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Pacific Ex-Japan fund has risks and rewards, too

Pacific ex-Japan funds had a whopper of a fourth quarter in 2001 ---they soared ahead over 28 percent. Add that performance to what went on all year and it meant that the average fund in that category closed last year down an average of minus 1.8 percent. This year, that fourth-quarter winning streak has still been going on. And, through the end of February, the average fund in the Pacific ex-Japan group was up 5.5 percent, according to Lipper. While these regional equity funds always have added risks and volatility, a small dose of them in your portfolio is sometimes appropriate. Here's one that's beating the average.

The Investec Asia Focus fund, (IASMX), is the new name for a combo of funds--Investec's Asia Small Cap fund and their Asian New Economy Fund. After the funds' merger earlier this year, the Investec Asia Focus fund, (it's symbol the same as the old Asia Small Cap fund's was), is showing that change can be a good thing.

"That merger offers us complete flexibility in picking stocks," says Agnes Chow, one of the fund's two portfolio managers. "The New Economy concept limited us to having exposure in just New Economy stocks and the Asia Small Cap fund in companies with a market cap no greater than $1 billion (U.S dollars). This one has no limitations in terms of market capitalization and we can basically buy stocks that we think have earnings growth potential and good valuations anywhere in the Asia ex-Japan region."

Keeping between 40 and 45 companies in its portfolio, as of March 6, the fund was up 12.3 percent, well ahead of its group's average. Here's more about the Investec Asia Focus fund, ( 1-800-915-6565):

Q: Where is the fund investing most of its assets now?

Chow: In Hong Kong, about 20 percent; in Korea we have about 43 percent exposure; 25 percent in Taiwan; around four percent in Singapore; five percent in Malaysia; and around three percent in Thailand.

Q: Why so much exposure in Korea?

Chow: Because there has been lots of good progress in financial restructuring there and we've seen improvement in capital deployment for a lot of companies. Also, people also aren't saving as much and are beginning to spend more. In the past, people did not have credit cards and right now credit cards are getting more and more popular in Korea. That's a big change.

Q: Could you name a couple of the companies that you like in Korea?

Chow: We have exposure in Shinsegai Department stores and Hyundai Department stores. So the concept is basically more shopping from the local people. We've seen sales in both companies pick up very strongly since last year with over 100 percent growth in terms of earnings last year. This year, we expect another 30-40 percent in earnings growth for both companies.

Q: Let's talk about risk and investing in this fund. Morningstar's report says it's " too dangerous" for most investors because it only buys the region's small caps.

Chow: We have had quite a bit of exposure to the small company sector, that is true. I would say 50/50---50 small cap and the other 50 medium and large companies. But we've seen a bull market in the small- to mid-cap sector in Asia and I think that the bull market is likely to continue. Actually, the Asia Small Cap fund was up 20 percent last year.

Q: Maybe their comment had to do with volatility and the fund's past performance---up 20 percent in 2001, down 45 percent in 1999.

Chow: That's probably due to the nature of not just Asian smaller companies, but Asia as a whole. It has been volatile but the volatility has come down quite a bit because we've come out from a financial crisis and corporate Asia, in general, had done quite a bit of restructuring.

Q: Tell me about how you select stocks for the fund.

Chow: The fund's focus is still on the technology and consumer sectors, those kinds of companies make up about 60 percent of the fund. And, on companies that are industry leaders. Right now the portfolio's aggregate P/E is around 15 times. We've never been interested in investing in start-up companies. It's not been our style. And we do not go into names that just have a concept. We go for companies with earnings growth, high return on equity and a company's record is very important for us. It's the major criteria we use in picking stocks.

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Again, world regional funds have additional investment risks. Just as their rewards may be sweet, their performance ride is often a rugged one. As a result, they are not suited for every investor.


Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.

To read more articles, please visit the column archive.

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