Legal & General Investment Management’s Paul Hilsley is shuffling the Australian allocation in his £200m Asian Income Trust to gain exposure to China.
Australia is Mr Hilsley’s largest geographic weighting by far, making up 26.3 per cent of his fund. The next highest is Hong Kong at 15.7 per cent.
“Australia has been a very lucrative source of both dividends and capital returns for the trust for a number of years,” he said. “There is a strong dividend culture there, boosted by the domestic franking credit tax regime, which provides a good dividend base.”
But recently Mr Hilsley has started to trim his exposure and reallocate his assets.
“Our exposure to Australia-listed companies, while still large, is down from its highs having reduced positions in financials following their strong performance,” he said.
He has also decided to focus on those Australian companies that offer him exposure to China and broader Asian economic growth, such as resources companies. “These are attractively valued and also have the added benefit of far better corporate governance than buying direct,” he explained.
Mr Hilsley’s number one holding remains the Australia & New Zealand Banking Group, the third largest bank in Australia by market cap, at 3.8 per cent of the portfolio.
Elsewhere, he said while he had targeted Australian companies that are linked to the Chinese economic growth, he was looking at the possibility of buying stocks based in the world’s second largest economy.
Mr Hilsley said he was hunting for companies with strong market positions and valuations that might provide both good yields and capital upside.
“Given the uncertainty in China and the subsequent weakness we have seen in some stocks there, we are looking closely for opportunities to add in this market,” he said.
China has shown wavering growth in recent weeks.
A Chinese manufacturing gauge, the preliminary Purchasing Managers’ index from HSBC Holdings and Markit Economics, fell to a three-month low on August 21. It was at 50.3 in August, down from 51.7 in July. A level above 50 shows economic expansion.
This means certain sectors of the market were offering good opportunities, he said. “We are finding some attractive companies at cheap valuations in the resources and mining services sectors, but we are keen to focus on market leaders when the whole sector is sold down.”
Mr Hilsley is also trimming his exposure to Thailand. He holds 5 per cent of his overall fund in the country, down slightly from 5.2 per cent at the end of June.
“The generals have provided short-term stimulus and stability to the economy but given long-term uncertainty over a return to democracy, valuations in some sectors are now fairly full,” he said.
The Asian Income Trust was merged with Mr Hilsley’s £75m Pacific Growth Trust on July 10.
“The merger has had no impact on the Asian Income Trust beyond increasing its size,” he said.
“The merger process went smoothly with no negative impact to either portfolio. At £200m, the Asian Income Trust remains very credible but importantly also very nimble.”
The fund has returned 20.9 per cent in the three years to the end of June, compared with 5.3 per cent for the IMA Asia Pacific excluding Japan sector, according to the company.
However, the fund has underperformed the sector in one year, returning 0.6 per cent compared with 3.5 per cent for the sector.
China numbers
6% – The amount the Shanghai Composite index has risen so far in 2014 - potentially significant given double-digit falls in 2010 and 2011 and an 8.5 per cent loss in 2013.
50.3 – Flash PMI reading for China in August - down from July’s 51.7.
