First State’s Tulloch: Why we don’t do income in Asia funds
First State Asian equity star warns on sustainability of dividends in emerging markets.
Income funds focusing on emerging markets could be hit hard if inflation picks up, First State’s Angus Tulloch has warned.
Mr Tulloch, manager of First State’s market-leading Asia Pacific equity portfolios, said although inflation expectations across emerging markets had come down, investors should not rule out “stagflation” if quantitative easing is brought in by some governments.
“The reason we don’t do income funds is the same as the reason we haven’t launched a Bric [Brazil, Russia, India and China] fund,” Mr Tulloch said in a web conference this morning (July 31).
“Why constrain yourselves to one area of investment?
“If markets were to change and inflation became a problem then those dividend-paying stocks would start to look a bit sick. If company profits halve then dividends will be cut. If things get nasty then dividends could get cut quite substantially.”
In a cautious outlook for the Asia Pacific region, Mr Tulloch said Asian markets were currently just as vulnerable to the ongoing eurozone crisis as Europe and the US, but claimed they would emerge stronger than developed markets which would still have high levels of debt to pay off.
The manager - who stepped down from his role as managing partner of First State Stewart earlier this year to focus on his funds - also predicted that the current definition of global emerging markets may cease to exist in the next 10 years.
He said frontier markets would still exist, but markets such as Brazil, Russia, India and China would be “part of the world scenario” with an increasing number of global companies based in these economies.
This belief has led Mr Tulloch and his colleagues in First State’s Asia Pacific and global emerging markets teams to launch the Worldwide Equity fund in June 2011, with a Worldwide Sustainability fund planned for later this year.
Mr Tulloch’s £5.6bn First State Asia Pacific Leaders fund gained 69.7 per cent over five years to July 30, according to FE, while his £785m Asia Pacific fund - which soft-closed at the beginning of the year - gained 67.7 per cent. This ranked both funds in the top five of the IMA Asia Pacific ex Japan sector, which posted an average gain of 24.6 per cent over the same period.