Closing some Asian positions

Just a quick note that I'm closing my positions in a couple of Asian funds -- I've liquidated my holdings in the Morgan Stanley China A Shares Fund (CAF), and in the South Korean iShares Index (EWY).

CAF I bought because the pessimism over the domestic China market was overwrought, and the discount was too steep. Since then, the shares have gone up about 45%, and the discount has closed to about 11-12% depending on the price you use. I'm willing to sell here, since this was intended to be a short term trade to take advantage of what seemed to me to be too much pessimism. I agree with most people who believe that the A shares market is bound to correct significantly at some point, though I expect it will be later than anyone thinks right now (I can't see the shares really correcting until Chinese residents get permission to invest elsewhere). Still, I wanted a short term gain and got it, so I've sold.

EWY I bought a long time ago, because at the time Korea was nearly on par with the developed world in terms of the sophistication of its best companies and the stability of its economy, but it was being priced at fire sale levels. It was an easy way to buy into Samsung, Posco, a few Korean banks and shipbuilders, and Hyundai, all companies I thought would do well.

Well, with the exception perhaps of Samsung in very recent times that has come true -- and Korea is not a bargain anymore. It's probably still a decent investment, especially as a way to play one of the stronger economies that's likely to benefit from Chinese consumption (I like Korea for that more than Japan), but I'm no longer quite as enamored of the huge Korean megacaps as I was a couple years ago. They've been recognized, they're not cheap anymore, and since this index is essentially a play on the top ten Korean companies I'm going to take my 100%+ gain on this one and go home.

I continue to have pretty heavy exposure to Asia in my portfolio -- Naspers, Swire Pacific, The China Fund, the India iShares ETN, and Keppel Corp., along with options on NetEase, Gigamedia, Huaneng Power, Home Inns, CDC, and Satyam. But in these two cases, I have seen returns that exceeded my expectations and I think the risk/reward ratio has shifted out of my favor. Time will tell if I'm right, but sometimes it's comforting to hold a little cash in hand.

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Seoul Trouble? (EWY)

I don't usually write much about my more diversified investments, but my posting earlier about the India Fund (IFN) and some press about Korea have me thinking some about my holdings in the South Korean Index ETF (EWY).

I don't know if I'm going to act on this, but I read a pretty compelling article in the Wall Street Journal, and some interesting related commentary from Seeking Alpha, that have me wondering whether I need to shift some of my Korean holdings elsewhere -- perhaps to build up my holdings in Singaporean conglomerate Keppel, which seems well positioned to me for growth in Chinese and Singaporean real estate, ocean rig demand, and southeast Asian gasoline demand.

Well, Korea is a pretty unique place -- my first investment in S. Korea was in Posco (PKX), which I held in 2004 and sold early in 2005 before starting this site. That seemed to embody Korean investing to me -- incredible cost advantages over other countries, combined with very productive use of technology and a great location for selling to the two engines of Asia, Japan and China ... that, and everything in Korea at the time was selling at a bargain basement rate.

I invested in EWY because I didn't want to focus so much on the steel industry, and I liked the fact that you were essentially getting a first world economy at emerging market discount valuations -- Hyundai and Samsung are world-class companies, regardless of where they're located, and the Korean banks were recovering from credit troubles and still looking very cheap, so the PE ratio on the index was minuscule.

That discount for Korea has gradually eroded, in my opinion, as my EWY shares have advanced 35% or so in a little over a year. That's nothing compared with the sexier Indian markets, but it's certainly a nice profit.

But the labor strife this summer seems much worse than previous Korean strikes have been, impacting some of the biggest manufacturers in this heavily manufacturing-focused and strongly unionized country.

And my exposure to the semiconductor industry, though somewhat indirect, is already pretty strong, and that sector makes up close to 25% of this ETF ... thanks largely to Samsung, which dominates the country's stock market.

So should I take advantage of some possible future weakness -- thanks to labor strife, increasing competition from a resurgent Japan and from homegrown Chinese companies -- and sell before that weakness hits the share price?

Or is this all overblown, and the Korean workers -- like French farmers when the weather turns bad -- will stop the demonstrations and go back to work? And will that make the problems of competition and possible downturns in semis or LCDs seem more manageable? It has been a mistake to bet against Korea in the last few years, so I'll be patient in making any decisions, but this gives me some food for thought.

