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The future of the Newton Asian Income fund

01 July 2015

The management team behind the popular Newton Asian Income fund explains why its investment process will continue to be focused on finding the strongest companies in the rapidly growing region.

By Gary Jackson,

News Editor, FE Trustnet

 
Newton Asian Income is one of the most popular funds in its sector thanks to a solid long-term track record and the factors behind this are still in place despite the departure of lead manager Jason Pidcock, investors have been reassured.

Between launch in November 2005 and the end of June 2015 the £4.1bn fund posted a total return of 164.73 per cent, compared with a 151.39 per cent rise in its FTSE Asia Pacific ex Japan benchmark and a 135.84 per cent average gain in the IA Asia Pacific Excluding Japan sector average. Newton Asian Income is also a top quartile performer over the five years to 30 June 2015, delivering 54.91 per cent in the process. 

Performance of fund vs sector and index since launch

 

Source: FE Analytics, bid-to-bid performance with dividends reinvested between 30 June 2010 and 30 June 2015

Pidcock had been lead manager on the fund since launch, before being joined by Caroline Keen in 2009 and becoming alternate manager on the fund in 2011, but last month it was announced that he is set to depart the group to join Jupiter.

The fund will now move towards a team-based investment management approach, which is overseen by Rob Marshall-Lee, with Keen having an integral role in its running along with Zoe Kan. As part of this, Newton’s emerging and Asian equity teams will be combined.

Keen points out that the merged team will number seven investment professionals with support from 20 global sector analysts and four environmental, social and governance analysts. She believes this will be of significant benefit to the fund.

“We have strength and depth created by the joining of the emerging markets and Asia teams, with very strong leadership under Rob Marshall-Lee, who has been at Newton for 16 years,” she explained.

“We’ve also got Sophia Whitbread, who’s been at Newton for nine years and Zoe Kan, who has been here for 14 years. Plus Naomi Waistell, Douglas Reed and Amy Leung. There’s plenty of different ideas, plenty of different characters and plenty of debate to be had. We’re very confident that the team, especially with Zoe and myself and a strong flow of ideas coming from the analysts, can very easily run this process.”

The process that has led to the fund’s long-term outperformance will remain in place, the manager notes. Newton Asian Income invests in businesses that demonstrate strong compounding growth with a steady growing earnings stream to make up a portfolio which yields at least 35% more than the index.

“We’re looking for companies that can produce some earnings growth, and that pay out a steady dividend1 from that growing earnings stream, in a sustainable way. The high cash flow generating nature is very analogous to the kinds of businesses that Rob is already looking for in the emerging markets area so it fits very well, though in the EM case, the cash will usually be reinvested rather than paid out to shareholders” Keen said.


 

“We’re looking for companies that we can buy and hold for as long as they meet the yield criteria, we see investment drivers intact and we believe in the management. We don’t expect the very low rate of companies leaving or entering the portfolio to change.”

“Telecommunications companies, for example, provide a good source of income and it’s very unlikely that we’re suddenly not going to have any in the portfolio but the actual companies in there may change as the company valuations move or new opportunities arise.”

A look at Newton Asian Income’s holdings shows that a long-term approach is built into portfolio construction. Keen notes that over 10 of the fund’s holdings were found in the portfolio on its first day; one of these is Taiwan Semiconductor Manufacturing Company, which is the largest current holding and is typical of the kind of stocks the managers will continue to look for.

“It’s got a very strong, innovative management team and has always been at the forefront of its industry. It has already benefitted massively from the rise in smartphone ownership and remains very well positioned in this regard," Keen said.

“The company thinks it can achieve mid-teens earnings growth for the next couple of years. It’s priced on a very reasonable company valuation we think for the consistency of its growth, it is a market leader with more than 50 per cent market share and there is a high start-up cost which can deter new competitors entering the market.”

A key feature of the fund is its strong performance when markets are falling, which helps to protect investor capital and is seen as an attractive attribute for an income fund. This means the fund tends to underperform in rapidly rising markets, but this has not stopped it from building a strong long-term track record.

Newton Asian Income is currently in the Asia Pacific ex Japan sector’s fourth quartile over one year. An underweight in China – which has surged on the back of looser monetary policy and moves to open up investment markets – has held back relative performance.

However, Keen stresses that the portfolio will not be shifted to chase short-term gains at the expense of its long-term approach.

“Over the past year, we have held less Chinese companies than the benchmark2 which has been the main cause of our underperformance, as has the fact we haven’t held as many companies as the benchmark in the financial sector. Do we think Chinese financial companies are fundamentally good companies and a place you want to invest? We don’t and we think the higher their company valuations go up, the further they can come down,” she said.

“So we’re not overly concerned and we’re not going to chase the momentum. Chinese banks are now 50 to 60 per cent more expensive than when we didn’t like them before, so we certainly aren’t going to buy them now. This is about sticking to the philosophy and the process, as well as having strong views on what you’re investing in and why you like it.”

One headwind that is often seen as looming over high yielding Asian equities is the prospect of the Federal Reserve lifting interest rates from their historic lows, as the asset class was hit hard in the ‘taper tantrum’ when the Fed suggested scaling back quantitative easing in 2013.

However, Keen expects Asian stocks to hold up better than many expect when rates do rise and does not think this will create too many difficulties for the future of Newton Asian Income’s investment opportunities.

“I think things will be OK for Asia this time around. We seem to be having a disconnect between what’s happening in the US and what’s happening in Asia. Asia is on an interest rate cutting cycle: China has cut rates three times since November last year, India has cut rates three times this year. Indonesia, Korea, Thailand and Australia have also all cut rates,” she said.


“There seems to be a separation, which is interesting because Asia countries in the past have been forced to go with the US Federal Reserve because of currency depreciation. But this time, things are looking a lot healthier.”

Keen believes that all of the above – the healthy dividend-paying companies, a potential to withstand down markets and robust economies – mean the Asian income story is one that more UK investors will be considering for their portfolios. 

She said: “it makes sense to be geographically diversified. Asia is a very good source of dividends, it’s growing and roughly a third of the MSCI World Index3 of company shares yielding more than 3 per cent are based in the Asia pacific region4. You get more growth from Asia than you do from other developed markets, so it’s a balance between steady growth, strong compounders5 and income.”

 

[1] A sum paid somewhat regularly by a company to its investors as a reward for holding their shares

[2] In this case, the benchmark is the FTSE AW Asia Pacific ex Japan TR Index. An index is a measure of company shares which represent a portion of the market.

[3] An index is a measure of company shares which represent a portion of the market. In this case, the MSCI World is an index of 1,612 'world' companies.

[4] Source: FACTSET, Datastream, 31 December 2012

[5] Reinvesting interest payments from an investment in order to add to total amount invested and in turn increase the amount of interest paid.

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