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Hi, I’m Joss, Research Analyst at FundCalibre, and I’ve been joined today by Jason Pidcock, manager of the Jupiter Asian Income fund. How are you, Jason?
Very well, thanks, Joss.
Well, let’s get straight to it. Earlier this year you said that you would not be investing in China as long as Xi Jinping was in charge. Can you tell us why that is? And now that this term has been renewed for another five years and possibly his lifetime, does that mean that the fund will never invest in China again as long as his regime is in charge?
[00:34] Yes. We’ve certainly become more cautious about China over the last couple of years. We do think politically it has regressed, and that intervention in the economy, which has picked up a lot in the last couple of years, is likely to remain the case. So, whilst some people have got a bit more excited about the Chinese economy and the Chinese market quite recently, we remain very cautious. We think China has got big problems with the level of debt, problems in the property market, demographics, the national politics, and also geopolitically with other countries led by the West, the US trying to contain China’s growth rate, particularly its expansion in the technology sector.
So, it is largely a decision made because of the politics surrounding China. And it’s also because there are so many other countries around the region that we find more exciting, where we think risks are lower, where their governments have a greater level of legitimacy ie. they were democratically elected, where there are independent judiciaries ie. free and fair rule of law, free courts that governments can appeal to if they feel that their governments are doing something that really, they shouldn’t. So, all of these things come together. We have been underweight China for quite some time now. We went zero weight mainland China in early July, and we are intending to stick with that position.
Well, very interesting. Jason. Now having no exposure to China has helped a lot this year as the market has had a miserable 12 months. The fund, at the time of recording this video, is up 8% when the average fund in the sector is down 7% – has that outperformance all been down to China or have individual holdings done well as well?
[02:59] The outperformance here today, to a great extent, has been because of our position on China, but we’ve also benefited from being overweight the markets which have done better in the region, particularly Singapore, which has been one of the best markets in the world that’s not a commodity associated stock market.
We’ve also been overweight Australia, which has done better than some of the other markets in the region. And we’ve also picked some stocks that have done particularly well and had a high weighting in those stocks. For us it’s important not just to pick the right businesses, but to have a very high conviction exposure to them and we would feel that it would almost be a shame to put 1% of the fund in a stock that does very, very well, when you could have had 5% in it. So positioning is just as important as picking the right businesses in the first place. And some of our very large-weighted stocks like Woodside Energy [Woodside Energy Group Ltd] in Australia and ITC [ITC Limited] in India have done particularly well.
Just on that Australia point, Jason I’ve noticed that you have about a third of the fund invested there. Another manager we spoke to mentioned that domestic investors don’t pay as much tax on dividends in Australia than foreign investors. That obviously doesn’t put you off. What companies do you like over there?
[04:34] Whilst it’s true that for a lot of companies because of franking credits [a tax credit paid alongside dividends for company tax that has already been paid by an Australian company], domestic investors receive a higher overall yield than we do, we absolutely look at the net yield that we receive – that’s what’s important. And when we look at that, when we compare that to other yields – net yields – on offer in the region, when we compare them, those net yields to the risk-free rate of investing in Australia – and for that, we take the 10-year government bond yield as a proxy – the yields on many stocks still look attractive, especially when combined with expected growth rates. So, some of our larger holdings in Australia have done very well this year. BHP [BHP Group Limited], the world’s largest mining company it’s up about 50%. Woodside Energy is up about 89%. Amcor [Amcor plc], which is one of the world’s largest packaging companies, is up 18%. All these figures are in sterling, and they’re year to date at the time of recording. Not all of our stocks in Australia have outperformed, but the combination of having some of our highest-weighted stocks and being overweight that market has certainly helped us.
Why do you think equity investors should look to Asia rather than the UK or as well as the UK? What can that offer a portfolio?
[05:58] There are two simple reasons. Firstly, we do expect growth to be higher, more often than not, in Asia compared to the UK. And secondly, we do think it makes sense for investors to diversify their portfolio and have exposure to well-managed, well-positioned, good value, high-yielding companies around the world, including Asia, which is one of the best parts of the world to invest in from an equity income point of view.
The region has done very well over the last 17 years, since 2005; returns have been very strong – total returns in sterling terms. There are some great businesses across the region – we can invest in both developed and developing markets so, countries at different stages of growth. There are lots of world-class companies in the region that have very large market caps. So, the shares are very liquid. And that gives the strategy a lot of capacity. And we do find that valuations are compelling and, of course, the lower the valuation, the higher the dividend yield when companies are paying dividends.
All makes a lot of sense. Finally, Jason can you tell us about one or two holdings in the fund that you’re most bullish on or you like the most at the moment?
[07:31] Yes. So, I’ll pick two quite different companies. Hon Hai [Hon Hai Precision Industry Co., Ltd] is a Taiwanese business that we’ve owned for some time, a number of years now. It’s the largest contract manufacturer in the world. What that means is, they build or assemble – manufacture – products that other people have designed [and] that other people handle the branding and the distribution of. So, Hon Hai makes a lot of electronic items like phones, computers, servers, game consoles, etc. And it’s also looking now to move into the EV space – electric vehicles – and expects, by the end of 2025, it will have a 5% market share in manufacturing EVs, again to other companies’ orders – so, other companies will focus on the design, the branding, the distribution. Hon Hai’s great strength is its ability to manufacture at a very low cost and its supply chain management. So, its ability to assemble all the key components and put them together to make the product. Currently, the country where most of the goods are manufactured is China, but – partly at the behest of many of its key customers, such as Apple – it is expanding capacity elsewhere. So, in Asia, the two key countries are India and Vietnam, but it also has manufacturing bases in North and South America, and in Central and Eastern Europe. So, it does have a global footprint. We like the valuations.
It’s on a single digit PE – high single digits – has a dividend yield of about five and a half percent, it’s about a 45 billion dollar market cap company, so, the shares are very liquid. It is net cash, so, it has a very strong balance sheet, and we are expecting it to grow both from a top line point of view and from a margin expansion point of view. So, that’s Hon Hai in Taiwan.
The other company that we’ve added to quite recently in the month of October, so quite different in the sense that it’s a more recent addition is HDFC Bank [HDFC Bank Limited] in India.
Now, unusually for a stock in our portfolio, it has quite a low dividend yield today, but it’s a good example of how we try and have a blend of stocks within the portfolio, some that have low yields, but the potential for much higher growth, and some that have higher yields, but where we would expect then that the growth rates would be lower.
HDFC Bank is a company where we think earnings growth and dividend growth can be in the order of 15%, maybe even more for some time to come. It is the largest private sector bank in India. It has roughly a 10% market share of banking in India, has over 70 million customers, and is expanding quite rapidly. The market cap is 111 billion dollars, so it’s already a very large company, but we think it has a very scalable business model and will get larger. It has a 17% return on equity, very high margins – 4.3% net interest margin – and its cost income ratio is only 39%. On top of that, it’s well capitalised. And we think India will remain one of the fastest growing economies both in the region and indeed globally.
Well, Jason, I have nothing else to say, but thank you very much for that. That was incredibly interesting. And if you’d like to hear more about the Jupiter Asian Income fund, please visit www.fundcalibre.com. Thank you very much, Jason.
Thank you Joss
