This week’s investment soundbite from Fund Calibre is with Jason Pidcock, manager of the Jupiter Asian Income fund, who looks at why Australia and India could be the best developed and emerging markets respectively for investors, and gives three key benefits to allocating to the region.
(Pre-recorded 19 April 2023)
The fund has a zero weighting in China. Can you tell us why?
We’re uncomfortable with the political system of China. It is, of course a communist dictatorship that doesn’t have the type of rule of law that we recognise – it doesn’t have an independent judiciary. It seems that it has become a bit more repressive domestically and, of course, geopolitically, tensions between the West and China have increased and that may worsen.
We’re very comfortable with many of the other countries in the region. We like Australia, India, Taiwan, Singapore, South Korea and we have a couple of investments elsewhere in Southeast Asia. There is no shortage of countries in the region that harbour companies where we think the growth outlook is good – they’ve got strong balance sheets, they’ve got good business models and where they can see a wider marketplace than just the country they’re domiciled in.
Could you have ignored China ten years ago, as you are now? And are there any factors that would tempt you back in?
With hindsight, I wish I’d had less invested in China over the last decade. Chinese equities have been serial underperformers and they’ve performed very badly compared to the higher GDP growth rate of China which has, of course, done better than many other countries. It goes to show, you shouldn’t invest in GDP numbers – they often don’t translate.
We’ve seen much better returns in many of the other markets in the region. Australia is one place that often surprises people just how well it’s done. I believe that, since the year 1900, it’s been the best equity market in the world, just eclipsing that of the US. But in the last 30 years Australia has massively outperformed China, as it has done over the last five years.
In terms of whether we may go back into China, it’s highly unlikely, even if valuations become supposedly more attractive, because you don’t want to get trapped just by a low valuation if there’s a risk that things can change and become worse. There is, of course, some correlation between stocks across the region, and if some kind of event happened which lowered valuations everywhere, then, just because China has become cheaper, it may not be relatively more attractive to other markets. So, we don’t feel uncomfortable with the zero weighting in China; it doesn’t make us feel nervous or exposed.
About a third of the fund is in Australian companies. What is it you specifically like about them?
One reason why Australia has avoided recessions over the last few decades, is that even when GDP per capita takes a dip, the GDP rate for the country as a whole has still often gone up, because of the demographics.
Australia has one of the fastest growing populations in the world – in percentage terms, Australia’s population has grown faster than that of India. There was a pause during the Covid period, but they’ve opened up again and, in the last 12 months, something like 650,000 people have emigrated to Australia, on a population of about 25 million, which makes quite a big difference.
Australia is quite fussy in terms of who they allow in. Broadly speaking, it’s people that are highly skilled and/or are already quite wealthy. By and large, it’s people who can turn up and contribute positively to the economy from day one which is quite different from population growth because of a higher birth rate, where you would have to wait 20 years or so from someone being born to being able to contribute to the economy. So, that has made quite a difference.
Australia is also a land of professionally managed, private companies. You will struggle to find a state-owned enterprise listed in Australia and it is like a small version of the US – it’s a federalised democracy, a fully-functioning democracy, with a lot of first, second, third generation immigrants – people who are very industrious, very ambitious, who want to get on and improve themselves. And they have a political system that allows them to do that freely. Unemployment is also very low. Government debt to GDP in Australia is low by developed world standards and Australia retains a triple-A sovereign credit rating.
We find a lot of companies there are very concerned about shareholder returns. They manage the balance sheet effectively, and also have attractive dividend yields. Ten of our 30 holdings are Australian businesses, and they’re spread between companies that give us exposure to domestic demand in Australia, regional demand and global demand, so we have a mixture of different companies in Australia. It’s not that we are only investing in one or two different sectors, we have quite broad exposure.
The fund has a significant weighting in India but Indian companies are not necessarily synonymous with dividends, maybe more with growth. Is that culture changing?
That’s correct, India isn’t often associated with dividend yields. And it does have a relatively low yield compared to other markets in the region. That’s partly because the dividend payout ratio is lower and partly because valuations are higher than elsewhere.
The market yield in India is about 1.5%. The yield that we are achieving from the stocks we own is about 3%, so, we are getting double the market yield, but that’s still quite a lot lower than the 10-year government bond yield in India, which is over 7%.
