Juliet Schooling Latter, research director, FundCalibre and Chelsea Financial Services continues her series for professional Paraplanner looking at funds that are coming up to or have just past three-year anniversary of launch.
Asia has typically been viewed as a growth opportunity by investors, but the region has developed substantially over the past 15-20 years, and it has moved beyond just being about growth to being an attractive income story too.
While yields in different Asian countries still vary considerably, as you would expect, dividend payments across the region have almost doubled in the past decade and it has become one of the highest-yielding and largest sources of income around the world.
Crucially, according to Jochen Breuer, manager of Fidelity Asia Dividend fund, these dividends are also supported by strong balance sheets, which, he says, can be traced back to the 1997 Asian financial crisis. “During this period companies learned a hard lesson in what happens if you do not allocate capital correctly and borrow for domestic ventures in foreign currency,” he commented. “As a result, Asian companies now enjoy some of the most solid and stable balance sheets in the world, creating a strong foundation for increasing dividend payments.”
Jochen joined Fidelity’s London office in 2007 and covered a number of sectors before moving to Asia in 2013. He took on the management of the Asian Dividend fund in October 2016.
Based in Singapore, Jochen obviously has a dividend focus and the fund will pay a decent income around 30-40% above the wider market. However, he does not look for yield alone and aims to provide some capital growth and the opportunity for dividend growth.
He likes to invest in high quality franchises, with good balance sheets, good levels of cash, and strong management teams who understand capital allocation. While the portfolio favours high quality companies, Jochen will not invest in them at any price and this value-aware mindset, coupled with the yield target, gives the fund a value tilt. The fund usually has between 35-45 large cap holdings (with at least $1 billion in market cap and $3 million daily liquidity) and is benchmark agnostic.
Idea generation comes from Fidelity’s regional analysts and regional visits: Jochen makes two research trips per country, per year. Once he has been presented with an idea, Jochen will typically spend half a day on initial analysis. He will read the analyst’s note, as well as sell side notes and the company’s annual accounts. If there are no red flags he does more in-depth work.
Valuation work depends on the sector and the company, but he generally looks for intrinsic value, reverse DCFs, and price relative to history. He creates base case, bull case and bear case assumptions.
Resulting portfolio holdings will range from 1.15-5% in weight, based on Jochen’s view on their risk/reward, income contributions, liquidity and diversification benefits.
Jochen considers risk to be the permanent loss of capital, so will do his utmost to avoid large drawdowns. He has been very successful in this endeavour to date: while the fund can be expected to lag in strongly rising markets (as it did in 2017), in 2018 it was the second best performing fund in the sector of 102 funds, returning 0.03%* while the peer group fell an average 9.81%* and the stock market fell 9.05%*. Last year, in a more modest market (at compared with the US), the fund was top quartile, returning 18.37%** versus 15.78%** for the peer group and 13.61%** for the market.
Cumulatively, over his now three-year-plus tenure, this has resulted in the fund returning 34.91%^ – almost 7%^ ahead of the sector average and 4.5%^ ahead of the market – and makes it a worthy contender for an income or a growth portfolio.
*Source: FE Analytics, total returns in sterling, calendar year 2018, for the fund, the IA Asia Pacific ex Japan sector and the MSCI AC Asia ex Japan Index.
**Source: FE Analytics, total returns in sterling, calendar year 2019, for the fund, the IA Asia Pacific ex Japan sector and the MSCI AC Asia ex Japan Index.
^Source: FE Analytics, total returns in sterling, 1 October 2016 to 5 February 2020, for the fund and the IA Asia Pacific ex Japan sector and the MSCI AC Asia ex Japan Index.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.