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Guinness Asian Equity Income
Guinness Asian Equity Income fund invests in companies across the whole Asia Pacific region, including Australia. The portfolio is concentrated in just 36 equally-weighted stocks, and has a one-in, one-out policy, looking for a combination of capital and dividend growth.
Our opinion
This fund has two stand out characteristics: the well-defined and disciplined process; and the equally-weighted stock positions. Ed and Mark use their screening tools to great effect, looking for specific characteristics and taking the unusual step of not analysing dividend potential until the final stage of their process. We like their approach of focusing on companies that can sustainably grow their dividend into the future, and the fact that Guinness Asian Equity Income looks very different from the benchmark and their peers.
Company description
Guinness Global Investors was established in 2003 by Founder and Chairman Tim Guinness. It is an independent active fund manager specialising in long-only equity funds and private equity investments. At heart, it is a value (or growth at reasonable value) investor. Managers combine strategic sector selection with a fundamental screening process to identify stock opportunities and result is a suite of high conviction, equally weighted portfolios. The company has a collegiate culture, with teams across the business benefiting from each other’s expertise in achieving positive outcomes for investors.
Fund manager
Edmund Harriss and Mark Hammonds work as co-managers. Edmund has been running money in Asian funds since 1994 and has worked in both London & Hong Kong. He graduated from Christ Church, Oxford, with a Masters in Management Studies and has a Bachelor's degree in History from the University of York. Mark joined the firm in September 2012. He trained as a Chartered Accountant, and previously worked at Ernst & Young. As well as being a CFA charterholder, he graduated from Corpus Christi, Cambridge, with a first-class degree in Management Studies.
If I buy a car, I look under the bonnet to see if it has a sound engine. I do the same with stocks: the engine being a strong balance sheet which will drive returns year after year, over and above what it needs for reinvestment, and which can then be distributed as dividends.
Edmund HarrissFund manager
Investment process
The managers screen their universe of circa 7,000 companies for specific characteristics, using Guinness' own proprietary modelling systems. They look for companies making a real return on investment of at least 8% for each of the past eight years. Only around 7% of Asian listed companies get through this screen and the managers then reduce their universe further by excluding highly indebted companies and those less than $500 million in size. That leaves them with around 300 companies to research more thoroughly, with in-depth modelling of the businesses cash flow, capital budgeting and – last but by no means least – potential for dividend growth.
The resulting portfolio consists of 36 equally weighted companies. This equal weighting, together with their one-in, one-out policy, means there isn’t a long tail of smaller holdings, so each stock can make a meaningful contribution to performance. The holdings are rebalanced periodically to retain the equal weightings and are continually assessed to see if there are better opportunities, although turnover is relatively low (holdings are generally kept in the portfolio for three to five years).
ESG
ESG - Limited
Guinness’ approach is to focus on quality companies and invest with a valuation discipline. The managers believe this approach gives them an implicit bias towards better ESG characteristics. These quality characteristics are both financial and non-financial and will determine whether a firm can create value throughout a business cycle. ESG factors are considered part of this, especially those that carry a material risk to the future returns of the business. This means that in practice, many firms with negative ESG profiles, such as oil & gas and mining companies, do not pass the process and are therefore not included in the portfolio, but there are no specific ESG restrictions on their inclusion.
Risk
The screening process for Guinness Asian Equity Income will filter for risk factors. The initial screen finds companies that have eight years of consistent cash generation, which gives a statistical likelihood of persistence. It will therefore filter out a lot of cyclical companies (those more linked to the economic cycle) like energy and materials names. Sector and country exposure is considered at a portfolio level with a diverse mix targeted. The portfolio's exposure is monitored regularly. A second filter removes higher risk smaller companies, as well as companies that are more indebted. The fund is benchmark agnostic and highly concentrated, meaning it has stock-specific risk.
Read more about this fund
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