In mid-2005, when Singapore-based portfolio manager Jeremy Whitley was making the rounds of his clients, he was asked one question again and again: Did he have an Asia ex-Japan high-yielding equities fund to offer? He didn’t, though clearly the appetite for one was there.
Now he does. In October, Whitley’s firm, Aberdeen Asset Management, began marketing its Aberdeen Asian Income Fund. The U.K. money manager hoped to attract between £50 million ($87.5 million) and £100 million to the fund, which can invest in both stocks and bonds. When it closed on December 15, the fund had raised £110 million from about 500 investors. Observes Whitley, “There was clearly demand and little product out there.”
In the past, the veteran portfolio manager says, “you wanted Asia because you wanted some spice, you wanted growth, you wanted capital appreciation.” But in recent years a growing number of Asia-Pacific ex-Japan companies -- from financials to utilities to industrials -- have either begun paying dividends or have boosted their payout ratios, making an equity-income strategy more attractive to investors.
Last year Asia-Pacific ex-Japan companies paid a combined $70 billion in dividends, twice their payout in 2002. Back in 1997, the year the Asian fiscal crisis began, companies in the region paid just $15 billion in dividends.
The dividend boom reflects a new outlook among many Asian CEOs: Whereas they once focused primarily on growth, they now pay greater attention to managing capital. Says K.C. Lee, manager of Fidelity International’s $560 million Asia Pacific Growth & Income Fund, which was launched in December 2004: “Years ago we would have had a difficult time finding enough high-yielding stocks to have a fund with this focus. But now there is a greater awareness on the part of Asian companies that they should manage their capital structures to enhance return on equity.” As of year-end 2005, Lee counted 130 stocks in his portfolio.
In the past several years, many publicly traded Asia ex-Japan companies have cleaned up their balance sheets, reporting average debt-to-equity ratios of 25 percent in 2005 and a projected 20 percent this year, according to a study by ABN Amro. That compares with 35 percent in 2003 and 60 percent in 1998.
“Generally, companies have good cash flow,” says Kerry Series, equities investment director at HSBC Halbis Partners and manager of HSBC’s $242 million Asia Pacific ex Japan Equity High Dividend Fund, which was launched in November 2004. “Debt levels are low, and companies have a lot of cash.”
Among the corporations paying dividends: Indonesia’s Bank Mandiri, which has a forecast yield of 8.1 percent, and Delta Electronic, a Taiwanese electrical equipment manufacturer, which has a predicted yield of 4 percent. By comparison, the average Standard & Poor’s 500 index stock yields 1.73 percent; the typical MSCI Europe share, 2.31 percent; and the average Japanese Nikkei 225 stock, 0.92 percent.
But as Asia ex-Pacific stock prices have risen in the past two years, yields have come down for many stocks. For that reason, suggests Mark Mobius, head of the $996 million Templeton Emerging Markets Fund and a 30-plus-year investor in Asia, buying stocks with high yields has become somewhat less attractive. In addition, Mobius cautions, “the risk of further interest rate hikes presents another challenge, presuming one is a U.S. dollar investor.”
Some portfolio managers plowing this territory choose to reinvest the better part of their dividends, while others distribute a hefty share to their fundholders.
One of the pioneers in the yield game is the $38 million Principal Asia Pacific High Dividend Equity Fund, which was launched in December 2002, when the region’s economic recovery was just beginning to look sustainable. Today it is sold only in Macau and Hong Kong. “At the time, values were fairly decent,” says Binay Chandgothia, chief investment officer at Principal Asset Management Co. (Asia) in Hong Kong. “Since then equity markets have done well.”
Between its inception and October 2005, the Principal fund, which holds some 65 stocks and reinvests dividends, posted a 101.8 percent return, compared with a 94.5 percent rise in the MSCI Asia Pacific Free ex-Japan index.
Chandgothia takes a bottom-up approach to portfolio management -- he looks at individual stocks more than economic sectors. The portfolio manager sets a yield target of at least 4 percent and screens potential holdings on the basis of projected cash flow.
His fund’s top five positions, ranked by the size of the holding: Commonwealth Bank of Australia, ANZ Banking Group, Australia-headquartered mining concern BHP Billiton, Taiwan Semiconductor Manufacturing Co. and PetroChina Co.
The HSBC fund managed by Series looks for companies with strong cash flow and a significant amount of cash on the balance sheet. He usually has about 80 names in his portfolio. Series likes to own stocks for the long term, typically between 18 months and three years. He aims for a 33 to 75 percent annual turnover rate, whereas many fund portfolios turn over more than 100 percent.
Generally, Series looks for companies offering the possibility of growth of 10 percent or more a year and yielding at least 5 percent.
The HSBC investment director likes Asia ex-Japan financial companies because they have “high deposits,” but HSBC has “not seen high loan growth” in an environment of decent profits. Among his top ten holdings: Indonesia’s Bank Mandiri and Hong Kong’s Bank of East Asia (forecast yield: 6.3 percent). He also favors utilities and telecommunications companies because they are mature businesses with steady incomes. His fund’s other top holdings include Singapore’s Macquarie International Infrastructure Fund, yielding 7 percent, and Yellow Pages Singapore, yielding 6.8 percent. HSBC also owns a small position in Hong Kong’s Link Real Estate Investment Trust, which controls more than $3 billion in public housing, shopping malls and car parks.
Series tends to avoid high-tech companies. “They need lots of reinvestment,” he says, which makes their cash flow and dividend payouts hard to predict.
When he considers a company for his portfolio, Aberdeen’s Whitley, who has been investing in Asia for ten years, pays close attention to how management treats minority shareholders. “We need companies to treat us fairly,” he says. “We want to be equal to other shareholders.”
Although the five-month-old Aberdeen fund invests the vast majority of its assets in equities, its mandate allows it to invest in debt, convertible securities and warrants. At any given time, Whitley expects his fund to own 30 to 40 stocks. He seeks well-run enterprises with strong balance sheets that reliably throw off excess cash.
Aberdeen’s portfolio includes Taiwan Mobile, one of three leading cell phone providers in Taiwan (8.6 percent yield), Thailand’s Siam Cement Group (6.1 percent) and Telecom New Zealand (6.4 percent). “These companies are good, profitable businesses that are well entrenched and don’t require too much new capital investment,” Whitley says.
He wonders, though, about the sustainability of the dividend payouts. In years when profits are strong, the companies will deliver good dividends, he says, but in years when profits are weak, dividends will likely be cut. Of course, that pattern holds in more mature securities markets, but Whitley thinks the lurches between generous payouts and no payouts could be more extreme in Asian markets.
Still, Fidelity’s Lee feels confident that investors will continue to demand high-yielding equity funds, even if the supply of dividend-paying companies falls off for a time.
“The majority of mutual funds in Asia Pacific are growth-oriented,” Lee says. “Because of the competitive pressure on those funds, there is a tendency to manage quite aggressively. But for an investor’s overall portfolio, it makes sense to mix low risk with high risk.”
