Manager Michael Kerley notes the onshore Oeic was launched in 2009 replicating the strategy of an offshore Sicav, which had already been running for more than two years, and an investment trust run on the same process.
He explains: “Income makes a large part of return over time. But because we are talking about a growth area here, most of Asia is still an emerging market, we think the additional benefit is income growth and the potential for companies to pay out higher dividends over time. Generally the dividend culture is still at the early stages.”
The portfolio is fairly concentrated with roughly 50 stocks selected using a bottom-up process, although Mr Kerley notes the stocks are all evenly weighted so there is not say 10 per cent in one stock and 0.5 per cent in another. “Generally the largest stock is pretty close to 3 per cent because of share price movement.”
The team use macro factors as idea generation rather than anything that dictates asset allocation, as while something may be happening in a certain country that might have an impact on certain stocks or sectors.
Mr Kerley explains: “A lot of the macro indicators, themes and sector related stuff is important to us, but it is more about generating ideas to find the stocks that play into that”.
With Asia known for being less focused on dividend payments the search for income from this area can be challenging.
The manager says: “In Asia it is not quite as set in stone as that [in most developed markets]. Companies will cut dividends just to be prudent, because they think that’s what shareholders want. It is not as ingrained as in some developed markets, which is an opportunity but also a frustration. You can pick companies that have the potential to pay out dividends but then you can get frustrated if they don’t do it as quickly as you like.”
From the launch date of the onshore strategy on November 9 2009 the fund has returned 43.36 per cent to November 12 2013, outperforming both the IMA Asia Pacific excluding Japan sector average of 34.1 per cent and the MSCI AC Asia Pacific excluding Japan index return of 36.61 per cent, according to FE Analytics.
In the shorter term the fund is just ahead of the sector and benchmark for the year to date to November 12, with a return of 7.31 per cent, compared with the sector average of 5.12 per cent and the index return of 5.36 per cent.
Mr Kerley notes: “For income funds in general, everywhere around the world, the first five months was terrific as low interest rates have driven everyone towards yield. But from May it became more tricky as the US Federal Reserve started talking about tapering, and it became a bit more of a challenge.
“We haven’t really changed the portfolio, but we were getting worried towards the end of last year and into the beginning of this that some yielding areas were getting too expensive. Some equities have become overly expensive, so we’re moving the portfolio more towards dividend growth, which I think helped us in the second half of the year, but didn’t help us enough to match the index.”
The fund has a strong weighting to Australia at approximately 17 per cent of the portfolio, beaten only by China at 18.5 per cent.
Mr Kerley explains: “We’re an income fund and we have an obligation to pay a yield, so we need to catch a certain level of income that may push us towards certain countries and sectors. For example we don’t particularly like Australia but it’s the highest yielding market in the region by quite a long way. So as an income fund it’s difficult to ignore parts of Australia.
“We split the portfolio roughly 50:50 between high yield and dividend growth, when you look at it in those terms, Australia comes into the high yield type, as would telecoms, but then when looking at dividend growth China - where we have quite a high weighting relative to income peers - would come under dividend growth. It is bottom up but we are conscious of the fact we need to pay out a high yield which is an attraction of the strategy in the first place.”
EXPERT VIEW
Juliet Schooling Latter, head of research, Chelsea Financial Services:
This fund has quite a concentrated portfolio and the stocks are quite evenly weighting at approximately 2 per cent each on average. It selectively uses covered calls to boost income and the yield is roughly 6 per cent at the moment which is very attractive. On aggregate the fund has a higher yield, better dividend growth and lower volatility than the market and many of its peers. Income is paid quarterly but it can be ‘lumpy’ as they pay it out as it is earned – they don’t smooth the payouts in any way. It’s a nice fund for people looking to diversify their income or for a more defensive play on Asia. We currently have it as a hold rating.
