InvestmentsApr 1 2014

Income strategies can be a profitable way to play Asia

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Long-term performance data indicates income strategies can be a profitable way to play Asia with the added benefit of payment of a regular income.

Nine funds in the 91-member IMA Asia Pacific excluding Japan sector have an income mandate, while a further two income funds sit in each of the IMA Asia Pacific including Japan and IMA China/Greater China sectors.

Of these 13 products, 10 have a three-year track record and in that three-year period all have comfortably outperformed their respective sector averages.

But 2013 posed a significant challenge to these strategies.

Within the IMA Asia Pacific ex Japan sector, all eight funds with a sufficient track record – Fidelity did not launch its Asian Dividend fund until August – underperformed the MSCI AC Pacific excluding Japan index.

Richard Sennitt, manager of the £396.3m Schroder Asian Income fund, says: “High-yielding stocks performed poorly post-tapering talks and that has acted as a headwind.

“It impacted more on highly-rated, high-yielding, low-growth stocks.”

Mr Sennitt’s fund lost 8.84 per cent in the 12 months to March 7, which takes into account the selloff at the start of this year, compared with the index’s 9.89 per cent loss.

The higher-risk, high income ‘Maximiser’ version of the fund, run by Thomas See, fell even more, losing 11.31 per cent. These losses were typical among income funds.

But in spite of the collapse in short-term performance terms, IMA statistics show there was no huge withdrawal of retail money from Asian funds.

The IMA Asia Pacific excluding Japan sector saw net outflows in only two months in 2013, although monthly net inflows in the second half were noticeably much lower than in the first half of the year.

The main question is whether or not the current level of markets represents a buying opportunity. But while specialist fund managers are often to be heard talking up their own asset class whenever a setback is encountered, this time the rhetoric appears a little more cautious.

Jason Pidcock, manager of the £4bn Newton Asian Income fund, argues that Asia “looks cheap” but adds that the likelihood of outperformance is dependent on the performance of US equities.

“By the end of 2013, the valuation differential between the US and Asia looked very stark,” Mr Pidcock says.

“The US multiple is very high and Asia is low by historic standards.

“We have come into this year with the view that the US looks toppy and would not take much to derate, but Asia looks cheap.

“It could be a funny year where the Asian market is able to outperform. It doesn’t happen very often.”

Mark Williams, co-manager of the Liontrust Asia Income fund, has an overweight position in China but is wary of major headwinds to the world’s second biggest economy.

In particular, he cites the fallout from Chaori Solar, which on March 7 became the first Chinese company to default on a domestic bond since the market became regulated in the late 1990s.

“While there have been defaults by Chinese companies in international debt markets, the visibility of [Chaori Solar] would make it a potential focus point for domestic investors.”

The manager says the repercussions “can be viewed positively or negatively”.

While a negative view would forecast an eventual “systemic, liquidity-led crisis”, Mr Williams is more confident that the default will be viewed “as acknowledgement of the risks which must accompany returns, and as education that there is not an implicit government guarantee on any borrowing”.

Nick Reeve is deputy news editor at Investment Adviser

Expert view

Jason Pidcock, manager of the Newton Asian Income fund, says: “It could be that the US ends down a bit and Asia up. I would not expect the difference to be dramatic though: if the US falls by 10-15 per cent it would be difficult for Asia to go up, but if the US ends the year down 5 per cent it would be quite possible that Asia ends the year up – although that is not a forecast.”

Mark Williams, co-manager of the Liontrust Asia Income fund, is wary of major headwinds to China. He says: “While we think that the aggregate amount of debt should be manageable from here, significant reform will be needed to alter the inefficient allocation of capital that has driven growth.”