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Slow and steady wins the Asian mutual fund race

Robert Horrocks is chief investment officer at Matthews International Capital Management, the subadviser to BMO Guardian Asian Growth and Income Fund.

Kim White for The Globe and Mail/kim white The Globe and Mail

You might think that a mutual fund focused on Asia would be jumping into some of the most dynamic areas of the market to capture the region's heady growth.

The BMO Guardian Asian Growth and Income Fund prefers a more cautious approach. It focuses on dividend-paying stocks and convertible bonds – with stellar results.

"The idea behind the strategy is to try and participate in one of the fastest-growing parts of the global economy, but to temper that with an appreciation that markets are volatile," said Robert Horrocks, chief investment officer at Matthews International Capital Management, which is the fund's subadviser.

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The fund has been trouncing its peers, earning top ratings from Lipper. Over the past three years, it has delivered an average annual gain of 4 per cent, versus a group average of zero.

It stands out for its relatively low exposure to Japan. Less than 9 per cent of the fund's assets are focused on the country.

That is far below the average weighting for funds focused on the Asia-Pacific region, many of which have Japan weightings of 40 per cent or more.

Mr. Horrocks prefers places such as Singapore, a regional hub, where companies tend to have exposure to some of the faster-growing economies of Asia.

But the fund's stock selection is the real standout feature. Reliable dividends and steady growth take precedence over stocks with big promise and unproven performance.

Call it a defensive approach if you like, but Mr. Horrocks likens it to Grand Prix racing: "The key to winning is the pit stop," he said. "It's making sure there is gas in the tank. It is making sure the wheels are on properly."

Dividends reflect the core cash earnings of a business, he argues. If they are growing, it probably means the business is growing.

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Also, if management is paying out dividends, it probably means top executives are going to be good stewards of capital and take shareholder interests to heart.

"[Our strategy]has typically been a pretty good place to hang your hat, even if you do give up some of upside in the more ebullient market periods," he said.

He doesn't like to talk about individual stocks, but the fund's top holdings shed some light on its approach. CLP Holdings Ltd. is a Hong Kong-based power provider, Ascendas Real Estate Investment Trust is a Singapore-based owner of business and industrial space, AMMB Holdings BHD is a Malaysian bank, and Australia's Telstra Corp. Ltd. provides telecommunications services throughout Asia.

Of course, some observers argue the best approach to tapping Asia's growth is to invest in multinationals that are expanding into the continent. This can provide exposure to the region but also the comfort of familiar names and accounting practices.

Mr. Horrocks applauds the sentiment behind the approach because it emphasizes what he calls the stewardship of capital.

However, it also leaves out opportunities. A multinational company can provide exposure to Asia, but the region might be a relatively small part of its overall business.

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"For a lot of these multinationals, because Asia is a small part of their business, it may not get the management focus that it requires," he said. "Whereas the Asia-based business, that is everything, that is their existence."

But how will Asian businesses hold up amid the threat of recession in the West?

Companies that sell directly into the United States and Europe will see their earnings and share prices hit the hardest, he believes.

Firms that are focused on the consumer within Asia should do better – and with affluence on the rise throughout the region, these companies are gaining more prominence.

"In the past, investing in Asia meant investing in the company that made shoes for Nike or the company that made garden furniture for Wal-Mart," Mr. Horrocks said.

"Now you're investing in companies that are facing their own consumers and have their own distribution. I think that has made a strategy like this a little bit easier than it was in the past."

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