Street Wise: This isn’t your father’s Asia-Pacific mutual fund

India, New Zealand and Pakistan aren’t typically associated with an allocation to the Asian equity markets, but that doesn’t mean they can’t be.

In constructing the Matthews Asia-Pacific Fund (MPACX), which was launched Oct. 31, Matthews International Capital Management LLC in San Francisco wasn’t trying to mirror or necessarily compete with the existing indexes.

“If you were a passive investor in Asia, you would be 60% allocated to Japan and 25% in Australia,” says Mark Headley, who will help manage the new fund as president of Matthews.

That wasn’t the kind of allocation breakdown he had in mind for what is designed to be a true all-Asia fund.

Japan, for example, which represents 60% of the Morgan Stanley Capital International All Country Asia-Pacific Free Index, will account for only between 30% and 35% of the Matthews fund.

Australia, which Mr. Headley thinks could be reaching the end of its bull market cycle, will have a weighting of between 3% and 5%, compared with an index weighting of 15%.

The manager says that the long-term outlook for Asia goes well beyond the current Japanese rally, the solid potential of China and Hong Kong, or even Australia’s role as a leading supplier of commodities to the region.

“We’ve always believed that you don’t want to own the index, you want to own what the index will be in five or 10 years,” he says. “We are looking much more at the underlying economic activity and the long-term trends.”

Those longer-term trends, according to Mr. Headley, are going to encompass economic markets not typically associated with this region.

While he admits that New Zealand and Pakistan will be “very minor players” in the fund’s initial allocations, India could emerge as a surprising contributor to the fund’s performance.

Of the roughly 7,000 publicly traded companies in India, Mr. Headley estimates there are about 200 he would consider “investible.”

One of the positive signs that India is working to free up its economy and make it more globally competitive is the trend toward investing in India by Indians living in other parts of the world.

“For the first time, overseas Indians are seeing an opportunity in India, and they used to be loath to do that,” Mr. Headley says.

While he says India hasn’t yet shed its reputation as a “treacherous market” known for “roadblocks and tripwires,” the country has taken such steps as lowering tariffs in an effort to open the economic markets.

“We’re approaching India not with wild enthusiasm, but it could be a great third leg of our Asian strategy,” Mr. Headley says.

That leg would join China as the growth driver and the recently awakened Japanese market.

“We really see Japan coming back to life in a way that will integrate much of Asia,” Mr. Headley says.

“The region is going to pull together, not as a political entity, but as an economic entity,” he adds. “And this is the way most asset allocators will want to look at the universe – as one fund.”

Matthews, which specializes in the Asian equity markets with its group of seven funds, has seen its total assets under management triple since March 31 to $1.7 billion, thanks largely to the explosive popularity of the Japanese economy this year.

In the third quarter alone, according to Lipper Inc. in New York, the average return for Japanese equity mutual funds was 21%.

In managing the new Asia-Pacific fund, Matthews plans to leverage many of its existing resources in Asia, which will include cherry- picking from an impressive lineup of country-specific and sector funds.

The $800 million Matthews Asian Growth and Income Fund (MACSX) had gained 30% year-to-date through Thursday.

The $375 million Matthews Pacific Tiger Fund (MAPTX) was up 54%, and the $55 million Matthews Japan Fund (MJFOX) had gained 53.3% over the same period.

Questions, observations, stock tips? E-mail Jeff Benjamin at [email protected].