However, many of these funds are focused on large caps and tend to hold the same blue chip names. For this reason, many experts advise investors against holding two core UK Equity Income funds such as Invesco Perpetual Income and Artemis Income. This has resulted in the rise of a number of small and mid cap focused funds such as Unicorn UK Income and Marlborough UK Multi Cap Income, which represent an ideal way for investors to diversify their income stream.
A similar trend is beginning to surface in Asia, where many income funds are dominated by exposure to giant large cap firms and steady dividend-paying companies. The £4bn Newton Asian Income fund has been the biggest success story in this area, topping the tables for both performance and inflows in recent years.
However, the tiny £17m Liontrust Asia Income fund, run by Mark Williams, can offer true diversification in the Asian income space because it focuses further down the market cap spectrum.
This means that it gets its yield from very different companies than the large cap focused Newton Asian Income fund, thus offering investors a way to diversify their income stream.
The fund has managed to outperform both the IMA Asia Pacific ex Japan sector and MSCI Asia Pacific ex Japan index since launch in March this year, picking up 12.72 per cent.
Performance of fund vs sector and index since launch
Source: FE Analytics
Newton Asian Income’s superior protection against the downside, in part thanks to its larger cap focus, has seen it outperform slightly over the period.
With a yield of 4.26 per cent, it is one of the highest-yielding funds in the IMA Asia Pacific ex Japan sector, though Newton Asian Income has a slightly higher yield, at 4.8 per cent.
Williams explains that one thing that sets the fund apart from its peers is its greater focus on growth.
"Why invest in a growth part of the world like Asia just for income? You can get more than the market total return just by investing in both growth and income. We are more biased towards growth than the index and different to where our competitors are."
Williams says the strategy works to pick up gains when the market is rising, but the income also protects when, as has been the case in recent months, markets have fallen.
The manager says his value-based management style tends to drive him towards mid caps, which he says are better value in the current market.
"Mid caps are more appropriate now," he said. "If we wanted to be defensive, we would be in large caps. If we thought the world was going to fall apart, we wouldn’t have anything in mid caps [in Asia]."
However, Williams is encouraged by the positive signs of growth coming from the US, Europe and UK, which he says will bolster returns in Asia.
Another thing that makes the fund different from many others that are invested in the Asia Pacific region is its relative underweight to Australia. FE Trustnet previously pointed out the country makes up massive chunks of many of the leading Asia Pacific funds, including Newton Asian Income.
"I don’t see the same sort of earnings growth in Australia as we do in the rest of Asia," he said.
Williams says the country is facing domestic, debt-led headwinds and warns it is vulnerable to deleveraging. This, coupled with increasing international competition and falling interest rates, makes Australia less attractive on a six- to 12-month view, he says.
That said, the manager does have 12 per cent of the portfolio in Australia, which he says is used as a more defensive position, while the majority of total return and income growth comes from other areas in Asia.
"We’re also targeting growth so we’re avoiding Australia even though it is a higher yielding market," he said.
Co-manager Carolyn Chan added that the current high yields from companies in Australia mean they are less likely to increase in the future, something that could be detrimental to investors who rely on the fund for income.
"Australia is the highest-yielding market but it has the lowest potential for growth within those yields because it is representing larger, more established companies," she said.
The team looks throughout the region for companies with income payouts that are backed by strong free cash-flows and earnings growth, which could mean higher dividends in the future. Williams says he prefers stocks with low payout ratios now that will hopefully increase in the future.
The highest sector weighting in the fund is to financials, with 24.48 per cent of the portfolio in financial stocks. Among the top holdings in the portfolio are the Bank of China and Sunlight Real Estate Investment Trust (REIT), which Williams says is classed as a financial holding.
However, the manager says he plans to reduce his exposure to REITs and has already sold a position in the Cambridge REIT structure.
Williams stresses that he tends to hold very little cash in the portfolio because he believes he should be fully invested to provide the steady and growing yield that income investors are looking for. The fund currently has just under 5 per cent in cash and cash-related assets.
The fund requires a minimum investment of £1,000 and has ongoing charges of 2 per cent.
