Markets in the Asia Pacific region — like markets around the world — have taken a beating, largely on concerns of slowing global growth and the liquidity crisis emanating from the U.S. Although fund managers aren’t taking bets on whether the worst is over, some are searching the debris for attractive values while others are becoming a little more defensive.

“I’m a long-term investor and don’t try to guess the immediate direction of the market,” says Andrew Foster, lead manager of GGOF Asian Growth and Income Fund, sponsored by Guardian Group of Funds in Toronto, and acting chief investment officer at San Francisco-based Matthews International Capital Management LLC. “But I would say that there are valuations in segments of the market that are becoming increasingly compelling — provided you’ve done the due diligence on individual stocks, as events may become more acute.”

Asian financial services stocks have been hit especially hard, he notes. Yet, their fundamentals are generally in better shape than their U.S. counterparts. “The key is knowing your companies well enough to state that with conviction,” Foster says. “We are finding valuations increasingly attractive. But that’s not to say the short-term direction is a positive one.”

From an asset-class standpoint, Foster has allocated about 19% of the fund to convertible bonds, with 78% in dividend-paying common equities and the balance in cash. “We look for income across the portfolio and hope it provides an enhanced degree of stability in market downturns,” he says, adding that the running yield on the equity side is around 4.5%.

A bottom-up investor, Foster does not pay heed to the benchmark MSCI all-country Asia Pacific index. Rather, he seeks well-managed companies that are trading at reasonable valuations. As a result, the fund is overweighted in Hong Kong (27% vs 13.5% in the index), in Singapore (15% vs 2.8%), in Taiwan (13% vs 8.7%), in South Korea (12% vs 7.8%) and in India (7% vs 4.1%). Because Japanese stocks have very low dividend yields, it is drastically underweighted in Japan (3% vs 46% in the index). Foster also finds few attractively priced stocks in Australia, which represents 3.2% of fund assets vs 14% in the index.

Running a 70-name fund, Foster favours financial service companies including HSBC Holdings PLC. One of the world’s largest capitalized banks, HSBC has a 5% dividend yield. “It has been at the forefront of the credit-cycle contraction and was the first global bank to talk about the subprime problem,” he says. “The bank is conservatively managed and has excess capital, which has served it well in the current environment.”

Rather than cutting dividends, as many large competitors have done, HSBC has been increasing its dividend about 10% a year. “For the moment, the bank’s portfolio is still growing,” Foster says, “and its strength in the Middle East and Asia is enough to offset weakness in the U.S. An increasing portion of its top and bottom line are driven by emerging markets exposure. In that sense, it’s returning to its roots in Asia.”

A long-term holding, the stock was recently trading at US$82.60 a share on the New York Stock Exchange, or about 11 times earnings. Foster has no stated target.

Another large holding is Singapore Press Holdings Ltd. The leading media concern in Singapore, it boasts a clean balance sheet and very little debt. “But the balance sheet has almost no value ascribed to the media business itself. It’s reconciled to the cash and property holdings,” says Foster, noting that the stock also has a 6% dividend yield. “The media interests are substantially underappreciated.”

Foster attributes the lack of recognition to the fact that the media sector has not seen the kind of deregulation experienced by other sectors. “[The Asian media industry] is not showing the kind of valuations seen in other markets,” says Foster. “Meanwhile, we’re not paying much — and we get an attractive dividend.” The stock recently traded at S$460 (Singapore dollars) a share or 14 times 2008 earnings.

It’s difficult to determine if markets are bottoming, says John Millar, lead manager of the TD Pacific Rim Fund, sponsored by Toronto-based TD Asset Management Inc. , and a Japanese equity specialist at Martin Currie Inc. , in Edinburgh, Scotland.

“In the here and now, our main focus is a kind of ‘safety first’ approach to stock selection,” he says. “We like to look for positive change in companies. At the moment, that’s all about avoiding big disappointments, the negative surprises and profit warnings. This has led us, for the past six months, to focus on companies with sustainable business models and we’ve expanded the exposure to areas such as telecom, railways, non-life insurance companies.”

@page_break@That’s not to say that Millar and co-manager Jason McCay, head of Asia and global emerging markets at Martin Currie, have gone completely defensive. “A cheap stock which has good growth prospects, or which is low on a price/book basis — and we can see the returns improving rather than deteriorating — is attractive to us,” says Millar. “As we’re trying to fill the portfolio with decent stocks, we’re quite happy that what we have is attractively valued and offers decent near-term growth. We’re being careful about not becoming too defensive and striking the right balance.”