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Annual Checkup -- EWY and IFN

These two odd birds in my portfolio are of a feather, so I'll consider them together. These are not individual companies, but EWY is the South Korean index ETF and IFN is the India Fund, a closed-end mutual fund of Indian stocks. (EWY or IFN for free RT quote). While I have positions in some mutual funds that have strong foreign exposure in the Third Avenue International Value Fund (TAVIX) and the Dodge and Cox Foreign Stock Fund (DODFX), I think international exposure in general is very important and I thought it made sense to commit a bit extra to these two countries. India and South Korean markets have been on a tear this year, so my positions are up by just about 30% each -- a little more in Korea, a little less in India (note that the big slip in IFN at the end of the year was due to a large dividend). I still think these two countries are in the sweet spot, but I believe in them for different reasons. The Korean fund I like primarily because I think Korea is still trading at an emerging market valuation even though the country's major corporations have really reached first world status. EWY is a great way for me to get exposure to Samsung, Hyundai, Posco, and the various big Korean banks that should have great success -- especially as their Chinese neighbors continue to expand vigorously and the Japanese economy rebounds. India is not as company specific -- I don't even know of many individual Indian companies aside from Infosys, but the economy is growing nearly as fast as China's but the population and the economy in India are much more reliable and stable, and as the world's largest democracy with a great education system I think their future is bright.

Being invested in these two bookends to China makes one consider why I haven't included a Chinese fund here. Though I have invested in some Chinese companies, I'm not so confident about the Middle Kingdom's ability to pull off this kind of growth without some serious upset, either political or economic, and I'm not so comfortable with their huge government ownership when the government's needs can conflict with those of individual investors. I think it's important to look for good Chinese companies, but I'm not as comfortable with "buying the country" in an ETF or broadly diversified CEF. At least, not now. I see no reason to adjust my foreign exposure this year, I'll be holding on to my IFN and EWY shares but don't plan to add any more at this point.

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Changes to portfolio

I haven't gotten around to writing up these two companies, but I just sold them ... will explain more in detail later.

Sold CNET on June 30, 2005 for $11.98

I had bought CNET at 9.20 on March 30 and 10.14 on April 28. I sold all my holdings in this one at 11.98 on June 30.
Why did I sell? Because I had been becoming uncertain about why I had bought. I'm a CNET user, but I bought it after reading up on some articles in Motley Fool and elsewhere and convincing myself that they had uniquely valuable web real estate (download.com, cnet.com, mysimon, etc.) which pulled in unusually high advertising revenues per user. This was and is true, but as I continued researching it after buying my two positions, I became more and more concerned about competition from Google and Yahoo (and others, I'm sure). CNET was a very early mover at supplying premium online content supported by advertising, but the more I read the less certain I was that they would be able to maintain their competitive advantage, and the premium price of the shares was making me a little nervous. I still think that the online delivery of premium (and bandwidth-intensive) content is a good business, but I no longer want to focus my money on CNET as an investment in this area. I'm keeping my investment in Akamai (AKAM) and would like to add to it, I see them as a better investment in the future of rich commercial internet content, since they enable reliable and fast delivery of content for any provider who wants to pay for that insurance (and their acquisition of their major competitor, Speedera, means they've got more growth potential and pricing power going forward).

When buyout rumors surfaced in the NY Post and quickly spread online last week, the stock shot up 10%. This was a good opportunity for me to sell out of a position that I had lost faith in and that I thought was becoming overvalued, so I sold. It might have been a mistake to sell, it's certainly possible that the analysts foreseeing a $14 takeover price for CNET by one of the big boys will be correct. I'll take my small profit for a couple months work and cheer it on from the sidelines.

Sold AAUK on July 7, 2005 for 23.44

I had bought Anglo American UK on January 7 for 22.50, so this is pretty much a wash. AAUK had held the position in my portfolio of being a commodity (precious metals/ore/diamonds/coal) play, and I decided this summer that this wasn't necessarily something I needed to have exposure to in an individual stock. I like a couple things about AAUK, including the fact that I still think they're generally undervalued because they don't get enough credit for their interest in DeBeers, but there are two basic things that made me sell: 1, I didn't think I wanted to buy a company just as a hedge without really understanding their business well or their prospects, which is what I had done when I bought AAUK; and 2, I had other areas I wanted to invest in and this was the only other holding (besides CNET) that was on my "think about selling" list.

Bought IFN on July 7, 2005 for $30.15
Bought EWY on July 7, 2005 for $31.90

These are two of a feather as far as my strategy goes, but are very different animals. IFN is the closed-end actively managed India Fund, while EWY is an ETF for the South Korean Index. I bought both to expand my international diversification in the two countries that I see as growing parts of the world economy with relatively low risk -- India because political risk is limited as their increasingly business-friendly government is stable and democratic, and South Korea because market risk is somewhat limited by the fact that South Korea is the bargain basement of the world's emerging markets, with growing and dominant companies that I believe are extremely undervalued. Will provide more of my thoughts on these purchases as I have time.

Technorati tags: anglo american, aauk, Akamai, AKAM, cnet, india, south korea

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