Fund in focus: Schroder Asian Income
Posted by Liz Rees in Fund and industry updates category on 13 Feb 20
At least 80% of the fund invests in companies located in Asia, excluding Japan but including Australia and New Zealand, which pay dividends. Up to 20% can be invested elsewhere, including cash, and the fund may use derivatives to reduce risk.
The yield on the fund is currently around 3.7%, however there is no defined income target.
Manager Richard Sennitt has spent 26 years covering Asia for Schroders. He works closely with colleagues in the London-based Asia team, including Mathew Dobbs, another Schroder’s veteran. Sennitt is also supported by 37 analysts based across Asia.
Investment philosophy & process:
Dividends have historically accounted for half of the long-term returns from Asia and Sennitt believes that companies placing emphasis on dividends are likely to demonstrate good corporate governance and offer better protection in volatile markets.
The team look for quality companies, which are profitable and financially sound. Sennitt favours the prospect of dividend growth over a high starting yield. In his view, this should produce greater shareholder returns.
The team follows a disciplined process to assemble a high-conviction portfolio of 60-80 stocks. Managers and analysts draw on company meetings, third party research and data screens to generate ideas. The team then assess the quality and sustainability of earnings.
The valuation is then considered with Sennitt looking for a catalyst that will drive the share price upwards. He is careful not to overpay for quality, so an investment will only be made if it meets his strict criteria.
Although the approach relies predominantly on stock selection, their economic outlook is incorporated into the process.
Performance & charges
Over Sennitt’s tenure, from 11 May 2011 to 31 December 2019, the fund has produced a total return, in local currency, of 103% compared to 62% for the MSCI AC Asia Pacific ex-Japan index and 69% for the IA Asian Pacific excluding Japan sector. The fund has also been less volatile than its peers.
The fund has lagged recently due to weakness of the Australian market. The fund has been under-invested in China where many companies do not pay an income. This includes internet companies such as Tencent and Alibaba, which have been driving the market higher.
The Ongoing Charges Figure (OCF) of 0.95% is reasonable for the region whilst transaction fees are minimal.
Around half of the highest yielding stocks are listed in Australia whilst Hong Kong features as it is home to dividend-rich property companies. Conversely, there is little exposure to India as yields are only around 2%.
Exposure to China is significantly below the benchmark weight of 36%. Sennitt prefers domestically-focused stocks in China, driven by demographics and urbanisation. In Hong Kong exposure has been reduced, due to the political uncertainty.
The largest sector exposures are in technology, financials, real estate and communications. The top ten company holdings include Taiwan Semiconductor Manufacturing, Samsung, BHP, and Singapore Telecommunications. Sennitt believes the imminent launch of 5G networks in Asia will create good opportunities for some of his IT holdings.
The tentative trade settlement between the US and China helped sentiment. Central banks in India, the Philippines and Australia lowered interest rates last year whilst China’s Central Bank cut their bank's reserve requirements to encourage lending. With moderate inflation, there is scope for further monetary policy easing.
In Australia, damage from recent bushfires is likely to hurt the economy short-term, although stimulus measures will mitigate the impact. Whilst unfortunate, such events do not alter the long-term fundamentals of companies in the fund.
Demonstrations in Hong Kong, helped push its economy into recession in the third quarter with the expectation that it could affect the economy for a long time, impacting banking and property shares.
Elsewhere, the outlook had started to improve before the outbreak of the coronavirus in China. It is impossible to quantify the full impact on the economy but it is hoped that swift action by the authorities will contain the spread of the virus.
The level of dividend cover is comfortable and the risks of dividend cuts are low. In the manager’s opinion, the current valuation gap between high and low-yielding companies is very wide.
We admire Sennitt’s deep knowledge of fundamentals and understanding of cultural drivers in Asia. We consider the fund to be an option worthy of consideration for income seekers looking to gain exposure to an area with the potential for dividend growth.
: Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Nothing in this article is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment.