Schroder Asian Income first appeared on the site last October. At the time, I flagged the fund as a possible conservative way to own Asian equities. The income focus gives it a value tilt, while the region’s growth prospects appear quite bright. Corporate debt levels also appear relatively low out there. Granted, COVID clearly represented a near-term headwind, though Asia appears to have managed the pandemic well. GDP across China, South Korea, Singapore and Hong Kong has certainly held up relatively well compared to the UK, especially in China.
On that basis, a blended price-earnings ratio (“PE”) ratio of circa 15 seemed appealing. Note too that the fund sports a less direct exposure to Chinese-listed stocks than its benchmark, the MSCI AC Asia Pacific ex Japan (NR). Instead, equities listed in countries like Singapore make up a bigger slice of its assets, though China obviously still plays a huge indirect part for obvious reasons. The portfolio holds around 65 stocks in total, of which the top ten account for just under 40% of assets. Assets stand at around £1.35b in total.
The fund also offered up a 4% dividend yield at the time, which again looked attractive given the region’s dividends held up better than in the UK. The units have also done well in the intervening period – not a surprise given the broader rally, but still. Total return stands at circa 18% since that post was published, several points ahead of the benchmark.
Prior to COVID, Asia Pacific ex-Japan was responsible for around £87b in annual dividends according to analysis of the world’s top 1,200 firms by asset manager Janus Henderson. That represented a nearly threefold increase on its level in 2010. Profit over the same period increased by circa 55%, or roughly 5% per annum on average. Note that these figures are all in GBP terms, and that both come out ahead of the UK and Europe. Those reading closely will no doubt note the mismatch between dividend and profit growth. The latter coming in slower than the former saw the payout ratio inch up to the 50% mark pre-COVID, which is still reasonable.
Note also the mismatch between other areas of the world and North America. There, profit appears to have essentially doubled between 2010 and 2019, equal to an annual rate of circa 8.6%. Dividend payouts increased at the even higher rate of 12.6% per annum. That performance clearly looks a lot better than Asia, but bear in mind a few points. Firstly, the 2017 Tax Cuts and Jobs Act probably explains a chunk of it. That included a massive corporate tax cut, with obvious knock on effects in terms of corporate profit.
Secondly, figures are in GBP terms and fluctuations versus the dollar no doubt had an impact. Dividend cover declined too, falling from circa 3.2 to 2.3, which helped boost dividend growth. I would add that the recovery from last financial crisis played its part as well. Profits recovered faster than dividends, explaining the high starting dividend cover figure. That, in turn, partly explains why payouts grew faster in the following years.
The recent rally bumps the PE ratio here up to 16 as per Schroders, so still reasonably attractive. The underlying dividend yield stands at circa 3.4% according to the same source.
Longer-term, Asia likely still retains very good growth prospects, relatively speaking. The area accounted for just 10% of global GDP at the turn of the century according to Janus Henderson, with that rising to 27% by the end of 2018. Quick maths implies annual GDP growth of 11% which looks pretty high, but numbers from China and India back it up. The former’s GDP grew from $1.2t to $13.9t in that period, while India saw GDP rise from $470b to $2.7t on the same basis.
Of course, Schroder Asian Income tends to hold stodgier names. It is more conservative and carries more exposure to relatively slower-growth economies like Australia. Still, it hardly requires double-digit growth to do well either. A quick look at the dividend yield and PE ratio implies the payout ratio of the fund stands at circa 50%. On that basis, it doesn’t seem a stretch to imagine long-term growth in the 6% per annum region assuming market-average return on equity and historical nominal GDP growth. That implies long-term total returns in the high single-digit per annum region after the ongoing charge, which stands at 0.84%. That is roughly in line with historical performance, with the units generating a circa 9.5% per annum return over the past decade in GBP terms.
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