InvestmentsSep 8 2014

Fund Review: Aberdeen Asian Income fund

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This £407m investment trust was launched in December 2005, with the aim of providing investors with a total return by investing in Asia Pacific securities, including those with an above-average yield.

Managed by Aberdeen’s Asian Equities team, led by Hugh Young, the Aberdeen Asian Income trust has benefited from an investment philosophy based on the belief that in the long term share prices will reflect underlying business fundamentals.

Mr Young explains: “We therefore commit significant resources to in-depth research, company visits and meetings with management to provide us with the foundations to assess both the quality and valuation of a business.”

He notes the investment process has remained unchanged since launch, with the 30-strong team conducting rigorous, first-hand research and numerous visits to companies before the team buys them to ensure they satisfy the quality criteria.

“It’s a checklist that includes strong finances, regard for minority shareholders, good corporate governance, sustainable businesses and solid long-term prospects. Then we make sure companies are fairly priced. This process continues even after we’ve introduced a holding. We find that picking stocks this way is the best defence against market uncertainty,” Mr Young says.

He adds that while macroeconomic factors are something the team monitors, they are “secondary to our focus on company research. Most fund managers spend 90 per cent of their time focused on the macro and only 10 per cent on companies. We’re the reverse”.

Since launch in December 2005 the trust has delivered a strong total return of 184.08 per cent, compared with 129.99 per cent from the MSCI AC Asia Pacific ex Japan index, according to FE Analytics. In addition, the trust has outperformed the index across both three- and five-year periods to August 27 2014, although performance has lagged slightly in the past 12 months, with a total return of 6.08 per cent compared with the index return of 15.15 per cent.

The manager attributes the consistent performance to a number of factors, including the team’s disciplined approach to investing, the growing financial strength of Asian companies and its commitment to improving shareholder returns, as well as investors’ search for income in a low-yielding global environment.

Regarding recent changes to the portfolio, Mr Young notes: “We took advantage of last year’s sell-off to add to better yielding and more defensive holdings. Significant transactions included top-ups in China Mobile, Hong Kong fashion retailer Giordano and Far East Hospitality Trust. Although their share prices were weak, these companies remain cash flow generative, enabling them to offer attractive dividend yields relative to their peers.”

In terms of specific drivers, he points to favourable stock selection in Singapore and Australia, including holdings in Singapore Post and recent addition Jardine Cycle & Carriage, which rose on the back of pre-election enthusiasm in Indonesia, where it has businesses across the automotive distribution, palm oil plantation and coal mining contracting sectors.

Meanwhile, an underweight position to China and an overweight to Thailand helped boost performance, although Mr Young suggests that China’s recent focus on state-owned enterprise reform is expected to unlock greater value over the long term.

“State-owned oil companies are beginning to emphasise quality and returns instead of volume and scale. PetroChina is looking to increase private investment in some of its existing assets, while earmarking certain pipelines for sale, which is expected to improve efficiency. The lack of exposure to several mainland-listed financial services firms also added value.”

But a notable detractor for the portfolio has been its holding in Singapore lender OCBC. Mr Young explains the share price came under pressure as investors were initially concerned the company would overpay for its acquisition of Hong Kong bank Wing Hang.

Hugh Young is manager of the Aberdeen Asian Income fund

Expert View

Rob Morgan, pensions and investment analyst, Charles Stanley Direct:

Hugh Young’s team has built an outstanding reputation through a well-honed process common to all its funds. It places emphasis on the quality of company management and corporate governance, so it is unsurprising the portfolio has a large weighting to developed markets in the region, such as Singapore. China, meanwhile, accounts for only 7 per cent due to long-held concerns regarding corporate governance. The trust contains roughly 50 mainly larger companies that tend to be solid and dependable, rather than immediately exciting. However, by taking a long-term view, the Aberdeen team has managed to outperform by owning relatively defensive stocks able to harness the region’s economic growth. In my view, it is well worth considering for exposure to the region.