Mark Headley

Uploaded by WealthTrack on 18.02.2011

CONSUELO MACK: This week on WealthTrack, Great Investor Mark Headley discovered the investment
allure of Asia early on. Now the pioneering chairman of Matthews Asia Funds warns Americans
could be missing the boat on future growth unless they change course. Mark Headley on
investing in Asia is next on Consuelo Mack WealthTrack.
SPONSOR: The company keep is also the company we keep.
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SPONSOR: Additional funding provided by: Loomis-Sayles - investors seeking the exceptional
opportunities globally. Research Affiliates - Efficient index foreign inefficient market.
The Wintergreen Fund - your home for global value.
Rosalind P. Walter and
The Dremen Foundation
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. Emerging markets have
been the darlings of the investment world for the last two years. While investors were
fleeing stocks in favor of bonds overall, they made an exception for stocks in the developing
world, at least until now.
In what Bank of America Merrill Lynch’s Chief Global Strategist Michael Hartnett is
calling “The Great Rotation,” emerging market stocks along with other past winners
such as gold and small cap stocks have been fading while yesterday’s losers, European
stocks and global financial shares, are leading. Developed markets have outperformed emerging
markets for five straight months. Investors are taking note by paring their positions
in emerging market equity funds while raising them in large cap stock funds. There are some
fundamental reasons why investors are skittish about emerging markets. Political unrest in
the Middle East is one, and there are significant economic challenges. A slew of commodity prices
have been setting records in recent weeks, including copper, cotton and wheat; higher
global commodity prices take a much larger toll on low wage countries than they do on
higher ones. As you can see from this chart on inflation in China, prices which fell during
the financial crisis have been rising rapidly. Inflation is now running close to 5% year
over year. In response, China has been hiking interest rates. A week ago, it raised rates
for the third time in four months. Just about every other developing Asian country is doing
the same in an attempt to contain inflation, which will mean slower growth down the road.
That said, Hartnett and his team at Bank of America remain long-term bulls on emerging
markets because of their still relatively strong growth outlook and higher bond yields.
By one estimate, China’s GDP will be around 9% higher this year and next. We can only
wish. China’s growth has propelled it to yet another milestone. This week it was reported
that China’s economy surpassed Japan’s to become the world’s second largest. Last
year, China’s GDP reached $5.88 trillion versus Japan’s $5.47 trillion output. The
two combined are still considerably less than the U.S.’ GDP, which grew to $14.66 trillion
last year, during a relatively weak recovery.
But, despite the rising economic clout of China and other emerging markets, American
portfolios remain heavily skewed to American markets, which is a bone of contention for
this week’s guest. Great Investor Mark Headley is a pioneer in Asian markets, where he has
been managing portfolios for Matthews Asia Funds since 1996, including the Matthews Pacific
Tiger Fund, a Morningstar pick with a ten year annualized return of nearly 15%, far
ahead of its peers and category. Headley has stepped back from active portfolio management
and is now overseeing the firm as chairman of Matthews International Capital Management.
I began our interview by asking Headley why he feels Americans approach to international
investing is frequently mistaken.
MARK HEADLEY: The point we’ve been trying to make is, you know, America makes up 25
to 30% of the global economy, 30 to 40% of stock markets, depending upon how you count
capitalization. And yet, the standard American advice is, you could have 20% international.
And in that international piece, you have emerging markets, but there’s usually not
a lot of commitment to that emerging markets piece. When it’s hot, people pile in. When
it’s cold, they tend to pile out. So it’s very tactical. And I think this just defies
good long-term investing logic, which, you know, as I’ve tried to point out, we tend
to be very good investors in the United States. We take long-term positions in large cap,
small cap, value growth. But then we tend to be much more flavor of the month when we
go international. And somebody who has a couple hot years, or a sector that’s really good,
we pile into, the winds change, we’re out of it. And that isn’t really the way to
be successful in any long-term equity investing. We’re too opportunistic. We treat it as
not part of our core investment theme.
