In the past, equity income investors were largely confined to the West, and especially the UK, where companies have a long history of distributing profits as dividends.
Investors therefore faced a choice – they could either opt for exciting growth potential from emerging markets or attractive income from the developed world, but not both.
Investors no longer have to choose. Asian companies traditionally reinvested cash in projects they considered would yield a better return for shareholders than a straightforward dividend. Today companies are realising there is considerable investor demand for dividends, especially if they can increase over time. Asia’s dividend culture is growing, and increasingly it is accepted that paying dividends is not always a sign that a business can no longer grow.
Newton was one of the first investment groups to recognise this trend, leading to the launch of the Newton Asian Income Fund under the stewardship of Jason Pidcock. He uses Newton’s trademark thematic approach to identify themes set to drive long-term growth, combined with individual stock selection to find companies he believes are set to benefit.
As an investment house Newton is relatively conservative. It believes, quite rightly in my view, that governments across the globe have not addressed the enormous debt burdens that still exist. I recently met Jason Pidcock for an update on his views. Interestingly, he expects there will be further quantitative easing (QE) in the US by next summer.
While economic growth is picking up in the US, there are no inflationary forces present, and more QE is the likely antidote in a deflationary environment. Furthermore, unlike many analysts, he does not foresee an interest rate rise in the US next year, given the vast amount of debt remaining.
Following a challenging 2013 for the fund, performance is ahead of its benchmark so far this year. Exposure to some of the more developed Asian markets has been a tailwind, especially in New Zealand; the country’s stock market got a boost in September when the conservative government of John Key was voted back in.
The fund holds a significant weighting in Australia, which Mr Pidcock describes as the US of the Asian region. The fund’s 19 Australian holdings contain only one miner and one bank. Australia has a clear link to China; in the past the country benefited from China’s voracious appetite for raw materials, which has dwindled in recent years. Yet there is life outside the resources Australia has on offer. It is one of few countries to maintain its AAA-rating, debt levels are considerably more manageable than in most Western nations, while an array of well-managed companies exists across a range of sectors.
Mr Pidcock and his team have generally been bearish on China. While they do not anticipate a collapse, they expect growth to slow to a steadier and more gradual pace. According to the team, economic growth could reach 4-5 per cent; this should, in fact, be viewed positively as credit will gradually fuel growth to a lesser extent.
At present, the fund yields a generous 4.6 per cent compared with 3.1 per cent for the benchmark index. Many Asian companies already have formal dividend policies in place and Mr Pidcock expects further dividend increases to come. Encouragingly, rising dividends have mostly been a result of earnings growth rather than companies simply increasing their payout ratios (the proportion of a company’s earnings paid out to its shareholders), so the dividend growth looks healthy.
In my view, this fund offers an interesting way of accessing the long-term Asian growth story. While volatility should be expected in terms of capital returns, dividends tend to follow a smoother path. In addition, a regular income allows you to bide your time during more difficult periods for stock markets. In my experience, a regular dividend provides a defensive element to a portfolio because a decent yield tends to support share prices.
I invest in the fund through my Isa and recent weakness in Asia has presented me with an opportunity to top up this holding. In my opinion, this is an excellent choice for exposure to the exciting growth potential of emerging and Asian markets, and for investors looking to diversify their sources of income.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds in this column, visit www.hl.co.ukReuse content