When I entered the industry in the early 1980s, pretty much the only way of achieving a growing income was to use UK equity income funds. Cash and bonds provide income but are less able to combat the effects of inflation. On balance, UK equity income has provided exceptional returns for investors but it arguably led to a rather one-dimensional portfolio as diversifying into other areas such as Japan or Asia meant reducing the income potential. Retiring investors looking for income therefore missed out on some exciting growth potential outside the UK.
All this has changed over the past decade. Equity income investing has become far more fashionable, perhaps because interest rates have fallen substantially and the yields on cash and bonds have become leaner. It is also true that a dividend culture has developed in other areas of the world, notably in the dynamic economies of Asia.
Previously, Asian companies tended to reinvest cash in projects they considered (rightly or wrongly) would yield a better return for shareholders than a straight-forward dividend. Yet today companies are realising there is considerable demand among investors for dividends, especially if they can increase over time.
Dividends represent commitment and discipline on the part of companies. They cannot be faked, so those companies that can reward shareholders with growing payouts earn their trust and their investment.
Newton Asian income run by Jason Pidcock was launched in November 2005 and presently yields about 5.1 per cent which against interest rates looks extremely attractive. The fund has a concentrated portfolio of about 40 to 50 stocks. Since its launch, it has performed exceptionally well, rising by over 120 per cent v 87 per cent for the sector.
Last year, the fund was assisted by having no holdings in India, a market that fared extremely badly. There are few high-yielding stocks in India, so you would expect this stance anyway. Pidcock has also added value in other areas. One of his holdings was taken over at a 40 per cent premium to its price at the time. Positions in Singaporean property and the telecoms sector also significantly outperformed the market.
High-yielding funds such as this tend to have defensive qualities that mean they outperform in falling markets but I believe Pidcock’s returns last year were truly exceptional. The other side of the coin is that the return of a major bull market would probably see the fund lag behind but, over the longer term, he has shown that a patient income investing strategy works well in the region.
Pidcock uses Newton’s trademark thematic process to identify themes set to drive long-term growth and companies set to benefit.
He clearly wants stocks that will generate an income but he will invest in companies with lower yields where he expects strong dividend growth. Current themes include global realignment, that is, a change in the balance of economic power from the West to emerging economies in the East.
Asian markets have started 2012 in a buoyant mood but Pidcock remains cautious. He cites risks such as political wrangling over Iran’s nuclear programme causing an oil price spike and a continuation of the eurozone debt crisis. He also worries about a slowdown in China’s economic growth. He thinks valuations are neither excessive nor cheap but a 5.1 per cent yield offers a fair degree of compensation. So for income-seekers looking to diversify away from the UK, I believe this fund is worthy of consideration.
Mark Dampier is head of research at Hargreaves Lansdown