Whereas, I would argue, you know, if America’s maybe as much as 40% of the market cap, you
know, being 50, 60% in your American investing, being at least 30 or 40% in your international
investing, this is a huge component of your long-term equity investment, and it should
be treated very, very seriously. And it doesn’t mean that any one solution is better than
the other, whether you’re passive or active. But to really make the commitment to find
strategies you believe them, have them fit in with your overall investment philosophy,
and stick with them. Rather than seeing it as, you know, I’ll buy China this year,
or Brazil, or now we’re off to the Middle East, and bouncing around, the way people
used to with tech stocks.
CONSUELO MACK: Let’s talk about Asia, which is your specialty. And, aside from China last
year, Asia stocks, the Matthew Pacific Tiger Fund did extremely well, for instance. So,
how should we be viewing Asia, as American investors?
MARK HEADLEY: Well, you know, as I always say, it’s a huge region. So there were areas
that were particularly hot, and we had great returns from another bureau, the Southeast
Asian markets: Thailand, Indonesia had terrific years. India had a great year. And China was
actually relatively flat. Korea came on strong more recently. So it’s a very mixed region.
There’s a lot going on. But I would say overall, it’s a time to be cautious. You
know, we hit tremendous valuation lows two years ago in the crisis. The markets have
responded fabulously since then. Thank you very much. If you’ve made those great returns,
and Asia’s outperformed other areas of your portfolio, it’s a perfectly reasonable time
to reallocate to other regions, whether it’s in the U.S. or somewhere else, to take some
risk off the table.
On the other hand, Asia is generally not overly expensive. And where it was looking a bit
frothy, like India, we’re seeing double-digit pullbacks, already, in the, you know, first
six weeks of the year. So, I’m happy to see those markets retrench and get a little
fear in there. I think that there is no reason to run away from Asia, and there is no reason
to run into Asia, frankly, at this moment in time. I think the uncertainties about the
global economy, and the real pain that developing economies are feeling around the world, from
food inflation, from commodity inflation, it really hurts these countries in general,
unless they’re a big commodity producer, which most Asian nations aren’t.
CONSUELO MACK: So, talk to me about the threat that rising commodity price, and of course,
that means rising inflation, and that the central banks, China, for instance, are very
much responding to that by raising interest rates, trying to slow down inflation and economic
growth. How much of a threat are these moves to the growth of the region?
MARK HEADLEY: Well, I think they’re trying to engineer, and particularly in China’s
case, they’re working very hard to engineer a soft landing after pumping a ton of money
in the economy during the financial crisis. After loosening things up, you know, getting
a lot of fixed investment, they’re trying to wind that all back down to a more sustainable
rate. I think the odds are they’ll do it. They have a reasonable track record. But it’s
hard. You know, there’s a lot of uncertainty, and right now, we are being hit by these factors
like oil prices moving up, food prices moving up. There’s a huge potential drought, we’re
getting warning signs in North China that hits their wheat harvest. This can have a
huge impact, especially on poor, rural populations. You know, for an urban manufacturing employee,
probably not a big deal. But if you’re living out there and your fertilizer prices go up
30 or 40% and there’s a drought, this could be just, you know, devastating.
And I think that this is the life in many developing countries. There’s nothing extraordinarily
unusual about it. But I do think there’s a fair amount of uncertainty. I think that,
given the gains we’ve had in the last two years, it’s just a time to be careful, to
be cautious, to stay well-diversified. There isn’t an opportunistic reason to jump into
equities when interest rates are moving higher. I think, on the other hand, I don’t see
any reason to believe that Asia isn’t going to outgrow most of the rest of the world over
the next five to 10 years. I think that trend is still fairly solid.
