Page 1 of 3

Liana Madura is an assistant site editor with Morningstar US.

In this article, Matthews International Capital Management co-manager Sharat Shroff discusses navigating the volatile market while minimising risk potential, with references to the Matthews Pacific Tiger Fund. While the fund is not available in Australia, the themes are relevant to investors.

Despite the sell-off of Chinese equities, growing uncertainties in the eurozone, and slow economic recovery in the United States, Matthews Pacific Tiger has remained relatively strong. What approach have you employed to navigate the turbulent market and steer clear of excess risk?

Following a steady start last year, Asia's capital markets continued to weaken as the year progressed. This weakening came as concerns over the growing challenges in Europe were compounded by prospects of a hard landing for China. Amid this volatility, our approach to investing has remained consistent. Our philosophy is anchored in an active, bottom-up approach to stock-picking that is benchmark-agnostic.

We try to find quality companies with businesses that can deliver above-average growth across different macroeconomic cycles. In doing so, the strategy has focused on domestically oriented businesses with steady, visible growth, accompanied by an appropriate generation of cash flows such as we often find within consumer staples. These kinds of businesses, with more recurring sources of growth, have held up relatively well in uncertain environments. What has also helped the strategy deliver at least relatively better results has been our avoidance of the risks inherent in the cyclical industries of China.

Our allocation to some of the region's smaller economies, such as Indonesia, has also increased steadily during the past few years. These economies have proved to be more resilient than some other economies as a result of structural factors such as rising per capita income and better availability of capital.

What is your outlook for China in 2012? Will the country be able to avoid a hard landing and negotiate a slowdown in infrastructure spending?

A certain amount of moderation is being widely anticipated, but the investment community still largely believes the country will avoid a hard landing. Any fallout from such a potential hard landing might be disruptive to capital markets in the region and possibly for the rest of the world. The Chinese economy was able to negotiate the aftermath of the global financial crisis in 2008 through a massive infusion of government-sponsored stimulus. Consequently, there has been a surge in debt levels across many segments of its economy, and the costs of servicing the debt burden are likely to be felt for years to come.

Government efforts to rejuvenate domestic consumption mean that China might not be able to transfer household wealth to other troubled parts of the economy. So the policy options available to authorities are somewhat more limited. But a modest normalisation in the tight monetary conditions could provide some cushion to headline growth. There is also a risk that the government might panic in response to slowing growth and rising unemployment, initiating a larger reversal of the policies that seem to be reining in inflation.