Henderson Global Investors’ Mike Kerley has said he has an ambivalent relationship with the Australian stockmarket as investors’ hunger for income pushes up valuations.
Mr Kerley, who runs the £369m Henderson Far East Income trust, had approximately 17.8 per cent in Australian stocks at the end of April.
The weighting is less than the 27.1 per cent that Australian stocks make up in the FTSE All-World Asia Pacific ex Japan index, which the trust uses as a comparative benchmark.
The manager said Asia Pacific investors had to pay attention to Australia but that it had become “increasingly difficult” to find opportunities there. He said his view was reflected by his exposure being roughly half that of some of his peers, who have “more than 30 per cent”.
“To generate income out of Asia Pacific you must have a big weighting in Australia,” he said.
“It is difficult to ignore but quite risky. Australia should not be doing as well as it is.
“The economy has problems with competitiveness and the currency. The fundamentals are not attractive.”
Mr Kerley said the Australian stockmarket yielded approximately 3.2 per cent now compared with 2.7 per cent for his benchmark index, which was part of the reason some investors allocated heavily to it.
Elsewhere, the manager said he was increasingly looking for growth-orientated stocks that would be good sources of yield in the future, because “yields are very compressed in defensive equities across Asia”.
“People have not been willing to pay for growth. The upside is the companies with decent dividend growth,” he said.
Mr Kerley said some of the trust’s consumer discretionary holdings matched this description, as did large parts of his 15.3 per cent property exposure. However, the manager said he did not hold real estate investment trusts (Reits) because the popularity of the vehicles had brought yields to low levels.
The manager’s second largest regional bet is China where he has a 15.4 per cent weighting. Mr Kerley has roughly one third of this in two Chinese banks – Bank of China and China Construction Bank.
The manager said: “When China is weak, the areas impacted by the changes are cyclical stocks which are volatile.”
Last month the trust sold out of real estate company China Evergrande following poor results, while the manager said Chinese consumer staples had become very expensive, with beer and noodle companies performing particularly well.
“We have more of a focus on consumer discretionary than consumer staples, which is a popular sector and the valuations look punchy,” he said.
He sees Chinese banks and property as offering better valuations as part of the same play on domestic consumption because “we believe in the underlying growth story”.
Henderson Far East Income trust’s 33.6 per cent means it has outperformed the sector average in one year to April 29, according to Morningstar.
However, it has returned less than the sector average in three- and five-year periods.
How other managers are playing Australia
The Australian stockmarket has soared in the past 12 months as the MSCI Australia index has risen 28.3 per cent in the year to April 26, beating the MSCI World, S&P 500 and the FTSE 100 indexes.
However, in spite of the rises, Australia is inextricably linked to the fortunes of the Chinese economy. Recent softening of data in the world’s second largest economy, such as recent purchasing managers’ index data, could mean stocks in Australia pare their recent gains and present a new buying opportunity.
Mr Kerley’s 16 per cent in Australia is underweight compared with AIC sector peer Aberdeen Asian Income, run by Hugh Young, which has 19.4 per cent in the country including top 10 holdings in QBE Insurance Group and Woolworths.
Elsewhere Matthew Dobbs’ Schroder Oriental Income trust has 26.1 per cent in Australia. His top 10 stocks include Sydney Airport and Australia & New Zealand Banking Group.
Meanwhile, the Murray International investment trust managed by Bruce Stout (pictured) recently made a rare addition to its portfolio in the form of Australia-based Coca-Cola Amatil.