CONSUELO MACK: You know, we as individual investors have a lot of different options
on how to invest in many markets. I mean, in the emerging markets in Asia, for instance,
Matthew’s Asia Funds, you’ve got, you know, the Pacific Tiger Fund, for instance,
which invests in Southeast Asia, ex-Japan. But then you have country funds as well. So,
how do we decide when it’s appropriate to invest in a country fund, when it’s appropriate
to invest in a larger fund that invests in an entire region? You know, help us make those
MARK HEADLEY: Well, I have long argued that it takes a pretty sophisticated investor to
go into a single country fund. I’ve argued in general that most single country funds
are more like owning a U.S. blue-chip stock: that if you go out and buy GE or some other
large U.S. company, you can take on the risk of buying a China fund. But you should have
a reason why you want to do it. There should be something compelling. You’ve visited
it, you’re impressed by it, your company works with it, you know something about--
you know, you believe in it. You know, it shouldn’t be just, I’m going to make a
lot of money off China in the next couple years. I think for 90% of U.S. investors,
a diversified Asian fund is as far into the region as you need to go, and that if you
want to add that single country exposure, it’s because you really have some special
So, diversified regional funds are a really nice way to offset what is really, in my mind,
the over-emphasis that you see in most international funds on Europe historically, and developed
markets in general. You know, they’ll have much more in Canada than they’ll have in
China. And you can add emerging markets funds and balance it out any way you like. You know,
there’s diversified emerging markets funds, dedicated regional funds, and the large international
landscape funds. They’re all good ways to go. And knowing what’s in those portfolios,
and how the managers run those portfolios, and mixing them together in an appropriate
way, again, very much like we would put a value fund alongside a growth fund in the
U.S., small cap versus a mid cap versus a large cap. Get a mixture of approaches. Don’t
put everything into growth. Don’t put everything into value. There are times when strategies,
whatever it may be, don’t work well for a period of years.
And so, you know, I just really encourage people to think in terms of, you know, when
you only had 10 or 15% internationally, you could put it in a couple funds and theoretically
let it go. But when you’re talking a third or more of your equity portfolio, you really
have to think of it, you know, how do I balance off the different ways I’m getting exposure?
What are the choices? What do I have an affinity for, and what makes sense? And that’s a
big educational challenge that I think Americans, you know, need a lot more access to, need
better ways to approach.
CONSUELO MACK: And so this is part of your message as well, is that we need to take the
sophistication, as U.S. investors, that we would apply to the U.S. market, and apply
that to emerging markets as well, including Asia.
MARK HEADLEY: What drives me nuts sometimes is that you hear about the emerging markets
manager, the international manager, who basically claims that, hey, I’ve got this huge, wide
landscape, and I’m going to jump around and I’m going to be in the right place every
year and the right time. And I think that most U.S. investors have learned that that
promise doesn’t work in our own market, that somebody who’s always going to be in
the right trend or the right place, that you’re much better off with somebody who says, “Listen,
this is my strategy. This is my approach. I’ll make adjustments. I may be opportunistic
now and then, but here’s my core approach. This is what I do, and it doesn’t involve
predicting what interest rates will be in China at the end of 2011. It doesn’t say,
oh, I know what inflation’s going to do to India.”
CONSUELO MACK: Is there any part of the region, is there any, you know, sector, is there any
country, you know, that looks particularly attractive right now?
MARK HEADLEY: Well, always, on an individual stock basis, you can find exciting opportunities.
And there’s always sectors that are out of favor. There are always countries that
are mired in a rut. And Japan, the largest stock market in Asia, you know, still more
than 50% of the Asia-Pacific Index, as MSCI defines it, you know, has really been the
great disaster of the last 20 years on an index basis. But individually, there are great
companies there. And I think Korea, Taiwan, all three of those countries, are actually
coming out of the gates pretty decently this year. And they’re hoping the U.S. economy
is going to continue to heal. They have strong ties to global exports. They continue to work
well with China and be very involved in Asia’s overall growth story. And yet, they weren’t
hot in the last couple years. The money went to China, to India, to Southeast Asia.
And so, there’s a lot of value in those markets, and I think that, you know, just
from a general sort of, where is the money moving, people are shifting around. They don’t
face the vulnerability to the inflation that you may see in the less developed countries.
So, there’s a natural shift in that direction. You know, it’s not a time to come running
into Asia and establish big positions and expect wonderful returns. I expect markets
to be volatile. I expect there to be winners and losers in this sort of environment, and
perhaps North Asia, which has lagged behind the--
MARK HEADLEY: I think Japan is really interesting on a bottom-up basis. Japan Inc., the country,
has just failed to evolve with the world. And from the tremendous pinnacle that they
enjoyed 20 years ago, they have really lost it. And they still have not been able to look
in the mirror and say, what are we going to do with it? Individual Japanese companies
can be extremely high-quality, well-managed, deliver great products globally, and that’s
what we tend to look at. I was just talking to our Japan manager last week and he’s
going, “You know, I never tell anybody to buy Japan. I just say, ‘Buy Japanese companies.’”
