First State Dividend Advantage invests in Asia ex-Japan stocks that pay attractive dividends. It feeds into the First State Asian Equity Plus Fund, which has around 70 stocks and a fund size of US$30 million. The Dividend Advantage has a regular payout feature. Starting next year, First State intends to make quarterly distributions for the fund. The initial rate of distribution will be 4% per year of the net asset value of the underlying fund, which works out to around 1% per quarter. Unit holders can expect to receive this payout within 30 business days after the end of each quarter. According to Lindsay Mann, CEO of First State Investments (Singapore), the fund is suitable for investors who want exposure to Asian stocks but are concerned about the risk. "We believe the fund's high dividend strategy as well as its unique quarterly distributions feature will appeal to Singapore investors. The regular distributions is likely to overcome some of the aversion to risk which is currently a concern to Singapore investors wishing to enter the equities market."

The underlying fund, which was launched in 2003, has been awarded a 5-star rating from Mercer Investment Consulting. Lead manager for this fund is Martin Lau. He's Director of Greater China Equities and manages the Regional China fund, as well as First State Bridge. He joined the fund house in 2002, and has over nine years investment experience in the industry.

By investing in quality companies that pay dividends, the fund house intends to focus on capital preservation as well as growth. Returns are derived from earnings growth (leading to appreciation of the share price) and dividend yield. Fund manager Martin Lau says that this is possible in Asia as well-managed, established companies are able to pay dividends to shareholders, whilst continuing to grow their business. "As the market remains uncertain, dividend yield will be a key determinant in performance as it provides stability towards an investor's total return. In the past, high dividend yielding stocks were mainly associated with cash cow companies. However this trend is reversing and we are finding good quality growth companies in the Asia Pacific region that are actually returning cash to shareholders, especially in countries like Singapore and Hong Kong."

He cites the following reasons to invest in this asset class:

• Strong performance by Asia ex Japan equities
• Domestic consumption story strong in Asia, especially in China and India
• Increasing domestic consumption in many Asian economies
• Increasing culture of quality companies paying dividends
• The dividend payout ratio in Asia currently the second highest in the world
• Investment philosophy has capital preservation ability while focusing on high growth in Asia
• Historical data shows that high yield stocks issued by good quality companies and are more stable in volatile market conditions -- these companies have strong balance sheets, as credit cycle in Asia is now at a stage where cash flow is healthy and debts are low.

Lau also explains that after the Asian financial crisis, only strong and resilient companies have survived. Since then, companies have improved their management, and cleaned up their balance sheets. This has allowed average debt to deposit ratio to fall to it's lowest since 1990. It reflects the low level of debt as well as healthy cash flow of the businesses. That's why the perception that only companies that lack investment or growth opportunities pay out their profits in the form of dividends to share holders no longer stands true. Currently, a dividend paying culture is developing in Asian companies. Historical data shows a positive correlation between dividend yield and performance and suggests that they out perform low yielding stocks in the long run (see table below)

Close to half of the fund is in invested in the Greater China region (see asset allocation table below). Lau says the geographical asset allocation is purely the result of where the fund is finding good investment opportunities. "You will notice that we have a preference for consumer and financial stocks. We were less positive in technology because most of them tend to get more money from shareholders rather than paying them dividends. This percentage will be close to zero if it's 12 months ago. We are actually adding information technology stocks now because we think they highly oversold."

RISKS

As the fund invests in Asia ex-Japan equities, it is subject to certain risks. Oil prices still remain a concern for many economies. Oil prices have risen significantly this year, and could still trend higher. If this scenario persists, it could impact economic growth in the region. Another important risk is the Chinese economy. In order to prevent the economy from overheating, the government has put in place measures to slow growth, demonstrating its resolve to maneuver a soft landing for their economy. As China is a critical engine of growth for Asia, a slowdown will affect other Asian economies. Yet another concern, is the falling US dollar. This is likely to affect exports to the US, which is still Asia's largest export market. Nonetheless, the fund house notes that despite these concerns, Asian economies are on track to post growth and stock markets should benefit from this overall trend.