Is Asia the solution to income diversification?

The UK has traditionally been a hotbed for dividend paying companies’ and UK equity income funds, which target such companies and pass on the income to investors, have always been very popular.

But investing purely in the UK also carries some risks. For example, dividend concentration, and the risk of this becoming too high, is often overlooked. Figures from consultancy Link Asset Services show 51%* of all UK dividends came from just five companies: Royal Dutch Shell, BHP Group, AstraZeneca, BP and Vodafone – while the top 15 dividend-paying companies accounted for 79.9%* of all UK dividend returns. Should one of these companies decide not to pay a dividend for a period of time, it could have a significant impact on many income portfolios.

So what alternatives are there for investors looking to diversify away from the UK for income? Asia may well be the solution to this problem. Despite traditionally being stereotyped as the place to go for growth, the dividend market in the region has grown to a great extent, making income returns almost too good to ignore, particularly in the longer-term.

Here are a handful of reasons why investors could consider Asia as an income alternative:

  • It is home to around two-thirds of the world’s population (4.6 billion) with large working populations which continue to underpin economies.
  • Wealth is growing rapidly in the region with the middle-class increasing exponentially. There are also more high net worth individuals in the region than any other.**
  • Many Asian companies paying dividends are global in nature and now have a strong dividend-paying culture and fundamentals to support wider growth.
  • Asia paid out record dividends of £133.3bn in 2018, according to the Janus Henderson Global Dividend Index: an increase of 31% in the last three years ($101.9bn in 2015).***
  • Asia accounted for 12% of all global dividends in 2018 (vs. 8% for the UK).***

Below are four funds to consider for those looking to invest in Asia for income:

Guinness Asian Equity Income

Managed by Edmund Harriss and Mark Hammonds since its launch in 2013, this fund is different because it invests in 36 companies, and each holding is equally weighted. This, 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 managers favour well-run companies that have fallen out of favour in the short-term but have historically shown an ability to perform in both good and bad economic environments. The fund has an historic yield of 4%****.

Schroder Asian Income

This fund gives equity investors access to the higher growth Asian economies, excluding Japan but including Australia and New Zealand. It has been run by Richard Sennitt since 2001 and invests in 60-80 companies, the majority of which are currently larger firms.

The fund’s biggest sector exposure is to financial stocks (21.3%), while Hong Kong (21.6%) is the largest country weighting. Schroder Asian Income has an historic yield of 3.75% .****

Jupiter Asian Income

This fund is run by Jason Pidcock, who is highly regarded as an Asian income specialist. He targets large companies with reliable dividends that can deliver both income and growth for investors. The fund’s typically higher developed market holdings, notably in Australia, as well as its income mandate, make it a relatively defensive Asia Pacific option.

Jason is well versed on the politics and economics of every country within his remit, and he makes carefully considered stock choices. Jason concentrates primarily on company research but will also pay attention to economic factors affecting the region (including US movements), to build a tight portfolio of around 40 to 50 stocks that meet his criteria. The fund has an historic yield of 4%.^

Artemis Global Income

Those looking to dip their toe into the Asian income market could consider the Artemis Global Income fund. It has 2.1%**** invested in Asia at the moment, but with 2.9%**** in the UK too, it would avoid any overlap with existing UK equity income holdings and give a portfolio that all-important geographical diversification we have been discussing.

Managed by Jacob de Tusch-Lec, it has an historic yield of 3.18%****. It tends to avoid the large global mega-cap companies and look further down the the market scale in search of stocks which may be able to grow their dividends over time. Jacob tries to identify businesses or sectors which are out of fashion but where he believes there may be a catalyst for change.

 

*UK Dividend Monitor, issue 37 Q1 2019
**Source: Jupiter Asset management
***Source: Janus Henderson Investors, 31 December 2018.
****Source: fund fact sheets, 31 March 2019
^Source: fund fact sheet, 28 February 2019

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.