From a value point of view, we compare dividend yields to the risk-free rate or the 10-year government bond yield. That and P/E are our two favourite methods of valuing businesses. So, it is important that we’re getting dividend growth, to make up for the fact that the equity yield is lower than that risk-free bond yield. So far, we have been able to invest in companies that have been growing their dividends.
Our mini Indian portfolio has done very well; we’ve outperformed the Indian benchmark for some time now. In fact, our best performing stock in the last 18 months has been our largest holding in India, which is the largest holding in the portfolio, a company called ITC Limited, which gives us exposure to broad-based consumption in India.
We’ve got about 17% in India. If you add that to our weighting in Australia, then just over 50% of the fund is in those two markets, and we see them as the best developing market in the region, India, and the best developed market in the region, Australia.
The fund has a bias towards large cap names, can you explain why and what makes them more appealing?
I’ve been investing in the region for 30 years now and I used to invest in small and mid-cap stocks, but a number of years ago I realised that I wasn’t particularly good at that! I realised that the attribution – over periods when my fund did well – was from the large cap stocks that really made the difference.
When we launched the Asian Income fund at Jupiter in March 2016, we set a minimum size for stocks to invest in that had a market cap of over 3 billion USD, but actually the vast bulk of the portfolio is now in companies with a market cap of over 10 billion USD.
At that level, you tend to find much better liquidity in companies. If youchange your mind, you’re able to get out relatively quickly. Companies tend to be better researched, they also tend to give out more information to investors. You tend to be able to meet management more frequently.
But most importantly, their size is not a barrier to further growth. Just because a company has a market cap of even 50 billion USD, if the potential market cap is a trillion USD, then you’ve got 20-fold to go. And we’ve seen a number of companies in the US reach and exceed that trillion USD level.
So, what really matters is the total addressable market of a business, its market share and its margins. And we actually like companies that have already proven themselves. We don’t mind the fact that we may have missed the first few years of high growth, because we’re always looking ahead; it’s sustainable growth that that matters to us.
Can you give us a couple of examples of holdings you have, maybe one that demonstrates that regional growth that you’re seeing, and then maybe one that’s more of a global player?
Over the last few years, DBS Bank Limited, which is a Singaporean-based bank, has done a very good job of expanding around the region. And it’s certainly an Asian regional bank, as opposed to a global bank. And we like that. It’s expanded, sometimes organically and sometimes via acquisition, in countries like Taiwan, India and now it covers more or less the whole region, apart from Australia, where we get exposure separately. It doesn’t actually have much in South Korea, but again, we have a separate holding there.
They have grown very well. They have a good commitment to dividends, and they have an attractive yield. Our weighting has come down a bit recently, but we continue to believe it’s a good long-term story, and it has worked well over the last few years.
In terms of a global example, the standard answer would be one of the big tech companies because Asia does tech, especially on the hardware side, very, very well, but I won’t do that because that might be a bit boring.
So, I’m going to pick Macquarie Group Limited in Australia. It’s another financials business, but Macquarie is different from a lot of other financial companies in that it is the world’s largest manager of green, infrastructure assets for other pools of passive capital. But Macquarie have the expertise of managing these assets, largely via closed funds.
So, it’s an asset manager in a real asset sense. It is an investment manager – it does have an orthodox investment management business. It’s got an investment bank. And in Australia itself, it’s got a conventional commercial bank which offers mortgages, etc. But roughly a third of its earnings come from North America, about 30% come from Europe, close to 30% in Australia. And then the rest in Asia, outside of Australia. So, it does have a true global presence now and, again, over the long term it’s done very well, and we think the next 10 years look exciting too.
What would your message to investors be, in terms of the benefits of Asian income?
It gives you the ability to diversify your source of income and your currency exposure. Importantly, it also gives you the opportunity to invest in a region that typically is growing faster than other parts of the world. So, it gives you that three-way diversification.
Over the long term, our fund has done well against most UK funds – particularly UK income funds – and indeed, against global income funds, so, we feel we know what we’re doing. And we’re happy with the performance numbers.
There are, of course, risks in this region, as there are all around the world, but we tend to focus on the more developed markets. We have quite a chunk of the portfolio in places like Australia, Singapore, Taiwan, South Korea. And the fund has a beta which is less than one. And typically, again looking backwards, it has been more defensive when markets have gone backwards.
You can listen to the full interview here:
[Main image: photoholgic-jK9dT34TfuI-unsplash]
