Jason Stipp: I'm Jason Stipp for Morningstar. We're in San Francisco visiting Matthews Asia Funds, and I'm here with Andrew Foster. He's a manager on Matthews Asian Growth and Income Fund. He's going to tell us a little bit about what he's seeing in his stomping grounds and where he's seeing some areas of opportunity. Andrew, thanks for joining me.
Andrew Foster: Thank you, Jason.
Stipp: I'd like to start out with a question on the income focus of your fund. You look for dividend-paying stocks at good valuations, you will sometimes invest in preferred stocks. I think in the past, you've held convertible bonds and some other bonds in the Asian markets.
This is an area of interest to our readers, because in the U.S., there is a lot of problems potentially for fixed-income investors. Low yields, potentially higher rates in the future. I wanted to get your take on what the income situation is like in Asia right now? What the credit quality and the dividend stability and how you are seeing the income situation compared perhaps to what you're seeing in the United States?
Foster: Well, I think, overall, I'd say the landscape in Asia for income is attractive. I caution investors that turning to Asia for income is not an outright panacea. So, it's a bit of a mixed bag. Let me explain that for a moment.
I think first and foremost, I'd say that the yields in Asia from a dividend perspective are reasonably attractive at this juncture. If you are looking at Asia-Pacific as a whole, there is about a 2.7% yield on average from stocks. It's a little over 3% if you throw Japan out of the equation, where yields tends to be a little bit lower still, which is not too bad in comparison to the U.S., which I believe is around 2%, maybe slightly above 2% at present. So that's a fairly attractive picture.
And also, I would say that the pool of dividends is quite large in aggregate. Asia is churning out well over $200 billion a year in dividends, which is on par with that of the U.S. S&P 500. So, Asia's – I would say that the pool of income available is sizable enough to merit investors' attention. It can generate income for investors over the long term.
I think there are some important caveats, too. I would say those evaluations figures I've given you are right about in line with historical averages, maybe even little below historical averages, and therefore not especially attractive at this juncture. And I would also say that currency risk is something that investors, I'm worried, are increasingly not paying attention to. They sort of assume tacitly that Asian currencies are deeply undervalued and that may be true over the longest horizons, but a lot of Asian currencies are quite fragile and between here and the long run, there may be a lot of volatility in between.
So, banking on getting dividends denominated in foreign currencies may not be a sure fire thing if you're looking for stable income, but growing income is different story. I think that's where Asia really stands out, getting back to the positive side of this. We've seen dividend growth rates in Asia really pick up steam and they've been growing in the mid-teens over the last several years, except for the '08-'09 period, where we did see a decline of about 15% in the pool of dividends. That's actually better than the U.S. as far as our estimates are concerned. The U.S. cut dividends a little bit more. So you've got dividend security, dividend growth and reasonable yields.Read Full Transcript
Stipp: Okay. Given that you have historically looked at some different types of income, different areas on the investment scale from bonds to dividend-paying stocks to convertibles. Are you seeing any areas – and you mentioned some valuation metrics on the stocks – have you seen any areas look a little bit more attractive in the capital structure than others, given that you have little bit more of a wide-ranging view there than maybe some other managers?
Foster: Bonds are tricky as well. I think if we're looking across the capital structure. Convertibles are fairly richly valued. That's really just a demand and supply issue. That universe is relatively small to begin with, and it's shrinking, unfortunately, because companies are not issuing enough new bonds, and these bonds are very, very much in high demand by global investors, and I think they are little too well bid. So, the yields on the convertible side are actually around 2% at present, maybe even a little lower than that, and I'd like to see that yield rise because of more supply in the market
And the same is true on the fixed-income front as well. I think fixed income in the emerging markets, in Asia especially, has received a great deal of attention from global investors, I think, warrantedly so, because the balance sheets of corporates and especially governments in the region are much healthier than other places in the world, and we have better growth in this part of the world. But here, too, you suffer from a demand-supply imbalance. There are just not many listed bonds from governments or especially from corporates in Asia.
And so, I think one healthy thing going forward would be to see greater supply and that's why I'm very bullish. I think these markets – these fixed-income markets will grow in terms of their depth and their breadth and their size, and that's going to represent a very important opportunity for investors over the next decade.