Asian markets have been under serious selling pressure since an end to Fed QE was announced last year, and Asian income funds have suffered. Mustoe says that this has opened up a value opportunity for global equity income investors like him and his team, and they will be increasing their weighting to the region in the coming months.
“Asia is becoming the valuation opportunity long-term,” he said. “A number of companies will fail our screens on corporate governance or balance sheets, but this is building up to be the opportunity like Europe was two years ago. Asia is becoming the new long-term opportunity.”
Data from FE Analytics shows that the MSCI Asia Pacific ex Japan index has suffered a sustained period of underperformance relative to the MSCI World over the past three years, resulting in low valuations relative to other markets.
Relative performance of indices over 7yrs
Source: FE Analytics
Mustoe notes that the current price to earnings [P/E] multiple on the Asia Pacific ex Japan market is 13.5 times, significantly lower than the 17.7 times on the global market and the ratings of the major developed markets.
The five FE-crowned, £627m Invesco Perpetual Global Equity Income fund is increasingly looking for positions in this market as a result, Mustoe says.
“It’s never going to be a big part of the fund but we are looking at adding a few names to the portfolio,” he said.
Asian stocks make up 5 per cent of the fund, and Mustoe says that he could see that rising by a further 3 to 4 per cent.
Asia Pacific emerging and Australasian equities make up 11.06 per cent of the MSCI AC World index.
The manager says that the increased weighting will be made very cautiously given the prospects for further falls in the Asia Pacific markets.
Data from FE Analytics shows that most Asian income funds have substantially underperformed their index over the past year as hot money flowed out of the region – income-paying stocks had been heavily bought and so had the farthest to fall.
The fund is team-managed by a suite of Invesco’s highly-regarded equity income managers who collaborate in sharing their ideas under Mustoe’s direction.
Management includes input from the UK team headed by Mark Barnett and the European team of Stephanie Butcher.
It was a big call on Europe that led the fund to shoot to the top of the performance tables last year, and Mustoe will be hoping that the call on Asia will be similarly justified.
Mustoe says that the team benefitted from taking a positive view on the European market at a time when the consensus was more negative.
“We benefitted from our European holdings in particular last year,” he said. “We added to these positions last year because we could see considerable undervaluation in Europe and things were getting better for companies.”
The weighting to Europe on the fund rise from 24.91 per cent to 35.51 per cent during the course of last year and has nudged up to 37.78 per cent. The average weighting to Europe in the sector is just 23 per cent.
The fund made 26.38 per cent as the IMA Global Equity Income sector made 20.4 per cent. This made it the third-best performing fund in the sector.
Since launch it has made 123.51per cent, the second best result in a sector that has averaged 108.4 per cent.
Performance of fund vs sector and index since launch
Source: FE Analytics
The produced the best returns in the sector in 2010 and 2011, and performed marginally worse than the sector in 2012.
It is managed with a team approach, with Mustoe making the asset allocation decisions and picking stocks with the input of the specialist managers on Invesco’s books.
That means FE Alpha Manager Mark Barnett for the UK, Stephanie Butcher for Europe, Tony Roberts for Japan, Tim Dickson for Asia and Simon Clinch for the US.
Mustoe explains that he looks to balance yield and dividend growth, and the payout on the fund has slipped to 2.45 per cent.
The growth rate on those dividends is signigicantly higher than that on the world market, Musto explains.
It currently contains 52 stocks, and aims to hold between 50 and 60 at any one time, making it reasonably concentrated.
The fund was flagged by Equilibrium’s Mike Deverell as a core global equity income fund in an article on FE Trustnet this February.
Mustoe manages a number of onshore and offshore portfolios for Invesco including the Invesco Perpetual Managed Income and Invesco Perpetual Managed Growth funds.
Performance of manager vs peers over 3yrs
Source: FE Analytics
Data from FE Analytics shows he has substantially outperformed his peer group composite over the past three years.
