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Beyond the BRIC: Are the Philippines the Next Frontier?   

by Ari Charney
3/18/2013

Over the past year, I've interviewed several portfolio managers who helm some of the top-performing international and emerging market funds. And when the conversation eventually diverges from the usual BRIC (Brazil, Russia, India and China) names, one of the more intriguing countries on their radar is the Philippines.

A big part of the growth story for this island nation of nearly 100 million people is the extensive diaspora of Filipinos working overseas. Despite having the highest unemployment rate (recently 7.1 percent) among its peers in the Pacific Rim, the Philippine economy grew at a torrid 6.8 percent last year, thanks in part to significant remittances from the country's expatriates. In fact, the money that Filipinos send back home, which amounted to USD1.7 billion in January, accounts for about 10 percent of Philippine gross domestic product (GDP).

With consumer spending contributing as much as 75 percent of GDP, remittances are a key component of the country's consumer-driven economy. Even with the peso still trading near five-year highs (recently at 40.62 pesos to the dollar), remittances may be growing at a fast enough rate to offset any decline in exports, which dropped 2.7 percent in January from a year ago. By contrast, January remittances were up 8 percent year over year, the third fastest rate in the past 12 months.

The Philippine Stock Exchange Index (PSEI) is up 27.5 percent over the trailing year, and the index has gained 17.6 percent annually over the past three years. Even with such heady gains, there are likely still opportunities for aggressive investors interested in this frontier market.

With that in mind, I screened for the top-performing mutual funds focused on international and emerging markets, narrowing the results to funds that specialize in the Asia-Pacific region or small- and mid-cap stocks. With regard to the latter, the average market cap of the stocks held in the iShares MSCI Philippines ETF (NYSE: EPHE) is USD5.7 billion.

I looked for mutual funds that beat the MSCI EAFE and the MSCI Pacific indexes over the trailing one-year, three-year, five-year and 10-year time periods. I also limited my search to funds whose management teams have been at the helm for at least five years. Of course, these criteria exclude a number of emerging market funds that were launched in the past five to eight years to capitalize on the outperformance of these markets, so it may be worth searching these newer funds for ideas in the future.

Among the dozen or so funds that fulfilled my criteria, the following six funds had at least one or more holdings domiciled in the Philippines. Since data for portfolio holdings is reported on a lag, I've also included the data cut-off for each portfolio in parentheses, so you can take that into consideration:

Artisan International Small Cap (ARTJX) (12/31/12)
Fidelity Pacific Basin (FPBFX) (1/31/13)
Invesco Asia Pacific Growth (ASIAX) (12/31/12)
MFS International New Discovery (MIDAX) (1/31/13)
T. Rowe Price International Discovery (PRIDX) (12/31/12)
Wasatch International Growth (WAIGX) (12/31/12)
All the funds are open to new investors, except for ARTJX. Four are no-load funds, while ASIAX and MIDAX have sales charges of 5.5 percent and 5.75 percent, respectively.

Aside from ASIAX, which holds seven names domiciled in the Philippines among its 41 holdings, most of these funds are generalists, so their exposure to the country is limited to just one or two names.

The only stock held in common across more than one portfolio is the holding company Alliance Global Group (Philippines: AGI), whose businesses operate in the food and beverage industries as well as real estate development. However, the two funds that hold this stock, ARTJX and FPBFX, moderately pared their investments, which suggests the stock may not be the best investment for new money.

Better bets could include the following three stocks, which were either new positions or stocks whose holdings were boosted significantly:

Megaworld Corp (Philippines: MEG)
Globe Telecom (Philippines: GLO)
International Container Terminal Services (Philippines: ICT)
Megaworld Corp is a real estate developer that specializes in an array of projects from hotels to condominiums. The stock was added as a new position to the portfolio of ARTJX in the fourth quarter, with a 1.3 percent weighting. Megaworld's shares are already up more than 29 percent year to date, though they've dropped about 8.2 percent over the past week.

PRIDX first bought shares of Globe Telecom during the third quarter of last year, subsequently boosting its position 74.6 percent, which brings its allocation to 0.4 percent of assets. The fund has over 200 holdings, so many of its positions account for less than 1 percent of assets. Shares of the wireless provider have gained just 5.5 percent over the past year.

The portfolio manager who runs WAIGX initiated the fund's position in International Container Terminal Services during the fourth quarter of 2010. In the most recent quarter, he increased the portfolio's holdings in the stock by 36.2 percent, to 1.5 percent of assets. The cargo handler and port operator's stock has risen 17.6 percent year to date, though shares are off 3.3 percent over the past week.

If you're leery of wading into the Philippine stock market or holding individual names, you can always invest in the aforementioned iShares MSCI Philippines ETF. The exchange-traded fund (ETF) actually outperformed the Philippine stock market last year, gaining almost 48 percent vs. nearly 33 percent for the PSEI.

However, it should be noted that its highly concentrated portfolio holds about 60 percent of assets in just 10 stocks. The ETF charges a reasonable 0.61 percent annual expense ratio.


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