- Rising bond yields mean income portfolios need to stand out even more on delivering dividend and capital growth
- Asia has an abundance of good quality, dividend paying companies across sectors and countries
- The Region’s structural growth drivers also offer highly compelling returns
Dividend stocks have been an attractive option for those seeking an inflation-adjusted income from their investments, especially in the past decade of ultra-low interest rates. This is changing. US 10-year treasury yields are tipping above 3%. Income seekers now have more choices.
As a result, today’s income portfolio needs to stand out even more in delivering on resilient capital growth and dividend returns. This would mean going beyond simply relying on a range of slow-moving industries in mature markets for reliable, long-term income. It would also entail including a breadth of markets that bring greater resilience and growth to portfolios.
We think Asia offers huge potential and fulfils both growth and income needs. The region has an abundance of good quality, dividend paying companies across sectors and countries. Such diversity and richness of choice is complemented by structural growth themes that present highly compelling return opportunities.
Quality, diversity and sustainability
abrdn Asian Income Fund offers an attractive way to target the growth and income potential of Asia’s most compelling and sustainable companies. We identify high-yielding, quality companies with strong balance sheets and earnings. This quality aspect is important especially at a time of rising rates. A healthy balance sheet means a company is not beholden to refinancing its borrowings at higher interest rates. We are also focused on understanding our investee companies to find out how they themselves manage inflation and rising input prices to protect margins and ultimately keep paying a growing dividend.
Drawing income from Asia also allows investors to build greater diversity into an income portfolio. Asia is home to some of the world’s best quality businesses across sectors and geographies that offer access to structural growth trends and attractive dividend yields. Our Fund’s biggest positions are in markets where dividends are high and growing, for example in Singapore, Australia and Taiwan, and in the dividend-rich sectors such as real estate and financials. Although we do not see the same quality and yields in sectors like healthcare and energy that exist in the UK and other Western markets, Asia offers world-class high-quality global leaders in the technology sector that are growing both earnings and dividends. For example, Taiwan Semiconductor Manufacturing Co (TSMC) is the world’s leading chipmaker that is benefiting from solid demand for its semiconductor chips that power next generation technologies. Despite the high capex required to maintain its innovative edge, TSMC’s profitability and dominant market share has enabled it to build up cash on its balance sheet, which, in turn, protects against financial risk.
Meanwhile, we regard Environmental, Social and Governance (ESG) practices as an integral part of our investment process towards generating better long-term outcomes for our clients. With Asian companies at various stages of their ESG adoption and integration, we are able to draw on our expertise to help companies along their journey and improve transparency and disclosures. For example, we are pleased to see that after our regular discussions with Asian insurance company AIA, they have announced that they no longer have exposure to coal mining and coal fired power businesses in their main investment book. The improving ESG footprints of our holdings helps to draw international investors and should support market leading returns over the long run. We see that companies are increasingly willing to engage with us, as addressing these issues helps enhance business value.
Economic resilience and structural growth trends
Looking to Asia may also help investors side-step some of the difficulties for other markets today given Asia is relatively less exposed to the Ukraine crisis for example. Asia is also at an earlier stage in its post-pandemic recovery. Inflation is still benign for most of the region, which has given its central banks greater policy leeway and flexibility. While some countries have started to shift monetary policy, China is easing credit conditions and Japan is maintaining its ultra-low rates. Asian countries have not built up the same levels of government debt, allowing policymakers to be more agile in supporting economies through difficult times. We are also seeing earnings resilience for our investee companies, which is translating into sustainable dividends.
Asia’s potential is also underpinned by structural growth trends. An expanding middle class is expected to fuel rising demand for healthcare and wealth management. Urbanisation and infrastructure needs remain vast. Changes brought about by the pandemic could prove durable, such as globally increased adoption of cloud computing and 5G which supports the technology leaders in Asia. We are more positive on areas with policy support. Policymakers globally are also committing to a lower-carbon future and Asia is at the forefront of change. We anticipate tailwinds for companies operating in renewable energy, batteries, electric vehicles, related infrastructure and environmental management.
Finally, the Fund remains focused on quality companies that can support sustainable dividends for shareholders. We do this from a position of strength. Our team is well resourced with on-the-ground presence in Asia. We have more than 40 fund managers conducting due diligence and generating stock ideas in seven locations. This year, we are celebrating 30 years of active investing in Asia.
Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.
Risk factors you should consider prior to investing:
- The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
- The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
- The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
- The Company may charge expenses to capital which may erode the capital value of the investment.
- The Company invests in smaller companies which are likely to carry a higher degree of risk than larger companies.
- Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
- There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
- As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
- The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
- Specialist funds which invest in small markets or sectors of industry are likely to be more volatile than more diversified trusts.
- Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
Other important information:
Issued by Aberdeen Asset Managers Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Authorised and regulated by the Financial Conduct Authority in the UK. An investment trust should be considered only as part of a balanced portfolio.