That’s what we’re after. You know, there’s thousands of stocks there, and so you have
a tremendous opportunity to find good companies.
CONSUELO MACK: China. Is China now too big to fail? When you compared-- you said Japan
20 years ago. You know, everyone thought Japan was going to take over the world. It was unstoppable.
And, you know, now we’re looking at China, and it seems like it, too, is unstoppable.
It seems like the engine of growth, not only in Asia but for the rest of the world. It’s
overtaking us by all sorts of different measures. How unstoppable is China?
MARK HEADLEY: Well, China could fail for lots of reasons. Social instability. You know,
the rural/urban structures are very difficult. Managing China has always been a huge challenge,
and it will remain a huge challenge.
MARK HEADLEY: But it isn’t a bubble, I would argue. You know, there’s overheated property
markets in China, but it is a huge nation, with lots of different economies. And you
know, you have individual pockets where things are speculative, and there’s a lot of bad
investment, but then you have lots of areas where things seem to be growing at a reasonably
healthy clip. Importantly, people have to put down large deposits when they buy houses
and apartments. You put down usually about 40%, and they’ve been ranking these up.
And a lot of people put down 100% and never take out a mortgage, because they don’t
want the debt. So you still have, on a personal basis, a debt-averse, pro-savings society.
You combine that with just an enormous amount of business activity. A small business, you
know, is huge in China. Little micro-businesses I think really are what keep the economy stable.
It isn’t …
CONSUELO MACK: Unlike Japan.
MARK HEADLEY: Unlike Japan, where you had these gigantic, the keiretsus-- you know,
which Korea emulated and then went down the tubes, much like Japan did. And so I think
China’s economy is much more diverse, much more fragmented, and that the overall management
of the Chinese government has one thing in mind. And that is survival. They want to stay
in power as long as they possibly can, and that means stability. And I will say, I think
they have a pretty good chance of managing something of a soft landing in their economy.
They’ve got to take a lot of money out of circulation. They’re going to keep raising
interest rates. They’re going to keep jacking up a number of their things that will cool
markets in China. That’s healthy. That’s good. They are aiming for growth that they
can maintain. You know, whether it’s seven, eight or nine percent doesn’t matter too
much to me. I don’t think it matters that much to them. But it’s very healthy growth,
and I think that’s going to continue.
CONSUELO MACK: So how do we as investors, American investors, invest, you know, in China’s
growth; if in fact, you know, the GDP’s going to be, you know, higher, certainly than
the developed world, if it is going to be an engine of growth? So what are the best
ways to invest in that Chinese growth? It used to be that, you know, you said you kind
of invested through companies that did business with China. Is that still the case?
MARK HEADLEY: Well, that is still the case, and that’s perfectly valid. But I will tell
you, the range of companies available in China today- many of them listed in the United States
but most not- is wide-ranging, from highly speculative and really scary, to well-structured
professional companies with long-term track records. And the company I was going to bring
up today, which is--
CONSUELO MACK: Right. For the One Investment for a long term, diversified portfolio.
MARK HEADLEY: The One Investment for me, after I looked around the region and China Mobile
was a stock that I got right a number of years ago, and post the tech boom, it had really
fallen out of favor. It had been the original big China blue-chip, and it was a huge part
of the index in the late ‘90s. It crashed with the whole tech sector, and 3G taking
a lot longer to come through than anybody hoped, and massive investments. It then had
a wonderful run-up for about five years before the crisis. It was clobbered in the crisis,
fell by roughly 50%. And it really hasn’t come back at all since then. It has been out
of favor, because the growth in the sector has slowed. Mobile phones, there are almost
800 million mobile phone users in China today. China Mobile has almost 400 million of them.
Competition is intense. Aggressive competitors force them to constantly invest in advertising
and new systems and, you know, nice little campaigns to get people to hold onto their
But, I’ve known the company, really, since the listing. Very professional management.
Very straightforward. It’s trading on 11 times earnings, with over 3.5% dividend. And
it is really, in my mind, just this giant, stable Chinese utility. This is something
China can’t live without. Most rural Chinese will never see a fixed line telephone. It’s
all mobile. And, urban China is rapidly going to move into a 3G and eventually a 4G world.
