The Covid-19 pandemic has seen many companies slash or suspend their dividends, particularly in the UK, one of the most important global markets for dividends.
Given the strong payout culture and domestic bias of portfolios, it’s likely that many UK investors will suffer disproportionately as companies continue to cut and postpone dividends.
As such, Nick Wood, head of investment fund research at Quilter, said UK investors worried about a loss of income should look to alternatives and one region in particular: Asia. “Whilst the UK tends to provide a higher dividend yield than most markets globally, there is good reason to look East and to Asia for that income,” Wood said.
“During the global financial crisis, Asian companies protected dividends well relative to other regions. There were cuts, but this was helped by the fact that compared to the UK the payout ratio is lower to begin with.
“Furthermore, companies in Asia have very conservative balance sheets following the Asian financial crisis [in the late 1990s], with typically less gearing than in developed markets.”
Below are Wood’s three fund picks which he says could provide investors with a meaningful yield as well as providing an outperforming total return.
Prusik Asian Equity Income
First up is the $684.3m Prusik Asian Equity Income fund – an offshore fund, which has recently dropped its initial charge after several years and has a current yield of 5.8 per cent, according to Wood.
Managed by Tom Naughton since 2010, the fund invests in companies from across the Asia Pacific ex-Japan region with above-average dividend yields and which have the ability to grow dividends over time.
It aims to outperform the MSCI AC Asia Pacific Ex Japan Gross Return index (USD) by 5-10 per cent annually whilst also growing its dividend over time.
Naughton invests in key themes in the Pacific region that are “driven by factors outside of the normal economic cycle and are not yet discounted by the market”.
A particular emphasis is placed on identifying companies with exceptional franchises, annuity-like cash flows and pricing power which are trading at significant discounts to intrinsic value, according to Prusik.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
Prusik Asian Equity Income has made a loss of 16.77 per cent over the past three years, in total return terms, compared with a gain of 12.22 per cent for the MSCI AC Asia Pacific ex Japan benchmark and a 6.13 per cent return the average FO Equity – Asia Pacific ex Japan peer. It has an annual management charge of 1 per cent and has a performance charge equal to 10 per cent of the net outperformance of the MSCI Asia Pacific ex-Japan Gross Return USD index (in sterling terms), with a high-water mark.
Matthews Asia ex Japan Dividend
Next up is the five FE fundinfo Crown-rated Matthews Asia ex Japan Dividend fund, overseen by Alpha Manager Yu Zhang and deputy managers Robert Horrocks, Sherwood Zhang, and Joyce Li.
“This fund is somewhat of a hidden gem within a large and very reputable Asian investment house, currently at a size of just $70m but growing,” said Wood. “The manager focuses on companies both large and small that pay a higher and growing dividend, but also strikes a balance between stable yielders in developed Asia and companies with growing dividends in emerging Asia and the frontier markets.”
He added: “The fund tends to have a bias towards the long-term increase in consumption in Asia, and in uncertain times has performed very well in difficult markets.”
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Over the past three years, Matthews Asia ex Japan Dividend has made a total return of 37.62 per cent, outperforming the MSCI AC Asia ex Japan benchmark (12.78 per cent) and the IA Asia Pacific ex Japan sector (9.83 per cent). The fund has been a top-quartile performer over one and three years, having launched in 2015.
It has a yield of 2.42 per cent and an ongoing charges figure (OCF) of 1.25 per cent.
Baillie Gifford Japan Income Growth
Wood’s final pick is the four FE fundinfo Crown-rated Baillie Gifford Japan Income Growth fund – co-managed by Matthew Brett and Karen See – which focuses on a geography not traditionally associated with a strong dividend culture.
“Japanese companies are in the enviable position of often having too much cash on their balance sheets,” explained the Quilter fund picker. “This has been a source of concern for shareholders, who would rather it was put to good use, but in current market conditions this looks like a positive.
“Corporate governance reforms in recent years have led to increasing dividend payouts and this shows no sign of abating despite Covid-19.”
Wood said the fund combines investments in long-term growth companies – as to be expected from the growth-focused asset manager – and companies that provide an income above that of the broader Japanese market.
He added: “The fund is invested in areas such as e-commerce, new technology and robotics and automation, all themes we think will continue to be long-term outperformers.”
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
The £586.8m Baillie Gifford Japan Income Growth fund has made a total return of 19.80 per cent over the past three years, outperforming the IA Japan sector (12.21 per cent) and the TSE Topix index (9.88 per cent). It has an OCF of 0.62 per cent and a yield of 2.35 per cent.