The title of this article is a slightly augmented quote from Jesper Madsen, the manger of Matthews Asia Pacific Equity Income Fund (MAPIX).  In a wide-ranging interview, he not only explained to me why he believes "Asia and Income" finally belong together, but also how he goes about managing his fund.  In the end, I found that he and I share a lot of the same ideas when it comes to finance and investing.  

Madsen started investing at an early age, saving money from a paper route to invest in stocks when he was in the fifth grade.  It shouldn't be surprising then, that he believes starting to save and invest early is one of the most important things you can do in your financial life.  "Time is on your side when you are young," he made sure to note.  Of course, ever the optimist, I noted that the opposite is true for those who start late-in that case time can be an enemy.  But I believe Madsen's eye to the future "start early" mentality also helps to explain why he is so excited about the opportunities in Asia, but I'll get to that later.

Regardless of your view of the half full (versus half empty) time glass, it was during these formative years that Madsen learned some key lessons about investing, such as the importance of a security's valuation and the benefits of diversification.  These lessons were, unfortunately, learned the "hard way."  One lesson was learned when he put a significant amount of his money into one insurance company he knew well because his father was an employee.  Unfortunately, that company went bankrupt.  But with time on his side, he took the lessons to heart and he has put them to good use for his shareholders.  

In fact, it is clear from my discussions with him that he is passionate about investing and takes the responsibility of investing other peoples' money very seriously.  Note, too, that he eats his own cooking, as he has money in the fund he manages.  So he isn't pushing an investment style that he wouldn't follow himself.

It is also clear that he is a fancier of dividends-just as I am.  There are, in fact, a great many dividend proponents out there and, with the baby boom generation nearing or entering the retirement years, I suspect there will be a great deal more of us around in the coming years.

That's why Madsen is prosthelatizing about the benefits of dividends-particularly those that come from the Far East.  (OK, prosthelatizing is a bit strong, as he's not exactly on a soapbox pounding this year's edition of the Mergent Dividend Achievers book, but he has published several op-ed pieces on the topic of dividends and Asia.)  The interesting thing is, his logic is pretty solid.

Asian economies, and the companies within them, are maturing very quickly.  With this maturation has come a greater focus on dividends and returning value to shareholders.  One might say, that Asia is in the early stages of becoming an important dividend destination-which I believe is one of the driving forces behind Madsen's fervor for the region.  

Moreover, Asia, unlike much of the rest of the world, is in a growth phase, providing more opportunities to invest in expanding markets and businesses.  Thus, you can find growing companies paying dividends that are likely to increase over time.  That's pretty compelling, but when you examine the amount of debt that is being taken on in the United States and throughout the more developed world, it is clear that growth of any kind could become an increasingly difficult thing to find in the years ahead.  

Indeed, as countries try to dig themselves out from under mountains of debt, inflation or currency devaluation (or both) could be material impediments to investors.  If this scenario comes to pass, putting some portion of your assets into income-oriented investments in Asia makes complete sense.  Not that Asia is without risk, but it appears that, on the whole, the opportunities for capital growth and distribution growth are better than for many of the more developed economies around the world.

With this overview, the fund's stated goal makes sense.  First, is capital appreciation; second, is income.  This is an important distinction, and one that Madsen went to great lengths to highlight in our discussion.  If an investor is simply looking to generate income, this is not the correct fund.  If, however, an investor is looking for capital appreciation with a material, but not dominant, portion of that return coming from dividend income, then it makes sense to examine Matthews Asia Pacific Equity Income Fund in more detail.  

The fact is that dividends play an important role in the portfolio, but not the only role.  Madsen views dividends as providing something of a window into a corporation's soul.  He wants to purchase companies that have made a commitment to their dividend, through a stated corporate policy or mandate, and have the ability to increase that distribution over time.  This may result in owning companies with relatively small dividend yields, but the potential for above-average distribution growth.  Finding companies with a stable dividend track record is a desire, too, but because of the state of the region's economic maturity, long-term dividend records can be difficult to come by.  So while the fund's dividend yield may not be as high as one might hope, the potential for distribution growth over time may make up for that.

Madsen also tends to be a penny pincher, so he doesn't want to pay too much for a company.  A taste for high-quality entities leads him to favor companies with solid balance sheets.  He makes it a policy to talk with management, asking specifically about the dividend policy, and making sure that the company's business model makes sense.  

To focus on the growth potential of the region, Madsen likes to stick with companies that he believes will benefit from domestic or regional growth-not exporters that live and die based on the economies of more developed regions.  Obviously, this has been a good call of late, as export-oriented businesses have been hard hit of late despite growth in certain home countries.  It's one of the reasons that the fund was down just about 15% in the twelve-month period ended May 2009, while the MSCI All-Country Asia Pacific Index, the fund's benchmark, was down about twice that over the same period.  

Note that when markets turn upward, Matthews Asia Pacific Equity Income Fund isn't likely to perform as well as more aggressive offerings in the area, but not falling as much in a down market leaves less ground to make up.  Of course less volatility should help investors sleep better at night, too.

A Matthews' mandate is to always be fully invested, which can be both good and bad depending on the time period (it was a detriment over the past year or so), but the end result is that any time something is sold, something also tends to be purchased.  So Madsen is always on the lookout for great companies to add-which may result in selling a less-compelling investment.  Of course, finding a better company than one you already own is a good reason to sell, but it isn't the only reason.  If corporate governance issues come up-not unheard of in Asia-he will sell immediately.  

He'll also sell if his original premise for a purchase proves wrong.  He and his team create three years of estimates for each company, which helps to serve as a benchmark for his expectations.  Falling short of the estimates isn't immediate cause for elimination, but it is a cause for a review of the position and the logic of the purchase.  This evaluation process may result in a sale if the company no longer holds up to Madsen's scrutiny.

Dividends are also used on the sell side of the equation.  A company that trims or eliminates a dividend is instantly reviewed.  There may be a good reason, such as a growth-oriented acquisition leading to a slight reduction of the distribution.  That said, such dividend actions can also be a signal that management doesn't have shareholders' best interests at heart or that there are fundamental problems at the company.  Madsen doesn't want to be invested in those types of companies.

In the end, the story goes something like this: Investors worried about slowing growth in the United States and other mature economies, the potential for higher inflation, and a desire for income should be looking to diversify their income streams.  Asia looks poised to outperform more developed regions, which should help to offset the ravages of inflation on the income generated by investments, provide capital appreciation as the region expands, and, now that it is starting to mature, allow for more stable diversification options.  With a keen eye on dividends, Matthews Asia Pacific Equity Income Fund looks like it could be a key component of a diversified income portfolio.