Mr Horrocks says it is important to recognise the importance of dividends reinvested over time as a generator of returns. The manager claims reinvested dividends provided roughly 20 per cent of the returns from Korea through to approximately 80 per cent for Thailand during the same period.
He says this has the added benefit of reducing the amount of cash that builds up on companies’ balance sheets, as they are paying it out to investors in the form of dividends, which means that when they do invest their cash, they “do so wisely”.
The Matthews Asia Dividend fund, which launched in 2011, is run with the aim of producing a total return with an emphasis on providing income.
Mr Horrocks, alongside co-lead manager Yu Zhang and co-manager Jesper Madsen, balance the fund between companies that have a solid, stable yield and those where there is an expectation of a growing dividend.
At present the portfolio is invested 60 per cent in large-caps and 40 per cent in mid- and small-caps.
“In terms of yield, it has typically been above the market level but there is no specific target,” Mr Horrocks explains. “The yield is lower now than it has been for most of its life. It is roughly market yield but I would typically expect it to be above the market level.”
A focus on the sustainability of companies is another key aspect of the fund, adds the manager.
“It is not about how fast is it growing this year or next but to what extent it can sustain reasonable levels of high-quality growth and returns above the cost of capital,” Mr Horrocks says.
“We’re not looking for ‘shoot the lights out’ performance but 10 per cent growth year-on-year as there are very few of those companies about. If we find companies doing this there is a good chance they are underpriced by the market even if the price-to-earnings ratio looks high.”
According to the manager, investors’ time horizons are too short and that “one of the biggest traps in investing is looking at the price-to-earnings ratio in the context of short-run growth”.
He says: “If a business can sustain a competitive advantage over a long period, a price-to-earnings ratio of 20-30x can be cheap. The compounding up of dividends reinvested is the best source of returns.”
With a current portfolio turnover rate of roughly 20 per cent per annum, Mr Horrocks explains that the past year has seen a greater proportion of the fund moving to those businesses able to increase shareholder payouts and has trimmed “so-called anchor stocks”.
He adds that the fund’s focus on quality long-term businesses had been rewarded by the market in the past few years.
“People have to understand that if we get a liquidity fuelled rally – a very cyclical bias [in the market] – companies with distressed balance sheets go up, [but] we will not follow that up,” he says. “We are not going to try as we think those rallies will peter out.”
Since the launch of the fund’s sterling share class in February 2011, it has delivered 25.4 per cent, outperforming the MSCI AC Asia Pacific index’s 10.8 per cent (in sterling terms) and the IMA Asia Pacific including Japan sector’s 9.7 per cent, according to FE Analytics.
The manager says good sources for income in Asia are the technology software companies, consumer-facing businesses, and healthcare, distribution and logistics firms.
“China, Thailand and Malaysia’s economy are like that of the US in the 1950s,” he says. “People are starting to spend in non-basic ways and purchasing a bit of luxury.”
EXPERT VIEW
JULIET SCHOOLING LATTER, HEAD OF RESEARCH, CHELSEA FINANCIAL SERVICES:
Verdict
“Matthews Asia is an independent, privately owned company and a dedicated Asia-only specialist. Asia Dividend is quite concentrated as it has less than 60 holdings. It is a multi-cap fund, with roughly 60 per cent in large-caps but has a decent 25 per cent-plus weighting in mid-caps too. Unlike many funds of this ilk, it invests in the whole of Asia, including Japan, so investors will get quite a high exposure to Japanese equities, which they wouldn’t in most Asian income funds. The yield is lower than the other funds at just more than 3 per cent. But the team has a good record of investing in the region and it has made a promising start.”
