InvestmentsFeb 2 2015

Fund Review: L&G Asian Income Trust

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Paul Hilsley has been managing the £212.48m Legal & General Asian Income Trust since its inception in November 2008.

He runs it as a total return fund with an income bias and a strong emphasis on valuation. “This means that we are focused on both income and capital gains by searching for strong relative value opportunities across the markets among high-quality, cash-generating and dividend-paying companies,” he says.

“The resulting yield of the fund remains high due to the type of companies we are buying and the price we pay for them, but the distribution is not the sole focus. Putting it another way, we do not trade to maximise income and the fund is structured to avoid arbitrary rules that may force sub-optimal positions into the fund, which could undermine the total return.”

Mr Hilsley notes the process has not changed since the fund’s launch and that it is consistent with the investment process he pursued since he began investing at Phillips and Drew Fund Management at the start of the 1990s. His approach to investing for Asian income is based on bottom-up fundamental analysis.

“We spend lots of time getting to know corporates and have good relationships with their management via regular meetings and contact,” he says. “We then concentrate on analysing the components of companies – which can often be very complex – to appraise what we believe is the fair value for the business as a whole. We compare this with peers to evaluate whether we believe there is a valuation opportunity and, if so, we invest.”

Mr Hilsley explains that positions are held in the portfolio for an “extended period”, not only to collect cash flows, but also to benefit from prices reversion to fair value. There are 76 holdings in the fund. He points out that the Legal & General Investment Management global macro team provides detailed analysis and insight of the macro environment in Asia.

“There are many moving parts within Asia’s diverse economies and we need to be aware of and appreciate what is going on in order to understand the environment that our investee companies are operating within,” he notes.

Ongoing charges on the I-share class – which is the clean class available through all intermediary platforms – are 0.84 per cent, while the fund is placed at level five out of seven on a risk-reward profile.

The fund’s longer-term performance has seen it ranked top quartile in its Investment Association’s sector across both three and five years, according to data from FE Analytics. In the five years to January 20 2015, it generated a return of 53.34 per cent against the sector average of 36.97 per cent, while the FTSE All World Asia Pacific excluding Japan index returned 41.71 per cent. The fund’s outperformance continued across three years, delivering 34.06 per cent to investors, compared with 24.51 per cent by the sector and 25 per cent by the index.

But Mr Hilsley acknowledges that short-term performance is weaker. In the year to January 20, the fund returned 10.43 per cent, below the sector average of 14.18 per cent. He cites disappointing returns from a small number of the portfolio’s holdings, particularly in the resources sector and in Macau. Among the holdings that detracted from performance in the past 12 months are Australian iron ore miner and steel maker Arrium and department store operator Myer Group, also based in Australia. “We believe there is good scope for these positions to recover from short-term pressure and their valuations remain attractive,” he says.

On a more positive note, the portfolio’s performance was boosted by holdings such as Coal India, China Mobile and Australian toll road company Transurban.

He adds: “During the past year the best contributors to the fund were the New Zealand-based electricity generators and retailers that were added in late 2013 and early 2014 at their initial public offerings. These sell-offs from the government were poorly received by investors and we took the opportunity to build positions at low valuations. They have subsequently performed extremely well and are paying substantial dividends from their cash flows.”

EXPERT VIEW

Rob Morgan, pensions and investment analyst, Charles Stanley Direct

The Legal & General Asia Pacific team went through a reshuffle in 2013, though Paul Hilsley has run this fund since inception. While the portfolio is fundamentally bottom-up focused, the managers are supplemented by top-down input from the internal macro and strategy team. The fund holds 60-70 holdings and has delivered performance similar to the FTSE Asia Pacific excluding Japan index since launch. Previous outperformance has been largely undone by a difficult 2014 in relative terms. Broadly speaking, the fund has performed better in falling markets and has a mega large-cap bias. A solid, core fund for exposure to the region.