Henderson’s Michael Kerley has warned an interest rate rise in the US may be one of the most significant headwinds for Asian equities in the near future.
While others have worried about the impact of Greek uncertainty on Asian markets, Mr Kerley – who runs the Asian Dividend Income fund – said he was looking further ahead to a possible rate increase by the Federal Reserve in September.
“What is more of an issue is the change in the interest rate in the US because that could increase volatility in [Asia], such as when we had the ‘taper tantrum’ in 2013,” he said.
In the so-called taper tantrum, investors sold out of Asian assets when the US threatened to tighten monetary policy.
“We have been nervous about high-yielding defensive stocks [in Asia] for some time, and the biggest risk when you get this change is that some of the high-yielding stocks get called into question,” the manager added.
“We have been moving away from expensive defensives, such as utilities, so we are already positioned for [a rate rise].”
The fund has instead been focusing on stocks with the potential for dividend growth.
“In the past six to 12 months we have been finding it increasingly difficult to find high-yielding stocks at the right price, so we have been focusing on companies that can grow their dividends and I hope can give us some insulation if and when the rate rises,” Mr Kerley said.
“But are we going to be completely excluded? No.”
The fund’s biggest regional investment is in China at 22.5 per cent, but the manager said he was unfazed by the recent battering taken by the Chinese A-share market. The Shanghai Composite index fell more than 12 per cent in June, bringing to an end months of gains.
Mr Kerley has two A-share investments, including a 2.5 per cent stake in the fund’s fourth-largest holding, Gree Electric Appliances.
He admitted that Gree had experienced “quite a lot of volatility”, but he added the shares were cheap and had increased in value by 60 per cent since he bought them last year.
“It’s valuation – it’s not a macro call,” he said.
“[China] is moving through a reform process and the quality of growth will improve. We expect some volatility, but we are positive on the companies we own and also for the country in general.”
The Asian Dividend Income fund is currently paying out a yield of 5.6 per cent, which Mr Kerley said was the highest in the sector. He attributed this partly to his use of derivatives to enhance returns.
Elsewhere, the recent high-profile move by Newton’s Asian Equity Income fund manager, Jason Pidcock, to run a similar mandate at Jupiter has attracted some interest for Henderson’s offering.
“We are getting quite a lot of interest in the fund at present,” Mr Kerley said.
“People are reassessing their position because of his move and the performance has not been that great in the past year, so maybe that is a catalyst for review.”
Mr Pidcock’s Newton fund has suffered a 1.1 per cent loss in the past year, data from FE Analytics shows, while Mr Kerley’s fund has risen 9.1 per cent, ahead of its benchmark MSCI AC Asia Pacific ex Japan index’s rise of 7.9 per cent.
FUND WEIGHTING
22.5%
Amount Michael Kerley has in China – his largest geographical weighting
40%
Manager’s largest sector exposure is to financials at 40 per cent, with Bank of China his biggest holding at 3.4 per cent
