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Fund Review: Asian income

Introduction

So finding income has been something of a challenge for many Asian income funds in the past 12 months or more.

A strong showing from the Australian economy has boosted performance in the region, although the Reserve Bank of Australia recently lowered its GDP growth forecast to 2.5 per cent in the year to December, down from 2.75 per cent. For those funds that have been underweight Australia, the search for income has been even more challenging.

Nevertheless, the MSCI AC Asia Pacific ex Japan index has returned 14.42 per cent in the year to August 20, against a return of 11.13 per cent by the MSCI World index for the same period, according to FE Analytics data.

For investors in Asian income funds, the main concern has been whether corporates have been able to pay out dividends.

In the Henderson Global Dividend Index report, it states that weak currencies and slowing economic growth affected dividends from Asia Pacific markets in the second quarter of 2014.

However, the region still saw dividends climb 10.7 per cent to $38.4bn (£23.2bn) on a headline basis, boosted by special dividends from Hong Kong’s Cheung Kong and Hutchison Whampoa worth a combined $5.9bn.

The report reveals that excluding special dividends though, total Asia Pacific dividend payouts fell 5 per cent. Australia made up just under a quarter of the total at $9.1bn and saw dividends rise 2.4 per cent in spite of a $1bn negative contribution from the lower Australian dollar.

Michael Kerley, lead manager of the Henderson Asian Dividend Income fund, says he has been positive on the region for most of this year.

He continues: “I think the underperformance of Asia and emerging markets in general had become pretty extreme and that quantitative easing, which has been going now for four to five years, has actually done emerging markets and Asia no favours. It’s really helped bond markets generally, it’s really helped developed markets, but it’s been pretty negative [for Asia].

“But… we as fund managers and investors in general go back to what’s important, which is ultimately growth.”

That is where he believes Asia in particular looks good relative to the rest of the world.

Mr Kerley adds: “I still believe there will be a focus on growth from cheap valuation points. So I’m pretty positive for the rest of this year and into next on valuation grounds, and the fact that Asia growth will well exceed that in developed markets.”

Tony Jordan, manager of the New Capital Asia Pacific Equity Income fund, notes: “We are looking for stronger growth and higher interest rates going into 2015 but Asia usually does well in this environment. Given the recent rise I suspect it will be more about individual stocks rather than countries, until such a time that investors become comfortable that reforms in China will lead to more sustained growth.”

The picks

Liontrust Asia Income

This fund is a modest £25m in size having launched in March 2012. Managers Mark Williams and Carolyn Chan each have more than a decade of experience in Asian markets. They manage the fund on the basis that any single investment style is unlikely to deliver outperformance in this market and therefore choose an investment strategy to suit a particular point in the cycle. They invest in companies with a high yield in order to provide income and capital appreciation. The fund is yet to prove itself, having delivered only fourth-quartile performance in the year to August 19, according to FE Analytics, but this could be one for investors with a long-term perspective.

Newton Asian Income

Jason Pidcock’s Newton Asian Income fund has swelled to £4.8bn. It aims to achieve income and capital growth by investing in companies in Asia Pacific. The financials sector currently accounts for 30 per cent of the fund, while its largest geographical allocation is to Australia at 34 per cent. The manager has maintained a top-quartile performance over three and five years, according to FE Analytics. In the five years to August 20, it has returned 116.87 per cent, placing it among the top three funds in the IMA Asia Pacific ex Japan sector.

Editor’s pick

Schroder Asian Income

Richard Sennitt has been managing the £475.7m Schroder Asian Income fund since November 2001. It has clocked up several years of outperformance and currently sits in the top quartile of the IMA Asia Pacific ex Japan sector over three, five and 10 years. In the 10 years to August 19, it delivered an impressive 242.85 per cent return. It aims to grow income and capital growth by investing in Asian companies with attractive yields and growing dividend payments. The portfolio currently has 24.9 per cent in Australia, followed by Hong Kong, which accounts for 19.8 per cent.

In this special report