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Six Funds To Ride In Asia


Less than six months ago, investors were writing obituaries for the Asian markets as SARS paralyzed the region. But with the fear of severe acute respiratory syndrome diminished, the Asian Tigers are starting to roar. "There are a lot of green lights in the [region's] economy," says Mark W. Headley, co-manager of the Matthews Asia Pacific fund.

Some of those encouraging signs: Affluence is spreading, and consumers are snapping up everything from beer to cars and other big-ticket items. Companies are seeing an uptick in pricing power after years of deflation. And low labor costs, especially in China and India, and global demand for raw materials produced in the region are driving profits. With those fundamentals, it's no surprise that Asian markets are up anywhere from 33% to 96% so far this year.

Even with stellar returns, many think Asian stocks are still bargains. "Asia has had a good run, but it's not massively expensive," says Edmund Harriss, portfolio manager of several Guinness Atkinson mutual funds. The typical Asian stock is trading at about 13 times 2004 earnings, and earnings are expected to increase by 17% next year. By contrast, the average stock in the Standard & Poor's 500-stock index is trading at 18 times next year's earnings, with a 10% growth rate.

Still, picking stocks from the region on your own is tricky. Only the largest Asian companies offer American depositary receipts adrs) listed in the U.S. Moreover, getting detailed -- as well as trustworthy -- information on individual companies found on Asian exchanges can be challenging, to say the least. A proliferation of index funds and exchange-traded funds etfs) that mimic the Asian markets are available to investors, but with the rapidly changing markets, this isn't an area where you want your money to be indexed to a list. Your best bet is to find a veteran stockpicker who knows how to navigate this difficult landscape. We've come up with six funds run by savvy pros.

REGIONAL RESURGENCE

It's important to note that international mutual funds are often the target of market timers, who look to capitalize on the ability to buy portfolios of overseas stocks at what effectively are day-old prices. That has been one of the flashpoints in this year's mutual-fund scandals. The funds on our list take different approaches to ward off the hot-money crowd. The Matthews funds, for example, charge redemption fees of 2% for investors who decide to leave the fund within 90 days. In addition to a 2% redemption fee, Guinness Atkinson requires investors to make trades by 9:30 a.m. Eastern Time. That makes the fund useless to market timers -- and the management company is considering an even earlier deadline.

If you're thinking about investing in Asia, look no further than Excelsior Pacific (USPAX)/Asia to play the macroeconomic trends sweeping the region. The fund has a hefty 33% weighting in Japan, where stocks have awakened from their prolonged slumber to jump 24% in 2003. Yet it also has broad exposure to Australia and New Zealand, which get an additional boost from the Asian regional resurgence. Co-managed by David J. Linehan for the past seven years, the fund has been moving away from defensive stocks like breweries into companies leveraged to global growth, such as Honda Motor Co. (HMC).

For those who think the rebound in Japan is for real, Fidelity Japan Smaller Companies fund is a true standout. It has been one of the top U.S. funds investing in Japan in four of the past five years. The fund's focus on small stocks also means that it avoids some of Japan's large, troubled banks. Instead, portfolio manager Kenichi Mizushita, who is a buy-and-hold investor, favors consumer and information-technology stocks.

Another diversified play, sans Japan, is T. Rowe Price New Asia. It focuses on midsize companies and it's also the fund on our short list with the biggest bet on India: 16% of its portfolio is there. Co-manager Frances Dydasco likes India's huge base of young college graduates who are earning good salaries but still living at home, so they've got lots of disposable income. And she prefers to play the China story by investing in high-quality companies listed in Hong Kong such as Hutchison Whampoa.

Other investors don't share her reservations about China, where economic expansion is expected to be double the pace projected in the U.S. One good option is Matthews Pacific Tiger (MAPTX). Some 40% of the fund is in companies listed in China as well as retailers and banks in Hong Kong with close ties to the mainland. The portfolio is well diversified among sectors and among small, midsize, and large companies. Matthews also is slowly moving back into South Korea, which has trailed its neighbors in the most recent rally amid heavy consumer and corporate debt loads. "Growth is problematic at the moment, but that's where the valuations remain the most compelling in the region," Headley says. (Matthews has also just launched the Matthews Asia Pacific fund, which, unlike this portfolio, also includes Japan.)

CELL PHONES AND CARS

Like the matthews fund, Templeton Dragon (TDF) is gambling on China. Chinese companies "are moving from being third-party manufacturers to building their own branding, marketing, and distribution capabilities worldwide," says manager Mark Mobius, who has been navigating his way through emerging markets for more than three decades. Top holdings in the closed-end portfolio include a Chinese chemical manufacturer, a utility, and an energy company.

The best pure play in China is Harriss' Guinness Atkinson China & Hong Kong (ICHKX) fund. Since there are relatively few land lines available, portfolio manager Harriss likes Chinese cell-phone operators. He's also bullish on the auto sector because Chinese consumers, with their rising affluence, are making the switch from bicycles to cars at a rapid rate.

Despite the bright spots, some clouds still hang over the region. Skeptics point to the boom-and-bust cycles that still seem to be all too common, such as the 1998 crash that cut the Chinese stock market in half. Political instability and wobbly banking systems are potential threats. And these markets have run up a long way without a correction. That's why "investors need to have a time horizon of at least five years if they expect to make any money in Asia," says Marc Faber, an investment strategist who runs his own Hong Kong firm. Having an Asia-savvy fund manager also helps. By Lauren Young


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