You’ll receive your new Investment Digest issue this afternoon. First, here’s one more extended Daily Alert, a mutual fund recommendation from The No-Load Fund Investor.
“For several years last decade, Andrew Foster was unusually successful at providing impressive returns with limited volatility by investing in Asian stocks that pay dividends, along with convertible bonds. Matthews Asian Growth & Income (MACSX), which he managed for six years beginning in early 2005 (the last three years as lead portfolio manager), just about doubled its shareholders’ money during his entire tenure with only a fraction of the volatility of other Pacific mutual funds or even broad benchmarks of international equity investing.
“Matthews Asia Dividend (MAPIX), which he co-managed for more than four years beginning with its October 2006 inception, performed even more impressively, with extraordinary relative returns in good years and bad for the equity markets. In fact, he was so respected at Matthews that the firm made him acting chief investment officer (CIO) in 2008-09, during the height of the financial crisis.
“So, it was of particular interest to us when Foster left Matthews International Capital Management and founded Seafarer Capital Partners in 2011, followed by the launch of a mutual fund, Seafarer Overseas Growth & Income (SFGIX), this past February. He is assisted on the fund by an associate portfolio manager and a senior research analyst, both of whom have many years of investment experience in the emerging markets. Foster’s wife, Michelle, formerly a very senior executive at Barclays and other financial firms, heads up fund administration and other non-investment functions. As he did with his former charges, Foster emphasizes Asian stocks of any size. In fact, much of the investment approach is the same: a search for growing companies with solid financials, shareholder-friendly management, and rising dividends backed by sustainable cash-flow growth spanning many years. Foster emphasizes not fast-growing stocks, but instead those with growth in the range of 7% to 12% annually. He says that such moderate growers tend to garner insufficient attention from other investors in the emerging markets, and thus sell at attractive valuations.
“As for the dividends, while they add to total return, they also provide ballast in the case of a protracted bear market. Foster stresses that he is a bottom-up investor, meaning that he picks the stocks based on their individual fundamentals. However, while the fund offers exposure currently to many Asian markets (and non-Asian markets, too, as you’ll see below), he concentrates his efforts on individual stocks in countries that he believes are underweight in broad indexes of emerging markets. In time, he believes, the index providers and emerging market investors will increase their attention to countries with the economic size and growth characteristics to justify higher weightings, which in turn should benefit Foster’s picks in these countries.
“Foster’s current investment method differs from the one he practiced at his former firm in one major way. While Matthews International Capital Management sticks to Asian companies, Seafarer Overseas Growth & Income can invest anywhere in the world outside the U.S. According to the prospectus, at least half the assets must be invested in the emerging markets and at least 20% in developed markets. However, ‘developed’ doesn’t mean just Japan, Western Europe, Australia and Canada. The classification also includes such Asian ‘tigers’ as Singapore and Hong Kong, which are intimately connected with emerging Asia. At the end of August, East and South Asia accounted for 70% of assets, led by China/Hong Kong (19%) and Singapore (13%) but spread among more than 10 countries. (Japan was only 3%.) While not all of the positions in Singapore and Hong Kong are particularly inexpensive at current prices, they tend to have solid finances, attractive dividends, excellent corporate governance and strong likelihoods of moderate growth over many years.
“Outside Asia, the fund has significant positions among its 40-some holdings in Poland (9%) and smaller totals (4% to 5% each) in Mexico, Brazil, Turkey and South Africa. Foster praises Poland as having a high-quality workforce, with a lot of young, energetic people driving the economy forward as it continues to recover from a history of statist foreign domination. Compared to most other emerging-market oriented funds, Seafarer Overseas Growth & Income has much more in midsize and small Asian stocks, with higher dividends and more emphasis on serving their domestic economies as opposed to export markets. Also, because commodity-oriented companies often lack the sustainable growth characteristics Foster looks for, the fund is unlikely to have much in the way of these stocks or in such large commodity exporting countries as Australia and Canada. Currently available directly from Seafarer and also from Schwab and Fidelity Brokerage, the retail shares carry a net expense ratio of 1.60% (a little higher than we’d like, but we wouldn’t let it deter you) and a minimum initial investment of $2,500. Since inception, the fund is up about 8.6%, while the average diversified emerging market fund is down about 2%.”
- Mark Salzinger, The No-Load Fund Investor, October 8, 2012