Asia ex-Japan has been one of the most consistent equity sectors in the market, with the same groups dominating inflows and performance tables for several years.
A look at current returns tells a similar story, although with sector leaders Aberdeen and First State both taking steps to limit inflows, investors are taking a look at other names.
Over three years to mid-February, these two group have five of the top 12 funds between them, but Schroders has a further three and Newton Asian Income also boasts a strong track record.
Looking at a shorter timescale, over the last 12 months the usual names appear but an income bias is even more prevalent, with five of the top 10 performers focusing on yield.
Newton Asian Income remains one of the sector’s most consistent performers and manager Jason Pidcock highlights the region’s strong total return picture, with dividends making up a key part of that.
Like many of his peers, Pidcock notes healthy corporate balance sheets across Asia – with much lower borrowing than Western counterparts – encouraging companies to distribute surplus cash to shareholders.
According to the manager, several of Newton’s global themes support investment in Asia, primarily ongoing rural to urban migration and the domestic demand this unleashes.
As with the group’s other income offerings, the Asian portfolio has a strict yield discipline but Pidcock said this still allows plenty of flexibility to access themes.
He says: “Population dynamics is one theme we cover and with this in mind, we have a good understanding of the demographic makeup of each of the countries we invest in.
“Many people view Asia as one block where demographics are the same but actually they are very different. China for example has been in a sweet spot for the last two decades but we feel we are close to an inflection point and over the next few years, demographics will start to become a drag on growth rather than a benefit.”
Pidcock draws a contrast with a country like South Korea, which has a rapidly ageing population, very little immigration and low birth rate, and therefore looking for domestic consumption stocks is more challenging.
“With a theme like population dynamics, we take a view on whether we should invest in the consumption or savings sector to play demographic trends.
“With Australia, for example, we chose the savings sector as there are more people ageing and thinking about their retirement and have invested in two wealth managers to play this theme.”
Legal & General’s Asia Income portfolio is also among the best funds over 12 months, with manager Paul Hilsley (pictured) noting a strong period for high-quality and high dividend-yielding companies.
Hilsley says: “Against the backdrop of extremely low interest rates, investors searched for high and resilient yields, leading to alternative sources of income such as Asian equities.”
Financials have been a key part of his portfolio, with these companies in demand as their balance sheet strength, high dividends, exposure to growth economies in falling interest rate environments and cheap valuations became appreciated.
Hilsley says: “Another area of strength was telcos, which, in general, benefited from increasing data usage but, specifically in Thailand from progress towards the eventual issuance of third generation licences.”
Schroder Asian Income is another fund among the top performers alongside the group’s Asian Alpha offering and it has also focused its recent activity in financials and telecom names.
Manager Richard Sennitt has built up his position in financials in recent months on the back of positive earnings outlooks and increased likelihood of dividend growth, also locking in profits for certain names in telecommunication services.
In the former, he has added to positions gaining from global easing and the rebounding Chinese economy, highlighting Bank of China (HK), the Hong Kong-based subsidiary of Bank of China.
He says: “Earnings and dividends look well supported by an improving net interest margin, stable asset quality and robust non-interest income growth.”
Overall, Sennitt’s focus remains on buying into strong, quality names with consistent payouts as well as certain blue-chip, high-yielding companies in developed Asia.
Sennitt says: “We continue to seek out quality companies that offer exposure to Asia’s domestic consumer-spending story as well as a reliable and growing yield support. “These are also primarily positioned to benefit from structural changes ongoing throughout Asia and we maintain our belief that a focus on dividends remains one of the strongest equity strategies over the long-term.”
On the macro side, Sennitt said the group continues to have concerns about the balance sheets of Chinese banks and is therefore underweight the country as a whole.
He says: “The rest of Asia continues to perform solidly amid the uncertain global outlook. Corporate earnings are robust, private and public debt levels are low and favourable demographics all mean growth looks likely to be sustained through a mixture of investment and consumer spending.
“Dividends will likely remain supportive at current valuations and could increase for companies with bright earnings outlooks. Despite China posing potential pitfalls at the company level, we see plenty of opportunities throughout the rest of Asia, with ASEAN and Hong Kong stocks continuing to enjoy relatively stable demand and margins while maintaining a policy of sustainable, and sometimes growing, payouts.”
Rounding out the swathe of top-performing yield focused names is Henderson Asian Dividend Income, yet again boosted by strong returns from high-yielding sectors such as telecommunications.
Manager Michael Kerley also noted positions in energy and materials and his zero weighting in the underperforming Indian market.
Kerley says: “We remain positive on Asia in the medium to long term owing to the strong economic fundamentals and compelling valuations.
“In the short term, however, we expect markets will be dictated by the political and economic turmoil in Europe and the strength of the recovery in the US and China. We continue to reduce exposure to high-yield stocks where valuations have become quite stretched and focus on dividend growth companies with more valuation upside.”
Turning to more growth-focused portfolios, First State Asia Pacific Sustainability is among the best performers over both time periods.
Co-manager David Gait said the focus remains on well-run cash-generative companies that meet sustainability criteria.
He says: “The fund has significant holdings in companies with exposure to clean energy and energy efficiency, where we see very strong growth prospects.”
Significant new positions last year include Taiwanese company Giant Manufacturing, a global leader in bicycles positioned to benefit from a growing consumer focus on healthy lifestyles.