying to earn a buck. Fund managers and investors alike start to believe their own performance and think anything is possible in a dynamic economy with a hot stock market.

Most of our anticipated poor future returns will occur as this category begins to cool off, if not flat out crash, in general. Some of the decline will happen due to the funds' underperformance as managers accustomed to managing relatively small portfolios struggle to successfully invest billions of dollars in new money. We’re proud that the majority of the funds on our list have been category leaders since we picked them, but some are already showing signs of performance problems.

Matthews Pacific Tiger (MAPTX), which fortunately has been closed to new investors since last year, has been lagging for the last two years. It’s hard not to notice such subtle underperformance when performance in general has been so red-hot. If this fund had been underperforming because it was avoiding China – the hottest area for Asian funds now – it could be excusable, and a benefit going forward. However, this fund is into China and Hong Kong stocks to the tune of 35% - in line with benchmark indexes. The secret to Pacific Tiger’s underperformance lies in its overinvestment in financial stocks, underinvestment in energy stocks, and its manager's general aversion to the high-risk, high-valuation investing trend that has begun to dominate the Asian markets. Despite all of this, Matthews Pacific Tiger is still cheap for its category. We believe it should outperform the other funds in this category as the Asian markets sink, so we're keeping it on our Favorite Funds list for now.

T. Rowe Price New Asia and Fidelity Southeast Asia will likely fall about 10% more than Matthews Pacific Tiger once the air comes out of this market. Frankly, after reading some fund manager commentary, we get the impression that the Matthews people believe that Asian stocks are overblown, but like most actively managed sector and regional funds, they still remain fully invested because that’s what their fund investors want.

Although many of the older funds in this category have grown too large during the recent Asian funds hoopla, the fund industry has been dutifully launching new funds to meet the demand – which is usually a bad sign for future returns. Most of these launches have introduced new exchange traded funds, or ETFs, which are fast becoming the vehicle of choice for performance chasing investors, but there have been plenty of ordinary open-end funds available as well.

In the last two years, we’ve discovered the following new Asian open-end funds:

Buffalo Jayhawk China (BUFCX)
SPARX Asia Pacific Opportunities (SPAPX)
SPARX Asia Pacific Equity Income Fund (SPAIX)
Oppenheimer Baring China Fund (OBCAX) (Load)
Guinness Atkinson Asian Pacific Dividend (GAADX)
AIM China (AACFX) (Load)

And ETFs

iShares S&P Asia 50 (AIA)
PowerShares FTSE Asia Pacific S/M (PDQ)
PowerShares FTSE Asia Pacific ex Japan (PAF)
PowerShares Dynamic Asia Pacific (PAF)
SPDR S&P China (GXC)
First Trust ISE Chindia (FNI)
SPDR S&P Emerging Asia Pacific (GMF)
WisdomTree Pacific ex-Japan High Yield Equity (DNH)
WisdomTree Pacific ex-Japan Total Dividend (DND)

Opportunity rarely knocks by the dozen…

Even with this bounty of new product we don’t see a reason to replace a favorite here at this time but we’re keeping a close eye on the new SPARX funds. We’d add a China fund on about a 50% - 75% pullback in Chinese stocks or seeing some China funds close.

We wouldn’t be adding any new money to Asian funds today, even the best ones in the category shown here. Asian funds with less exposure to China should perform best over the next few years.


  1. T Rowe Price New Asia (PRASX)
  2. Matthews Pacific Tiger (MAPTX)
  3. iShares MSCI ex-Japan (EPP)
  4. WF Advantage Asia Pacific (SASPX)
  5. Fidelity Southeast Asia (FSEAX)