Lee Munson and Lorn Owen Davis provide independent fund research on Matthews Pacific Tiger (MAPTX).
Investors looking to recuperate losses from last year’s painful descent in the equity and fixed-income markets have been quick to jump on the BRIC bandwagon as it started rolling quickly in March. However when dipping their toes into the volatile and dangerously risky emerging markets, excellence in investment technique and analysis becomes even more important. At Portfolio Asset Management we hold a sizeable position in Matthews Pacific Tiger Fund (MAPTX) which invests in the large region of Asia with the exception of Japan. Our Chief Investment Officer, Lee Munson, generally prefers Asia oriented funds when searching for emerging markets versus a wider scope. Part of this is a bias against the soviet block that tends to be more of a kleptocracy than a wild free market experiment like China. Investing in Asis, however, needs a specialist that can focus on the region. Since short selling and diversification are not as widely practiced or culturally ingrained in Asia the fund has a long only bias. While our firm does not like long only posturing, we understand this as a reality in investing in Asia, at least for the time being.
Matthews is the largest Asian markets only collection of funds in the U.S. Launched in 1991, MAPTX has a long-term viewpoint that is key to investing in a region that is relatively new to deregulation and business growth under free market practices. These economic developments have certainly attracted interest from investors but have also led to serious volatility and confusion concerning cultural and governmental influence upon the markets.” With the increasingly delicate relationship of the Chinese government with its own economy, not to mention with the global economy, we should treat China with caution and true fundamental analysis as opposed to blind optimism. This reinforces why we think an institution dedicated to understanding and intelligently investing in this region is so attractive.” The next question we must ask ourselves as investors is: who are the managers and how much trust (i.e. capital) can we put in them as our gateway to this treacherous investment landscape?
The fund is managed by Richard Gao and Sharat Shroff, both of whom have extensive backgrounds in working in the Asian market with an emphasis on China. Mr. Gao began working for the Bank of China in 1989 and soon headed FOREX trading for import/export companies. He remained at this position until 1997 when he transferred over to Matthews to become a China Analyst. His experience working with import/export companies will be critical now as China attempts to stimulate its export based economy with falling worldwide trade. He quickly ascended to the position of Portfolio Manager after 2 years as an analyst running the China Fund and then MAPTX in 2006. Mr. Shroff provides another perspective to the fund as he spent most of his career prior to Matthews working as an Equity Research Associate for Morgan Stanley and holds the CFA charter which fulfills our expectation for the kind of bottom-up fundamental analysis the fund utilizes. The co-portfolio manager, Mark Headley, was on the team that launched the first SEC-registered open-ended Asia (without Japan) fund and has been on the MAPTX team since 1996. These managers have all had careers centered on the Asian markets and are each involved in managing different country specific funds which should help in bringing a synergy of expertise to Matthews Pacific Tiger. The research team provides many “windows” into their current market thoughts through monthly and weekly reports which comment on topics pertaining to the Asian Pacific region and respective markets. This information gives the investor an articulate look at how professionals view the Asian markets and provides a level of transparency that aids in gaining trust and capital.
The fund’s Q2 performance was 41.53% vs. the MSCI All Country Asia ex Japan Index which rose 34.98% and the YTD performance for MAPTX is 37.56% vs. 35.87%. But because this is intended to be a long-term, fundamental play these numbers, though impressive, shouldn’t hold as much weight as the longer term track record. That’s where the fund really shines in comparison to its benchmark. Since inception in 1994 the fund has returned 7.67% vs. 2.09% and again for 10 years the fund outperformed the benchmark 10.29% against 5.39%. Quite a significant difference and a testament to the reason managers are what make the fund in this field. The fund might not have been the best performer on a quarter to quarter or year to year basis in the past compared to funds that were overweight in Chinese equities, but it also fared far better than those funds when the pullback happened last year. The fund’s portfolio suffered in Q3 of 2008 but still beat its benchmark by a wide margin, thanks to exposure to Indian financials and consumer staples. This is why we like this fund and think it wise to avoid 90-95% of mutual funds in general. Most funds can’t even beat their benchmark and as such cannot add value to an investor’s portfolio. The team behind Matthews Pacific Tiger has a clearly defined long-term, value-oriented viewpoint that has been consistent in the past and managed not to blow up like the rest of the market did. That still doesn’t mean we don’t fluctuate in our weighting of MAPTX in our clients’ portfolios, adding and pulling out capital depending upon our own macroeconomic views, but we know the managers at the fund are good at doing their jobs and we can always rely on them to handle a region we don’t necessarily understand and a long-only strategy we would not employ ourselves.
In their 2009 second quarter commentary the managers discuss the recent Asian markets’ equity rally that has been developing into the third quarter and expressed contentment about their strategy of pursuing growth from domestic consumption that has been hitting their earnings expectations. Interestingly enough they are finding there is relatively more stable demand from smaller cities and rural areas which benefit from consumer related companies. They believe this comes from the increasing price of agricultural commodities and improved availability of credit. Retail sales are making positive advancements in China, India and Indonesia. However, the method the Chinese use to report their numbers may convey an overly optomistic outlook. One particular example that affects the retail sales number is the reporting of shipments as being sold when in reality it may take a while for those products to actually be sold in the market.
Promising long term developments in the macroeconomic outlook for the Asia/Pacific region exist including the first instance of a mainland Chinese company investing directly in a Taiwanese company and could be a sign of greater integration between the two economies. Furthermore, the political developments in India and Indonesia have positive implications. Those that are in power now have a more serious inclination to promote freer markets. This had a definitive impact on the performance of the portfolio recently as the fund is overweight India and Indonesia and underweight China and Taiwan relative to its benchmark, though the decision to be so had nothing to do with political prediction but rather good old fashioned fundamental analysis of the growth potential of the markets. This kind of foresight will probably buoy the fund as we start to see investors regain risk appetite and start speculating in Asian markets en force.
Ultimately, we invest in MAPTX for the long-term growth opportunities in a foreign market that is managed with a long-only strategy, by managers who have a clear view on what is going on in the region and are not just following a trend like so many other funds. The relative performance of the fund since inception is impressive and this year’s strong performance shows us the managers are working hard to continue their positive track record. We like that the fund is currently underweight in China because, we’re wary of the Chinese lending practices and don’t wish to get caught in a major pullback if an asset bubble bursts.
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