Schroder Asian Income: Attractively Valued

by The U.K. Income Investor

What a year. In spite of everything, the S&P 500 remains up around 7.5% in 2020 (excluding dividends). Imagine making that prediction back in mid-to-late March. Even after this incredible rally, I’m not sure the market is all together that expensive. I know that may sound strange, but forward earnings estimates for 2022 were at circa $190 for the S&P 500 last time I checked; call that equivalent to a forward price-to-earnings ratio of around 18.5. Is that really so expensive when corporate bond yields trade around the 3.4% mark? I’m not so sure.

That brings me to Asian equities. If you can make a decent case for the S&P 500 right now, then Asian and emerging markets look even better in my view. Check out something like the iShares China Large Cap UCITS ETF as just one example. This exchange traded fund basically tracks fifty of the largest Chinese stocks that trade on the Hong Kong Stock Exchange. Now, it is well known that China has been responsible for a big chunk of global growth in recent times. The country’s GDP has grown at a 6.5% per annum average clip over the past five years or so. Despite that, the ETF’s current underlying P/E ratio clocks in at just 11.8x annual profit according to iShares, which makes for an earnings yield approaching 8.5%. I’d wager the fund will have a very good decade ahead of it in terms of total return.

More conservative-minded investors might prefer something like Schroder Asian Income. It comes with a more diversified geographic spread across developed Asian, and is underweight China. The fund holds around 65 names in total, with Hong Kong, Taiwan, South Korea, Singapore and Australia accounting for over 70% of the portfolio at last valuation. Major holdings here include the likes of Samsung Electronics, China Mobile and Taiwan Semiconductor Manufacturing; stodgy blue chip stocks that do much of their business in Asia and Australasia. British income investors will also recognise the presence of BHP Group and Rio Tinto. The combined value of the fund’s holdings of the two mining giants came in at over £70M at the end of 1H20.

Schroder Asian Income

I singled this one out for a few reasons. Firstly, it must be among the larger funds in its sector; net assets stand at around £1.2B according to a quick look on Hargreaves Lansdown. Among the specifically income-focused Asian funds, Schroder Asian Income is the largest of the lot.

Secondly, the focus on income gives the underlying portfolio a value tilt, which is a plus point in my book. The fund has returned 68% over the past five years, which is less than the 88% posted by the MSCI AC Asia Pacific ex Japan Index benchmark. That doesn’t bother me too much. A chunk of that underperformance is probably due to the exclusion of low-yielding Chinese giants like Alibaba and Tencent. Growth names won’t always outperform value, even if it seems that way right now. A large-cap dividend fund is also a good fit for the site in general; the units sport a 3.9% TTM dividend yield as things currently stand.

The final reason is probably the most important: the current valuation looks pretty modest. Morningstar has the portfolio’s blended price-to-earnings ratio at 13.6x, with that accurate as of the end of 3Q20. Schroder has the figure at 14.9x. Let’s split the difference (probably due to timing differences and methodology of earnings calculations) and call it a 7% earnings yield. That looks quite attractive given the current economic environment we find ourselves in. Income seekers can also bank a circa 4% cash dividend too. Asian blue chips have held up quite well so far on the dividend front, as evidenced by the fund’s interim distribution, unlike stalwarts in the UK. The fund distributes semi-annually, typically in September and March.

In any case, things looks pretty well positioned here in terms of the long-term outlook. The fund has delivered average annual returns of around 8.5% over the past ten years if my numbers are right, and I don’t see why it can’t at least match that in the next decade. A 4% base dividend yield means that mid-single-digit corporate earnings growth on top should get us us there after fees (0.84% per annum). Given Asia is usually associated with higher growth prospects, this does not seem a particularly aggressive long-term target. On that basis, I’d say Schroder Asian Income is attractively valued for anybody looking for a more conservative way to own Asian equities.


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