A bottom-up stock-picker, Millar looks for stocks with the best opportunities, then applies top-down analysis on individual markets. As a consequence, the fund’s country weightings differ from the benchmark. Currently, there is an underweighted 29.5% of fund assets in Japan, 8.1% in South Korea, 4.5% in India, 12.7% in Hong Kong, 6.3% in China and an overweighted 18.3% in Australia. There are also small holdings in Malaysia and Taiwan.

Millar argues that Japan is adversely affected by demographic issues, as well as the strong yen, which has hurt exporters and eroded their competitiveness against countries such as South Korea.

“Japan may show more value, but there is a greater risk of earnings declining in Japan over the next 12 months than in the rest of Asia,” says Millar. “Taking a long-term view, Asian markets offer better prospects than Japanese markets, because of issues such as economic growth. Also, as consumers in Asian countries get wealthier, you will see more local savings go into the equity market, which could cause a re-rating of their stocks.”

Running a fund with about 90 names, Millar favours companies such as BHP Billiton Ltd. The Australia-based firm is one of the world’s largest mining companies and has benefitted from the so-called commodities super-cycle.

“For BHP, the news flow around its coking coal business remains extremely good,” says Millar, adding that coking coal accounts for 23% of the firm’s revenues. “Pricing power remains very strong, which provides very good near-term support for BHP’s share price. The fundamentals are still pretty good.”

A long-term holding, the stock was recently trading at A$38.50 a share, 10 times estimated 2009 earnings. Millar has no stated price target.

Another favorite holding is Sino Land Co. Ltd. The Hong Kong-listed property developer is active in commercial and residential development, with about 20% of its assets in China. As with many other property developers, its stock once commanded a premium. But since this past fall, its share price has dropped — to a recent HK$19 a share — and is trading at a 25% discount to its net asset value.

“It’s not a classic defensive stock, like a utility,” he says. “But the company has good growth potential and its valuation is defensive inasmuch as it’s fallen to a very attractive level.”



Like his peers, Mark Lin, manager of CIBC Far East Prosperity Fund and vice president of Montreal-based CIBC Global Asset Management Inc. , is a stock picker and is reluctant to make forecasts.

“The only gauge I have is valuation — and there are no bargains out there,” says Lin. Although he has added to some holdings, Hong Kong-based retailer Esprit Holdings Ltd., for example, he still has about 7% cash. “I don’t know where the market is going. I am only taking advantage of when the market goes down, with names that I happen to like.”

Lin, who took over the fund in May 2007, re-vamped it entirely, reducing the portfolio from 150 names to about 40. He focuses on companies that meet four criteria: they must experience volume growth, are leaders in their industry and grow faster than the market, have management teams with solid track records and the stock is trading at reasonable valuations. Lin also tends to prefer non-cyclical companies whose growth is predictable and benefits from demographic or long-range trends.

“We don’t own deep cyclicals, such as steel or commodities,” he says, “because it is very difficult to predict where they are going.”

As Lin does not pay attention to the benchmark, the sector and country weightings are a reflection of his personal convictions. Japan now accounts for about 30% of fund assets, followed by 18.5% in Hong Kong, 18.4% in Australia, 7.5% in China and smaller weightings in Singapore and India.

From a sector standpoint, there is a 23.8% weighting in health care, followed by 22.6% in consumer discretionary stocks and 16% in industrials, with much smaller weightings in financial services and energy.

One of the top holdings is China Mobile Ltd. The leading Chinese cellphone company has 384 million subscribers, about 33% of the population. But Lin believes there is more growth to come, given that less than half of China’s 1.1 billion-strong population are subscribers. “It has unmatched market leadership,” says Lin, adding that management has a good record of protecting shareholder value.

The Hong Kong-listed stock recently traded at about HK$123 a share, or 21 times 2008 estimated earnings. He has no stated target.

Lin also favours Sugi Pharmacy Ltd. “It’s the Shoppers Drug Mart of Japan,” says Lin. “Japan has a huge aging population problem and one of the highest life expectancy rates in the world. The company will grow to address those needs, and its market share is still relatively small.”

The industry is very fragmented, he adds, with many Mom and Pop-type outlets. The stock was recently trading at 2,925 yen, or about 22 times estimated 2009 earnings.

“There is a lot of opportunity to expand,” he says. “ We think it can grow at around 20% a year.” IE