InvestmentsSep 8 2014

Fund Review: Henderson Asian Dividend Income fund

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This £103m Asian income fund is run by lead manager Michael Kerley, who is assisted by Sat Duhra.

Mr Kerley says: “The aim is to offer a higher yield than the MSCI Asia Pacific ex Japan index, but it’s a total return-based fund, not purely focused on yield. We think the combination of income plus capital growth and dividend growth will lead to outperformance through a cycle.”

The fund currently has a yield close to 6 per cent, while the manager notes that the volatility of the fund is lower than that of the overall index.

Describing the process behind this fund, Mr Kerley explains the portfolio is split roughly in half, with 50 per cent in high-yield stocks, which are those yielding more than 4 per cent. “The other half of the portfolio is the companies we expect to be the high-yielding companies of the future. We will pick companies that have lower yields, maybe 2 or 3 per cent yields, but we expect them to be [yielding] more than 4 per cent within three years.”

He continues: “We think that if you are going to be in an income strategy in Asia, it is a growth area so you need to be focusing on growth characteristics and growth and income fits our mandate. And we think companies that generally have high yields have higher valuations in the market. We want to capture the capital upside as a company grows its dividend over time, which is why we try to get exposure to dividend growth as a theme.”

The fund is a concentrated portfolio of roughly 50 holdings, Mr Kerley says, and the portfolio is equally weighted so that every stock accounts for between 1.5 and 2.5 per cent of the fund. This could explain why it is considered higher risk at level six on a risk-reward profile, with ongoing charges of 1.55 per cent.

Although the fund uses a bottom-up process, Mr Kerley says macroeconomic factors come into play as a risk-measurement tool or an idea-generation tool.

He observes that prior to May 2013 he saw opportunities in dividend growth as yield became expensive. “We had more of the focus on the portfolio to dividend growth than we did to high yield, so less exposure to utilities, healthcare, consumer staples and telcos, which would be the defensive areas, and more exposure to things like industrials and consumer discretionary,” he reveals. “Although that’s changed slightly since May, generally, we still think that yield is too expensive.”

Within its peer group, the IMA Asia Pacific ex Japan sector, the fund is top quartile over three and five years. It delivered a 69.68 per cent return in the five years to August 19 2014, against a sector average of 60.76 per cent, according to FE Analytics. In the year to August 19, performance has dropped to fourth quartile, with a return of 8.1 per cent compared with the sector’s 10.67 per cent.

Mr Kerley acknowledges the portfolio’s performance figures for the year to date do not look “particularly compelling” and attributes this to talk of tapering by the US central bank last year.

He says: “Up to the end of July, on a one-year view, the fund is up 13 per cent in sterling terms but the index is up 19 per cent, so the one-year comparison isn’t particularly favourable. But on a three-year basis, the fund is up 20 per cent and the index is up 16.5 per cent.”

The manager highlights the portfolio’s Chinese holdings as having added to performance during the past 12 months, particularly Chinese banks and property companies. He suggests that being underweight Australia on the basis that it is expensive has actually hurt the fund’s performance because it has been one of the best performing markets.

He notes: “There are times when this strategy works better than others. What we’re trying to achieve is outperformance over a longer period but generate a nice high yield by doing so. Generally, that’s worked, but there are times when it’s worked better than others.”

Michael Kerley is lead manager of the Henderson Asian Dividend Income fund

Expert View

Rob Morgan, investment and pensions analyst, Charles Stanley Direct

Mike Kerley’s investment process focuses on finding companies that have a sustainable and growing cash flow. He believes this leads to a strong revenue stream that fuels growing dividends, and also leads to capital appreciation. The portfolio is split into two types of stocks: high income, which consists of companies that have high, sustainable dividends, and which are undervalued by the market; and income growth, which is made up of companies that may not have a high dividend now, but have the ability to generate cash and ultimately yield in the future. It results in less of a mega-cap focus than many others in its peer group and the setting of price targets means turnover in the fund is often relatively high. All in all, a solid fund.