Yoojeong Oh, Investment Manager, abrdn Asian Income Fund Limited
- Dividend investing has a different purpose in a portfolio at a time of higher bond yields.
- Equity income portfolios now need to deliver income growth, diversification, and the potential for capital gains.
- Investing in Asia brings a different flavour of income to a portfolio.
For more than a decade, income investors have had only a handful of options. However, bond markets have returned to normal, and investors can now generate 5% or more in income by simply buying a gilt. This environment gives equity income a different role in a portfolio. Rather than just providing a high yield, an equity income portfolio now also needs to deliver income growth, diversification, and the potential for capital gains.
Asia is often thought of as a growth market, but it can play an important role for income investors in this new landscape. Asian dividend-paying companies tend to be quite different from those found elsewhere, which helps diversify a broader equity income portfolio and bring in new sources of growth. In our view, this is particularly important today, when income investors have a broader choice.
What does this look like in practice? In the Abrdn Asian Income Fund (AAIF), there will be some familiar sectors, including financial and real estate holdings, but other areas such as energy or healthcare that might make up a significant proportion of a UK, US, or European income fund, are only lightly represented.
Equally, we will include sectors that don’t tend to be found in a conventional equity income fund, such as technology. We hold technology giants such as TSMC and Samsung, for example, but also several companies in the supply chain for these two behemoths. This includes a company that makes fans for the giant servers necessary to power Artificial Intelligence (AI). For many of these companies AI is creating new opportunities, and a powerful source of potential growth. These types of company in the UK, Europe or the US often won’t pay a dividend, but Asia is a different market.
AI is only one of several compelling growth themes available in Asia. In the AAIF portfolio, we also have a focus on areas such as consumer aspiration – those companies benefiting from Asia’s growing middle classes and increasing wealth across the region. Hong Kong-listed insurance company AIA for example, sells protection and savings products to a growing base of consumers in Asia who have wealth to invest.
Green energy is another important theme across the region. Power Grid of India, for example, has agreed to spend 20% of its capex on renewable energy and has already built solar farms in Rajasthan. It also generates a strong income from its existing assets, which powers its dividends. Another holding, LG Chem, is one of the top three manufacturers of electric vehicle batteries.
The result is an income portfolio that provides access to a range of growth themes. At a time when investors can get a high income from bonds, they don’t need ‘bond-like’ characteristics (reliable dividends, but no growth) from their equity allocation. This is why an Asian income fund can fulfil an important role in a portfolio.
Chinese weakness but economic strength elsewhere
For the most part, Asia is also in good shape economically. The region’s governments were less profligate during the pandemic and have less debt, giving them more flexibility on their monetary and fiscal policies. It is a similar picture for the corporate sector. Company balance sheets across Asia are much less strained than those in the West. Balance sheet strength is vitally important for dividend investors: we want to ensure that companies can continue paying and growing their payouts to shareholders. It gives companies options. They can pay down debt, raise prices in inflationary times, decide to invest in growth or raise their distributions.
Nevertheless, there is one elephant in the room: China. The Chinese market is dominated by the large internet companies that don’t pay dividends, so income strategies (including ours) tend to have a natural underweight position. However, we cannot escape the consequences of Chinese recent weakness entirely.
There is still a significant adjustment happening in the property sector, as developers are called on to curb their excesses. Where we do invest in China, we are careful to avoid any sign of fragility. We don’t invest in speculative developers or those with significant debt. This is where the greatest pressure has been felt. That said, poor sentiment can generate opportunities. We own China Resources Land, which has a balanced rental portfolio and high yield, but is trading below its long-term value.
It is also worth noting that some parts of Asia may be beneficiaries of China weakness. Companies are diversifying their supply chains away from China, with countries such as Vietnam and Malaysia picking up new business. The trust owns a Hong Kong based shipping company called SITC International, which has been a significant beneficiary of the new trading routes emerging under the ‘China plus one’ strategy. India is also becoming more interesting, with the government encouraging companies to set up new manufacturing plants through tax breaks and reduced bureaucracy.
Asia brings a different flavour of income to a portfolio. For investors in Asian equity income, there is no stark choice between income and growth. Instead, it is possible to generate a growing dividend stream from companies that also have a strong pipeline of growth. We believe this is particularly important at a time when investors have a far wider choice of income options.
Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.
Risk factors you should consider prior to investing:
- The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
- The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
- The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
- The Company may charge expenses to capital which may erode the capital value of the investment.
- Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
- There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
- As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
- The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
- Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
- Derivatives may be used, subject to restrictions set out for the Company, to manage risk and generate income. The market in derivatives can be volatile and there is a higher-than-average risk of loss.
Other important information:
Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London, EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.