Many investors want to get exposure to Pacific Basin economies and markets through mutual funds, believing the difficulties of investing directly in Pacific stocks makes mutual funds a better way to go. So we’ve selected a few indexed and non-indexed funds, taking account of geographical spread, costs and the manager’s track record.

There is one major problem with indexed funds in the Pacific Basin space: they tend to be over-weighted towards Japan and China, because of those economies enormous size compared with their competitors. The Vanguard Pacific Stock Investor index fund (NYSE:VPACX or VPADX) for example has 60% in Japan (it doesn’t own any China), far more than one would want as a rational investor. It therefore makes sense to buy a mixture of indexed and non-indexed funds, to gain exposure to the markets you want.

The five mutual funds in Pacific Wealth are as follows:

Aberdeen Asia-Pacific Income Fund (NYSE:FAX) is a closed-end fund seeking current income through investing in Australian and Asian bonds – at June 30, 32% of the fund was invested in Australian bonds, 59% in Asian bonds and 9% elsewhere. The fund is modestly leveraged, with net assets of $1.5 billion, and pays dividends monthly at a current annual rate of $0.42, giving it a running yield of 8.8%. It also trades at a discount of 15% to net asset value, giving it additional upside potential.

Fidelity Pacific Basin Fund (FPBFX) is a managed fund established in 1986 with net assets of $743 million that seeks to grow capital over the long term by investing at least 80% of the fund in Pacific Basin securities. Its annualized 10-year return is 9.6% compounded, handsomely beating its benchmark the MSCI AC Pacific Free index annual return of 6.3% compounded. It has a somewhat high expense ratio of 1.18%, not excessive for a fund with its track record, and invests 36% of its portfolio in Japan, 12% in Australia and 10% each in China and Hong Kong.

Matthews China Dividend Fund (MCDFX), a $191 million fund run by the Mathews Group, which has specialized in Asian investment since 1991. It seeks total return with an emphasis on current income by investing 80% of the fund in dividend-paying equity securities of companies located in China. Whereas the MSCI China index is 43% invested in financials, MCDFX has only 18% of the fund in financials, overweighting industrials and consumer discretionary stocks instead.  Its compounded 5-year return to July 30 is 10% compared with 4.4% for the MSCI China index and its current yield is 2.8%.

Matthews Korea Fund (MAKOX) is the flagship of the Matthews group, seeking long-term capital appreciation through investing in South Korea. Its 10-year compounded return is 8.8%, compared with 6.5% for the Korea Composite Stock Price Index. It has a gross expense ratio of 1.11% and, compared to the KOSPI index, under-weights information technology and over-weights consumer staples.

Vanguard Pacific Stock Index Investor (VPACX/VPADX) (Investor shares VPACX have a $3,000 minimum, Admiral shares VPADX have a $10,000 minimum and a lower expense ratio of 0.12% compared to VPACX’s 0.26%) is the Vanguard Group’s Pacific Basin Indexed fund. It tracks the FTSE Developed Asia Pacific Index, so 60% of the funds are invested in Japan, 17% in Australia and 10% in Korea, with smaller allocations to Hong Kong, Singapore and New Zealand. It therefore misses out on the Pacific’s emerging markets, where most of the growth is. However those who prefer to keep most of their money in developed markets where governance is sounder may find this fund attractive. 

In addition, several of Pacific Wealth’s stock holdings are exchange traded funds, a close cousin to mutual funds. These include the Guggenheim China SmallCap ETF (NYSE:HAO) which gives us exposure to Chinese small-capitalization stocks traded on Hong Kong, and the iShares MSCI Philippines ETF (NYSE:EPHE), giving us exposure to the especially attractive Philippines market, both in the Conservative Portfolio and the Market Vectors Vietnam ETF (NYSE:VNM) in the Aggressive portfolio, which gives us indexed exposure to the small and poor but fast growing Vietnam market, impossible to invest in directly.

Also in the Conservative portfolio is the Korea Fund (NYSE:KF) a closed-end mutual fund with a good track record investing in South Korea. This has two advantages; its shares trade at a 10% discount to their net asset value and, not being indexed, the fund can overweight the smaller, faster growing Korean stocks.

These mutual funds give you a broad exposure to the Western Pacific region, but do not cover the Eastern Pacific, which lacks funds devoted to Latin America’s West Coast. In the short run, that’s not a problem, because those countries are suffering badly from lower commodities prices. In the longer run, I intend to find us a way for us to get broad exposure there.

For a conservative investor wishing an exposure to the Pacific region through mutual funds, I would suggest buying the Vanguard or Fidelity funds, with Aberdeen Asia if you want a bond investment. However you should also look to get additional exposure to Korea, China and the Philippines, all attractive growth markets that are underrepresented in the general Pacific Basin funds, through smaller investments in the two Matthews funds and the Philippines indexed ETF.