When thinking of Asia, many view the area as a high growth region with some issues such as China A Shares volatility but generally a better place to gain returns than other continents globally.
However, Nick Clay (pictured), co-manager on the BNY Mellon Asian Income Fund, says that while ‘’the consensus view’ is that Asia is simply a growth region, this is ‘misguided’. He believes many have missed the fact that companies have matured and are now becoming focused on cash flow which many are returning to shareholders in the form of dividends.
He adds that it has got to a point where yields available in Asia are better than those available on a global basis. Furthermore, markets such as the UK where decent income is on offer tend to be concentrated in a handful of high yielding companies. “In Asia, you get a lot more breath and diversification of where the yield comes,” says My Clay.
The fund targets a yield of 3.5 percent, therefore investing in Asia just for growth is ‘misplaced’. Although he also says that after 10 years of quantitative easing most equity investors are “obsessed with growth” as well as FOMO, the fear of missing out. The latter point being a reference to the meteoric rise of stocks like Ali Baba and on a global level Facebook and Google.
How bad can it get?
One important active decision that the management has to take a view on is that when a company is hit with bad news causing many investors to drop the stock thereby lowering the share price, is will this impact the company’s cash flow and consequently its ability to pay a dividend? “If it doesn’t then you’re getting a good company at the right time and at an attractive rate,” says Mr Clay. One example of a scandal hit company held by the fund is Samsung Electronics.
Conversely, if a company’s valuation becomes too high it may be sold. He adds “as long as you think you’re being compensated for how bad you think it’s going to get, risk/reward is on your side.”
Of course, if a company’s share price falls but it can maintain its payouts, its dividend yield rises which is pleasing to investors. However, Mr Clay naturally prefers companies with sustainable dividends through the good times and the bad while those firms engaging in share buy backs will only tend to do this when conditions are right. “This [share buy backs] is not much good for you as an investor as we want to focus on the things that’re going to work to our clients’ advantage,” says Mr Clay.
Trade war issues
Although this fund is not simply concentrated on China and includes developed markets in the Asia Pacific including the likes of Australia, New Zealand and Korea, the US-Sino escalating trade war is something the fund has to keep an eye on. Companies engaged in manufacturing and subsequently exports, if a main market is the US this can be problematic. Marwar, a furniture maker that sold into America was dropped from the portfolio. However, with a turnover rate of around 20 percent per annum, this is not particular high and suggests a strict stock picking discipline. The fund is also fairly high conviction with only 40 holdings chosen from a mixture of developed and emerging markets.
Mr Clay views that the trade war is going to go on for much longer and certainly won’t be solved by the end of the year. The view is that this is about the US attempting to keep hold of its global dominance which is “not going to be solved overnight” and is something naturally Mr Clay and his colleagues are ‘quite concerned about”. The ability of Asia to trade to its neighbours, many of whom are still enjoying high levels of economic growth and with it a growth in middle class consumers may be seen as a threat to the US’ traditional dominance of the world market. He did add that this is not just a Donald Trump initiative but moreover one of the political elite’s agendas to remain top dog so a change in administration may not resolve the situation as Asia’s economic power increases.
This fund combines a decent level of income with a healthy amount of growth as well. Mr Clay suggests that the two attributes are inextricably linked, as quality companies who get used to paying a dividend encourages the discipline of cashflow allocation. A win-win situation if you will and explains why it is resoundingly beating its benchmark, the MSCI AC Asia Pacific ex-Japan.
BNY Mellon Asian Income Fund (IE00BP4JQC16)
Fund size: £1.4 billion
Fee: 0.85 percent
Annual yield: 3.7 percent
Three year annualised returns: 8.3 percent
Top holdings: Link Real Estate Investment Trust, Samsung Electronics, Taiwanese Semiconductors
Net Asset Value Growth
To read more about this fund, click here
