Finding diversified income streams for your ISA
There is a common misconception that income investing is just for those at or approaching retirem...
There’s much to love about Australia: sun-drenched beaches, glorious temperatures, a dizzying array of native animals, and the awe-inspiring Great Barrier Reef. These attractions lure more than six million people every year*, with the land down under proving popular with holidaymakers and students on gap years.
But what about investors? Is it as rich in exciting return-generating opportunities as it is in natural resources?
To coincide with the Australia Day celebrations on Friday January 26, we thought it was time to look at the country’s leading companies and the funds investing in them.
Australia is not just sunshine and surfing, it has abundant commodities, with iron ore its largest export**.That makes it the natural home for a number of the mining giants, including BHP, Rio Tinto and Newcrest. There’s also Macquarie Group, a financial services group and the world’s largest manager of infrastructure assets***. Other major groups include insurer Suncorp, and CSL, the biotechnology business.
The presence of multinational giants makes it an interesting area for investors, especially those looking to bring in some defensive options for growth-focused Asia portfolios. The US and the UK are the biggest investors in Australia, followed by Belgium, Japan and Singapore, according to the Australian Government****.
Australia hasn’t escaped the problems of high inflation. As with the US and UK, the country has wrestled with the impact on consumer spending and the property market.
The Reserve Bank of Australia has risen rates 13 times since the start of 2022, according to Richard Sennitt, manager of the Schroder Oriental Income. “However, for now the economy has remained remarkably resilient, with unemployment close to all-time lows and signs that inflation is starting to moderate,” he said. Richard also pointed out that the strong recovery in net migration, following the slowdown during the Covid-19 pandemic, has also played its part.
“Although earnings expectations for the market are not high, reflecting not only some of these domestic pressures but also more subdued commodity prices, the market continues to offer an attractive dividend yield when compared to much of the Asia Pacific region, with over half of the market return historically coming from the reinvestment of dividends over the long term,” he said.
The good news is there are a number of portfolios — both Asia-focused and specialist portfolios — that place high importance on the country’s quoted giants.
Australia is the largest country allocation (26.6%^) in the experienced Jason Pidcock’s Jupiter Asian Income fund. The combination of higher developed market holdings and its income mandate make this a relatively defensive Asia Pacific option. Long-term UK investors looking for lower risk exposure to the region could find this fund particularly attractive.
Australia is also the biggest country component of the Schroder Oriental Income fund^, which has been run by Richard Sennitt for almost four years. The portfolio’s aim is to provide income and capital growth by investing in Asia Pacific companies offering attractive yields and growing dividend payments. This fund is an excellent option for investors seeking exposure to the Asia Pacific region with both an income and a growth objective.
This fund invests in 36 equally weighted stocks from across the Asia Pacific region – and Australia currently has a 10.4%^ country allocation. The co-managers of the portfolios, Edmund Harriss and Mark Hammonds, have a well-defined and disciplined investment process. We like this fund’s focus on companies that can sustainably grow their dividend into the future, and the fact that Guinness Asian Equity Income looks very different from its benchmark and peers.
This fund seeks to deliver income and some capital growth by investing in listed infrastructure companies around the world. The portfolio currently has 9.5%^ in Australia. Manager Peter Meany is one of the most experienced managers in the space and has been running this fund for over 15 years. This is an alternative option to a conventional global equity fund with a thematic bias.
Manager Anthony Srom adopts a high-conviction approach to investing in this Asian equity fund that helps it stand out from its peers. Anthony approaches stock selection with a contrarian mindset, focusing on companies where the share price is out of step with its operational performance, and where there is value to be unlocked. Australia is currently the second largest geographic exposure (17.4%^).
*Source: Tourism Australia
**Source: Commodity.com, 24 May 2022
***Source: Reuters, 22 January 2024
****Source: Australian Government, Department of Foreign Affairs and Trade, 2022
^Source: fund factsheet, 30 November 2023