CONSUELO MACK: And China Mobile will be there, do you think?
MARK HEADLEY: And China Mobile will be there. And the market is very concerned. And their
own new CEO just got up and said, “You know what, it’s going to take us a lot longer
to make money on this than some people are saying.” You know, and I like it when a
CEO gets up and says, “Don’t get too enthusiastic. There’s no quick fix. We’re not going
to return to some high earnings growth path.” But on the other hand, I think you have a
very stable, very central company to China’s economy that has been very well-managed overall
for a significant length of time. And for an American to make a single company investment,
this is the kind of company that I think you can sleep at night that will be there in 20
years, and I think that this is a great time to buy it, given its underperformance relative
to the markets.
CONSUELO MACK: One last question. Going back to how Americans approach international investing,
one of the things that we hear from money managers is that, “well, you already invested
internationally, because you own the S&P 500. If you own the S&P 500, 40% of their revenues
come from overseas.” And you’re saying that does not mean you’re internationally
invested. Why not?
MARK HEADLEY: Well, you know, 40% of an Asian company’s earnings can come from the United
States. It is a global economy. So there’s certainly a truth to that. But I heard that
argument a lot in the late ‘90s.You know, you get all this international exposure from
owning these great U.S. multinationals, and they’re the best managed companies, operating
in the best regulatory environment. This was before the tech bubble burst, before Enron
and WorldCom collapsed and, you know, before we had to face the realities that I think
we’ve had to face over and over again in the last decade, that we are not the perfect
environment that we sort of imagined ourselves to be after a sustained bull market. And,
look at what the S&P has done in the last decade. Which is not a reason not to own the
S&P 500, but you simply did not get the diversification effect that a lot of people told you you would
get; that domestic companies, and I don’t have, you know, a study to prove this, but
domestic companies are still, even if they have significant overseas exposure, are driven
by their local market, are driven by the sentiments of the investors. If they’re locally, they
think very locally. If they’re internationally, they’re still placing you within your country.
And, you know, it is hard for Americans to understand that we really are a small part
of the world. We’re only 6% of its population. And people are going to view our economy as
one choice within many. And I think that trend is going to be unstoppable, that the opportunities
in other markets are going to continue to expand and be more reasonable and institutionalized.
The U.S. economy is going to have to face a world that is catching up with it in many
ways. Doesn’t mean we’re not a great place to invest. Doesn’t mean the S&P might not
have a terrific 10 years. I mean, you know, there’s a lot of logic to saying, hey, it’s
underperformed. Maybe the next decade will be a great one. But at the same time, the
global economy has changed so much. We really have to wake up to the diversification that’s
available to us.
And the last thing I’ll say is that stock investments are often your only true international
diversification. Your house is in the United States. Your job is probably with a U.S. company.
You know, we all own muni bonds and U.S. Treasuries. We’re all paid in U.S. dollars. We have
enormously concentrated exposure to our own economy- generally a good thing in the last
century. But your stock portfolio is one place where you can get exposure to other economies
and other currencies. So why wouldn’t you emphasize that?
CONSUELO MACK: Very good point. Mark Headley from Matthews Asia Funds, thank you so much
for joining us on Wealth Track.
MARK HEADLEY: Thanks so much for having me.
CONSUELO MACK: And with that sage advice we will wrap up this edition of WealthTrack.
Next week we are going to tackle a retiree’s worst nightmare: running out of money. We
will be joined by two retirement planning pros: Kiplinger’s Kim Lankford and New York
Life’s head of retirement income security, Chris Blunt. They will have strategies to
ensure our nest eggs last as long as we do.
Until then, to watch this program again, please go to our website,, to see
it as a podcast or streaming video. And while you are there check out our new WealthTrack
app, so you can tune in on your smart phone or tablet, wherever and whenever you choose.
Thank you for watching and make the week ahead a profitable and a productive one.
SPONSOR: The company keep is also the company we keep.
Together we'll provide lifetime guarantee income and investments solutions.
SPONSOR: Additional funding provided by: Loomis-Sayles - investors seeking the exceptional
opportunities globally. Research Affiliates - Efficient index foreign inefficient market.
The Wintergreen Fund - your home for global value.
Rosalind P. Walter and
The Dremen Foundation