Newton’s Kan on the turning tide in Asian income
After a frustrating 2017, last year saw Newton’s Asian Income performance recover. Portfolio manager Zoe Kan says that was just the beginning, and gives investors reasons for optimism on the long-term Asian income story.
A nuanced approach to investing in Asia could pay dividends as the market continues to mature. That’s according to Zoe Kan, manager of BNY Mellon’s Asian Income Fund1, managed by Newton – one of the few in its peer group to side-step last year’s sell-off.
While Kan’s Fund suffered in 2017, trailing the market due to the lofty returns delivered by the low-yield BATs2 stocks, her approach came into its own in 2018, with the Fund losing just 0.01% against benchmark index falls of 8.51% and a peer group loss of 10.72% for the full year.3
For Kan, the sell-off could mark a wider sea change as the tide turns on high-growth stocks in favour of less spectacular but more sustainable names in the region. “We’ve had a 10-year bull run and, in my view, the downturn towards the end of last year could just be the beginning of the next phase,” she says.
Kan concedes Asian markets have seen a relief rally since December, but is not convinced this is based on fundamentals. “Growth is slowing,” she says, “and earnings are facing headwinds, which reminds us of the importance of focusing on what’s actually achieveable and sustainable. I believe it makes sense to aim for income as a higher proportion of total returns rather than just going after capital growth.”
But this doesn’t mean chasing income at any cost – and Kan recommends keeping a keen eye on the the quality of the yield in her investment universe, especially with companies aware of the need to return capital to shareholders that offer high levels of dividends not backed by robust fundamentals.
“Even though parts of the Asian equity market have matured, you still have to treat our yield universe with caution,” she says. “There are a lot of Australian and Chinese banks and state-owned enterprises paying out dividends that may not be sustainable over the long term. It’s certainly easier to find yield in Asia these days, but it’s harder to find good quality yield. Those companies are the ones to avoid.”
The gift that could keep giving
Regionally, one area of focus for Kan is South Korea. The country is enjoying the benefits of reform under the regime of President Moon Jae-In as he looks to tackle corruption and challenge the power of chaebols, the largely family-owned industrial conglomerates that dominate South Korean equity indices. Elsewhere, the state-run National Pension Service – the world’s third-largest pension fund – has adopted a new set of stewardship principles to improve corporate governance and this should also be a tailwind for investors in the country, says Kan.
At present the geographical allocation to South Korea on Kan’s fund is 12.3%, with industrials and technology conglomerate Samsung Electronics holding the joint top spot in the portfolio at around 7%.
Kan highlights Samsung Electronics as a company that has reinvented itself in recent years. “Historically it would never have made it into the portfolio,” she notes. “It was a company with poor corporate governance with an overriding ambition to grab market share at the expense of profits.”
But she says progress in governance – though admittedly the company is not yet best in class – has impressed enough for the investment team to pay closer attention. In particular, she describes Samsung Electronics’ DRAM semiconductor business as being more disciplined, with it commanding a top-three market position globally, alongside Hynix and Micron.
“Semiconductor companies are very cyclical. During lows in the cycle we’ve seen the same thing again and again. Players bleeding losses then exiting the sector,” explains Kan. “These days it’s getting harder to succeed – the barriers to entry are higher, the costs of setting up are extraordinary and this in turn deters new entrants. Samsung’s continued ability to maintain profitability in a downturn gives us conviction in the sustainability of its earnings power.”
Kan concludes that she is hopeful for even more progress on South Korea and undoubtedly her investors will be waiting to see which names next fit the bill.
Source: Lipper, as at 31 March 2019. Fund Performance for the Institutional Shares W (Accumulation) calculated as total return, including reinvested income net of UK tax and charges, based on net asset value. All figures are in GBP terms. The impact of an initial charge (currently not applied) can be material on the performance of your investment. Further information is available upon request.
Past performance is not a guide to future performance.
The value of investments can fall. Investors may not get back the amount invested. Income from investments may vary and is not guaranteed.
For Professional Clients only. This is a financial promotion and is not investment advice. Portfolio holdings are subject to change, for information only and are not investment recommendations. Any views and opinions are those of the investment manager, unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes.
1 Please note, on 10 June 2019 the Fund’s name changed from Newton Asian Income Fund to BNY Mellon Asian Income Fund.
2 Chinese technology companies Baidu, Alibaba and Tencent, colloquially known as the BATs.
3 Source: Lipper as at 31 December 2018. Fund performance for the for the Instirutional Shares W (Accumulation) calculated as total return, including reinvested income net of UK tax and charges, based on net asset value. All figures are in GBP terms. The impact of an initial charge (currently not applied) can be material on the performance of your investment. Further information is available upon request.