Commodities risk threatens Asian income funds
The strong dividend culture in Australia makes it popular with Asian income funds, but the country’s dependence on demand for natural resources means this may soon lead to problems.
The average Asian income fund has a quarter of its assets invested in Australasia, according to FE Trustnet
research, suggesting a weakness in the commodity-rich economy could have a serious effect on portfolios.
The strong dividend culture in Australia makes it attractive for income-seeking funds, and explains their overweight positions, but means that any slowdown in the country could affect yields as well as capital growth.
The health of the Australian economy relies on strong demand from China, making the former reliant on the latter.
FE Alpha Manager James Harries
, manager of the Newton Global Higher Income
fund, said: "In the short- to medium-term we have big worries about China; it hasn’t had a downward cycle for about 10 years, the market has had 10 years of build-up, but it’s now due a tougher time."
The manager thinks that this could be positive for gold but negative for commodities and could weaken currencies in Brazil, Australia and Canada – all resource-driven economies.
Mark Dampier, head of research at Hargreaves Lansdown, points out that a weakening of the Australian dollar could be positive for the Australian economy, and he says it is difficult to know what to believe about the future of commodities.
"People have made up their minds and either have an entrenched point of view or admit they simply don’t know. You could still have a super-cycle in an up phase with quite big setbacks," he commented.
"I remember the 1987 crash for example, which seemed huge at the time but now looking back just seems like a blip."
Gervais Williams, who heads up the Acuim UK Multi Cap Income
fund, said: "I think we have had a credit boom for 25 years and a commodities boom off the back of it."
"It is not clear whether we are seeing everything wind down or there is still further to run. Central banks are trying to keep everything going with quantitative easing but who knows how long they can do this for?"
Dampier says this is definitely an issue investors should be thinking about, although he still holds Newton Asian Income.
"I asked Jason Pidcock exactly this question about Australia – he has a large amount in the country – but he is completely unfazed by the commodities risk."
Pidcock manages the £2.35bn Newton Asian Income
fund, a top-quartile performer in the IMA Asia Pacific ex Japan sector over one, three and five years; data from FE Analytics
shows that he has 26.2 per cent of his fund in Australia.
Exposure of funds to Australasia
Source: FE Analytics
Flavia Cheong, investment director on the five crown-rated Aberdeen Asian Income
trust, says that while the yield on her portfolio is 4.6 per cent, on its Australian component it is 6 per cent, underlining the importance she places on the country.
She says that the risk can be counteracted by picking the right stocks and that a US slowdown would have more of an effect on her fund.
Dampier said: "Whether there’s a risk really depends on what companies you buy, the economy might suffer a downturn but some companies will continue to do well."
"In the past Australia crimped your portfolio, but these days its economy is in much stronger shape than the UK’s."