Investors looking for an Asian market rally similar to the one seen in Japan over recent years need to pay more attention to the opportunities being created in Korea, according to Matthews Asia Dividend fund co-manager Vivek Tanneeru (pictured). 
When looking to invest in Asia Pacific, it seems that Korea can be forgotten about in favour of go-to regions such as Japan, China and India. Of course, the country is not as mainstream as these markets and many investors are reluctant to allocate on such as specialised basis, but Tanneeru believes Korea is one to watch in the years ahead.
FE Trustnet recently showed that four out of the top 10 best-performing funds in the first quarter of this year were Japan-specific vehicles.
However, Tanneeru thinks that Korea has potentially been overshadowed by Japan’s recent climb in the popularity stakes.
“Some of the biggest changes we’ve seen happening in the Asia Pacific region are in Japan and Korea,” he said. “As dividend investors, we’re extremely pleased about what has happened in both of these markets.”
Tanneeru notes that the Japanese government has been very focused on improving shareholder returns and that many large Japanese companies have announced they will become more like their global peers when it comes to corporate governance.
While he sees this as encouraging, the manager has also seen some very promising changes afoot in Korea. Since the start of this year, the Korean KOSPI 200 index has beaten MSCI World's performance by almost a third at 4.49 percentage points.
Performance of indices since 2015
Source: FE Analytics
He said: “We’ve seen some very positive changes from a dividend investor’s standpoint. The government is really starting to get more money out of Korean companies’ balance sheets and flowing back into the economy.”
“This could mean by way of more investment in the economy, this could be by way of higher wages to the employees or by way of dividend pay-outs. Or, less so, by way of share buybacks.”
However, Tanneeru accepts that the market is not without its faults, following reports of companies avoiding tax or finding loopholes to freeze their payments to shareholders.
“Companies are finding ways to distort what the government is trying to do, but we feel that, by and large, change is happening. We’ll see what happens,” he continued.
“It’s probably similar to how Japan was two years ago when the government started banging the table – nobody believed it was going to lead to a meaningful change. But two years ahead, we see things are moving, so hopefully, we can say the same thing about Korea a couple of years from now.”
Another negative for investors looking for income is the low pay-out ratio of the Korean market in general. However, Tanneeru believes that this will increase over the long term.
“The way we view these things is that we continue to keep meeting companies on a very regular basis, trying to assess whether there could be any change in their willingness to pay dividends,” he said.
“That’s what we’ve done in Japan and it’s been successful, so we hope to continue to meet these companies to assess their appetite for raising dividends. In the last year or so we’ve increased our holdings in Korea based on this a couple of times.”
Tanneeru and the team on the £435m Matthews Asia Dividend fund aren’t the only ones are investing substantially in the country.
Performance of fund vs sector and index since launch
Source: FE Analytics
According to FE Analytics, there are only three funds that specialise in Korea - Baring Korea Trust, Invesco Korean Equity and JPM Korea Equity.
However, BlackRock’s $1bn Asian Dragon Global fund holds a 20 per cent plus weighting in Korea, as do Baillie Gifford Pacific, HSBC Asian Growth and Fidelity Asian Special Situations.
The £4bn SKAGEN KonTiki fund also holds near to a 20 per cent weighting.
However, what sets the Matthews Asia fund apart from these is its focus on dividends. Some investors may not immediately recognise Asia as a dividend culture and instead look to the West for income.
Tanneeru believes that this is an oversight that could lead to many people missing out.
“What would surprise a lot of investors is the size of the dividend pool – the absolute dollar amount of dividends on offer in Asia Pacific is very comparable to what’s on offer in Europe and in the US,” he explained.
“Last snapshot we had, there were about $280bn worth of dividends in Asia, but $310bn or so in Europe and about $350bn in the US, so it’s a very comparable number.”
“Yield in Asia at this point is about 2.5 per cent whereas yield in the US is slightly over 2 per cent and Europe is closer to 3 per cent, so it’s roughly halfway between those two markets.”
“The most important thing in my mind is that dividend growth over the last 10 to 15 years in Asia has been far faster than in Europe or the US.”
“So the absolute dividend in Asia is comparable and yield is somewhere between the US and Europe, but the growth is absolutely faster than either of those markets. This should make for a pretty happy income investor.”
However, Tanneeru stresses that the best way to play the market in Asia Pacific is to focus on small and mid-cap stocks as opposed to large and mega-caps.
“Typically, smaller, well-run firms grow faster than mega-caps or large caps. That’s why our fund typically allocates at least 40 per cent to the small- and mid-cap space. “
“Some of the large companies in Korea are probably not going to change their attitudes that quickly, but there are enough small and mid-cap companies [who will].”
“Our interests as a minority shareholder need to be aligned with the majority owner of the business in question – we just need a few names to be happy with better dividend pay-outs. But there are definitely opportunities in Korea.”