The Philippines is set to be one of the fastest-growing economies over the next 20 years and Australia is often overlooked by investors, according to Jupiter’s Jason Pidcock. 
However, the manager (pictured) believes India – which is currently popular among investors – is not the best market area for those seeking income opportunities.
This comes shortly after Jupiter Asian Income’s one-year anniversary. Launched by Pidcock on 2 March last year, the £438m fund aims to provide long-term capital growth and a yield of 20 per cent more than its FTSE AW Asia Pacific ex-Japan benchmark through a concentrated portfolio of 40 to 50 stocks.
The manager says a focus on income is a sensible way to invest in the region, given the current macroeconomic backdrop.
“We think that demographics in the region mean more local investors will be income-hungry themselves,” he reasoned. “We have ageing populations in many of the economies, more people contributing to saving schemes and pension schemes, who in turn will look for income for their savers and will therefore be buying the types of companies that we are already invested in.
“The pay-out ratio in the region, or the proportion of net earnings that companies pay in dividends, has been very stable since the year 2001.
“Really the lesson was learned in the Asian crisis in the late 1990s and the pay-out ratio has picked up after that, meaning the choice of companies that we can invest in that show willingness and have the ability to pay dividends is growing the whole time.
“We also have a very diverse region to invest in. We have developed economies and developing economies. The developing economies are at different stages and there are lots of different sectors, so there are no sector or country restraints.”
When it comes to structuring the portfolio, Pidcock – former manager of the £4.6bn Newton Asian Income fund – will hold a combination of high-yielding and lower growth stocks relative to the benchmark, and firms that have low yields today but are expanding rapidly and expected to grow their dividends in due course.
Currently, a total of 32 stocks fall under the former category and six fall under the latter, which the manager says should offer investors protection in falling markets and steady long-term returns but may not shoot the lights out during bull markets.
As such, the fund has lagged behind its benchmark and sector average by a respective 9.39 and 4.71 percentage points since its launch with a total return of 33.57 per cent.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
However, it has done so with a lower downside risk ratio – which predicts susceptibility to lose money in falling markets – and a lower maximum drawdown – which measures the most money lost if bought and sold at the worst possible time frames – relative to its average peer.
Had investors placed £10,000 into the fund at launch, they would have so far received £386.27 in income alone.
“We accept that for some of [our higher-yielding stocks], growth rates will therefore be lower. If we can find a company that is growing 5 per cent per year with a 5 per cent yield, to us that is very attractive and warrants further investigation,” Pidcock explained.
“If we can deliver average compound total returns of high single digits or 10 per cent – this isn’t a guide or a guarantee – but if we can find companies that can do that, we think we can outperform most asset classes.
“Given the higher-than-average growth rates in the region and the quality of many of the companies, we think there will be a number of companies that will be able to achieve this.”
The manager adopts a combination of top-down and bottom-up research when it comes to choosing suitable stocks for the portfolio. Another reason the fund has fallen behind its benchmark in terms of growth is that Pidcock avoids most cyclical sectors.
For instance, he will not hold any cement companies, chemical companies, auto producers or steel producers. The fund also has a notable zero per cent weighting in energy stocks and has no direct exposure to rallying mining companies.
“That has been a relative drag on performance over the last few months, this has been a volatile sector,” he admitted. “It tends not to flat line; it’s either going up or down. Over the last 12 months it has done very well, partly because of the high growth rate in China, which has been largely due to a surge in credit.
“Despite companies reporting better profits recently, a number of the share prices have come back a bit. That indicates to us that over this 12-month period, we’ve probably seen the best of it for that sector.”
Performance of index over 1yr
Source: FE Analytics
However, this doesn’t mean the portfolio consists entirely of mega-cap stalwart stocks, although the manager has a preference for large, liquid stocks to minimise any potential capacity-related issues.
Some 20 per cent of the portfolio are lower-yielding but are either raising their pay-out ratios sustainably yet aggressively, or simply have faster earnings growth so pay-outs are increase more rapidly than other portfolio holdings.
Three of these companies – holding firm GT Capital, retail operator SM Prime and food & beverage supplier Universal Robina – are all top-down calls on the Philippines.
“We prefer to invest in private companies rather than state-owned enterprises and we like countries like the Philippines where debt levels are relatively low on a government, corporate and personal level,” Pidcock said.
“We take the view that the Philippines will be one of the fastest-growing economies in the world over the next 20 years, even if it simply plays catch-up to neighbouring countries. But we think it can go further than that.
“We have three companies that give us broad exposure to consumption. Because it’s an emerging market, it will probably be more volatile than some other markets we invest in, but we are willing to ride that volatility with a long-term view.”
Overall, though, the fund’s largest regional weighting is in Australia. It currently holds 15 Australian stocks including Sydney Airport, real estate investment trust Dexus Property Group and insurance firm Suncorp.
Pidcock says his Australian exposure, which is an overweight relative to the benchmark, is based on bottom-up fundamentals. A number of them are also tapping into the long-term theme of greater domestic consumption in the country.
“We think Australia is overlooked in this way by many investors and that many think of Australia simply as a commodity exporter and therefore a play on growth in other countries,” he continued.
“But Australia itself has been growing very rapidly, GDP growth last year was 2.4 per cent, one of the highest levels among developed markets around the world. This year, we actually think it’s likely to be higher than that. Demographics are positive, we have a growing population, low unemployment and the quality of companies is very, very good.”
In contrast, Pidcock believes India is less beneficial for income investors than many would believe, given it offers attractive valuations relative to other emerging markets and is in the process of undergoing a series of economic reforms.
Performance of index over 2yrs
Source: FE Analytics
“For an income-focused investor, India doesn’t look appealing,” he warned. “The 10-year bond yield in India today is 6.8 per cent and that compares with a 10-year bond yield in the Philippines of 4.4 per cent.
“The growth rate in India does look very good and many investors in India are focusing on growth, It’s just very hard to find many Indian stocks yielding above 1.5 per cent.”
Since Pidcock joined the team at Newton, he has returned an average of 318.81 per cent compared to his peer group composite’s return of 305.77 per cent. Jupiter Asian Income has a clean ongoing charges figure of 0.98 per cent and yields 3.7 per cent.