Slowing GDP growth, QE tapering and political/social unrest have caused emerging market share prices to plummet in recent times. The MSCI Emerging Markets index is down 15.46 per cent over a one-year period, which compares with a gain of 5.88 per cent from the MSCI AC World index.
Performance of indices over 1yr
Source: FE Analytics
A number of value-conscious fund managers have been buying into the asset class – which is cheap on a historical basis across all valuation metrics – for a number of months, but have failed to be rewarded as of yet.
Dampier (pictured) accepts that momentum against emerging markets continues to be negative, but says investors looking to use up their ISA allowance before the 6 April deadline could hedge their bets with an income-focused portfolio.
“We had Jason Pidcock in recently and following a period of around nine months of underperformance, he was bullish on his fund for the first time in a long while,” he said. “The way I see it, he might be wrong, but this is a fund that’s yielding nearly 5 per cent. If you’re looking to use up your tax allowance, you’ve got a very cheap area and essentially you’re being paid while you wait through dividends.”
“I’ve already got some in my ISA, and after seeing him I’m thinking about putting some more in.”
Investors can of course take the dividends paid out by Newton Asian Income every quarter, but the “being paid while you wait” factor helps to dampen volatility if you’re reinvesting.
As well as being one of the best performing funds in the IMA Asia Pacific ex Japan sector since launch, Newton Asian Income has also been one of the least volatile, with a max drawdown far lower than its peer group and FTSE All World Asia Pacific ex Japan benchmark.
Performance of fund, sector and index since Nov 2005
Source: FE Analytics
“The fund’s isn’t far behind [Angus Tulloch’s First State Asia Pacific Leaders] fund, which isn’t bad,” added Dampier.
Like Tulloch, Pidcock has a strong bias towards quality companies with strong balance sheets and predictable earnings, which tend to perform better in falling market. This has also helped dampen the fund’s volatility.
As well as being a top performer since launch, Newton Asian Income is a top-quartile performer in its IMA Asia Pacific ex Japan sector over three- and five-year periods. However, as Dampier mentions, it has fallen behind its sector and benchmark over one year, with losses of more than 10 per cent. An overweight to New Zealand has contributed to the mediocre performance.
Although the fund invests predominantly in emerging markets, it can also hold companies in Australasia, which currently have a 36 per cent weighting in the portfolio.
Rob Gleeson’s FE Research team rates the fund highly, including it in the coveted FE Select 100 shortlist.
The team likes Pidcock’s style, pointing out that it has protected against the downside very effectively since launch – with the exception of the last nine months or so.
“Thanks to a cautious approach, the fund has avoided many of the major price fluctuations that have been a common feature of its counterparts in the Asia Pacific region,” the team said.
“Since 2008 when the fund’s positioning became more defensive, its price has increased and become more stable, proving the stock-selection process employed by the manager has added value.”
“Historically the fund has lagged behind its peers in rising markets, but its income stream has supported shareholder returns in falling ones.”
Aside from the manager’s Australasian exposure and a 4 per cent weighting to the UK, Pidcock is entirely invested in the Pacific Basin. Although direct Chinese equities only account for 6 per cent of assets, he has a high degree of exposure to the region via Hong Kong, Singapore and Taiwan, which have a combined weighting of more than 35 per cent.
Telecoms are his biggest sector allocation at just over 18 per cent, followed by financials and consumer services. Sands China, a casino company operating in Macau, is his largest holding at 3.52 per cent.
FE data shows the fund is currently yielding 4.85 per cent. Among the other funds in the sector yielding more than 4 per cent include Schroder Asian Income, L&G Asian Income and Henderson Asian Dividend Income.
Paul Warner, AFI panellist and investment director at Minerva Fund Managers, agrees that Asian income funds are an interesting area for investors, though he highlights a different fund to Dampier's choice.
“For investors with a five-year horizon, I would have to say Asia is a standout area,” he said. “Those that also provide an income are particularly attractive.”
“In that area, I like Schroder Asian Income.”
The £396m fund, which Warner invests in himself, is another five crown-rated fund operating in the IMA Asia Pacific ex Japan sector.
It is yielding marginally less than Newton Asian Income, at 4.31 per cent, and has underperformed it from a total return point of view over three- and five-year periods. It is a top quartile performer over these periods though, and manager Richard Sennitt has coped with the sell-off over the past year better than Pidcock.
Both the Schroders and Newton funds have ongoing charges of around 1.65 per cent.