Environmental, Social and Governance (ESG) podcast
In this podcast we are joined by Yoojeong Oh, manager of Aberdeen Asian Income Fund and David Smith, Head of ESG in Asia for Aberdeen Standard Investments. They discuss Aberdeen Standard Investments' philosophy on ESG and describe how ESG is integrated into the investment process. They also share some examples of what engagement with companies on ESG looks like in practice.
Recorded on 3 December 2020.
Podcasts from Aberdeen Standard Investment Trusts. Invest in good company.
Host: Hello, and welcome to the latest in the Aberdeen Standard Investment Trusts podcast series. With me today is David Smith, Head of ESG in Asia and Yoojeong Oh, manager of the Aberdeen Asian Income Fund. We'll be talking about the ESG process at Aberdeen Standard Investments and how it's implemented on the Trust. Welcome, David and Yoojeong. David, I wonder if we could start with a big picture view of ESG. What is it? Why is this important?
David: Hi, well, thanks for having me. ESG refers to the analysis of environmental and social and governance factors. And really, that's an understanding of the way the company is managed. So that's the governance part. And also the impact that the company is having on the environment and on society at large. As long term investors, we think that understanding these factors help us make a better judgement around the quality of the company. So rather than looking at a narrow information set, just the financial numbers and how much money we think the company is going to make next year, for example, looking at a broader spectrum of information around these E and S and G factors, helps us fully understand the way the company is positioned for long term sustainable growth.
Host: Okay, and then there are different interpretations of ESG. And it can sometimes end up being a bit of an alphabet soup, you know, SRI and ESG and these kind of things. How do people's views tend to differ? And what's the ASI philosophy on this?
David: Absolutely, you’re right. And it can be, can be a bit of an alphabet soup, as you say. There's a there's a variety or spectrum of views as to approaching this, this issue. And we've seen some people have looked at screening and removing certain sectors, which is an approach that might see someone exclude a certain company or a certain country, right up to the other end of the spectrum, which is around the integration of these factors in the investment process and the way you look at companies to better understand the company. And for us, as we look to manage our portfolios, we've looked to integrate ESG as part of that investment process. So our philosophy sees us do a lot of research before we buy companies, look to understand the way they interact with their supply chain, the way they impact the environment, how much are they polluting the sea or the earth or the air? How are they working with employees, for example, and how are senior management incentivized, and how are the board of directors put together. The other difference in approach is that we've seen one approach have a large group of ESG analysts in a HQ of a fund manager, for example, that work loosely with fund managers and contribute indirectly to the investment process. We've chosen an alternate approach whereby we have ESG analysts such as myself, integrated within the investment team within the region that we're looking at, to allow us to be closer to companies, closer to markets, closer to the countries and closer to the issues that we're looking at, and to be able to work more closely with fund managers, as we meet and understand the companies that we’re looking to invest in.
Host: Okay. And then, I mean, certain areas, such as strong governance have presumably always been part of the investment process, and the way that people select companies. But how has the ESG process kind of evolved in recent years in terms of both the areas that you look at? And also the kind of disclosure you're getting from companies?
David: Yeah, that's a great question. So ESG has always been part of our due diligence process when we're looking at companies. But I think it's fair to say that we have iterated and strengthened the process on ESG over the last, let's say, three, five years or potentially longer. And that's not really been around a change in the process. It's just been a strengthening of the way that we've looked at it. It's been a deeper integration of these factors as part of our process. It's been around putting additional resources within regions within different fund management teams across Aberdeen Standard Investments. We now have dedicated ESG analysts in every region for equities for Aberdeen Standard Investments. I think the information we're getting from corporates is also evolving. So within Asia if you were to go back, well, I've been with the firm for almost a decade now. If you go back over that period of time, at the beginning we saw reasonable disclosure in some of the developed Asian markets. But really, the E and S component of ESG was somewhat nascent in terms of the disclosures and reporting that companies were making. And we've seen the strong focus on ESG reporting from corporates around this region, driven by strong interest from fund managers such as ourselves, and also from broader societal interest really pushed that reporting forward. Now, there's still a big spectrum of quality of reporting. And the challenge in Asia is that it is a market that is characterised by high levels of information asymmetry across the region as to ESG quality. So to an extent, to put it simply, it's very difficult to know how good companies are in terms of ESG by reading the annual report. There are some companies that do really, really well at managing their environmental impact and have really, really good supply chain management, for example. But they’re simply not reporting well on that - they're not telling their story good enough. And I suppose the bigger risk is the companies that report this really, really well and have really nice, glossy annual reports, but are perhaps not managing those risks or minimising their impact as much as we would like them too. So one part of our work as owners of companies and being situated in this region, is to work with the companies that we own in our various portfolios constructively, to encourage them to disclose more, but also to work with them to look at comparable companies across the region from their sector and say well, look, this is an example of the kind of disclosures you could be making. This is the kind of reporting you could be looking to. And also, here's the benefit of making those disclosures and improving your reporting quality, because we think that investors around the world are increasingly looking at ESG factors. And so by having better disclosure, and more fulsome reporting, we think those companies would be more visible to global investors looking at this region. So you see reporting improved, it's still a broad spectrum, but we're spending a lot of time working with companies to help them better tell their story.
Host: And obviously, there's a lot going on, internally, do you make any use of external providers or external research?
David: Yeah, absolutely. So I think this goes back to my earlier comments around the high levels of information asymmetry around ESG. So if you are a third party ESG research firm - so some are looking from the outside in - it's sometimes quite difficult to be able to make a judgement as to the ESG quality of a company if you're looking simply at an annual report or other similar disclosures, and they can be fairly sparse. And that may result in a fairly low score for a company, which in some cases, or in many cases, could be quite undeserving, whereas we spend a lot of time with companies, understanding companies and doing our research. So we've developed our own ESG score for companies, whereby we draw on our own experience and our own research to assess the ESG quality of a company. And there can sometimes be big disparities between the way we view our company and the way external researchers view a company because we have a better understanding of the company through our research process. And again, part of the work we do with companies is to improve disclosure to bring the perspective of third party providers up to the level at which we see companies.
Host: And Yoojeong, I'm going to bring you in here as well. I wonder if you could both talk about how ESG is integrated into the investment processes at ASI and how you work together. David, if you could go first. And then we'll begin Yoojeong after that.
David: Well, the understandings we have of ESG as part of the investment process, take their inspiration largely from the work we do on different sectors. So we look at sectors in some detail, we will sketch out our understanding of where a sector is going over the next, let's say, three to five years, what are the attractions of a sector, what are the drivers of value in that sector? And what are the risks in that sector to achieving that value? And part of that is, is these fundamental trends we see in a sector and part of that is ESG. If you look at the real estate sector that would obviously have different ESG risks and opportunities from for example, utilities, which would be different again, from information technology. And then the people who are doing the research on the companies themselves, so what we would call a stock owner or the stock analyst, integrates those perspectives from the way we look at a sector into the questions that we ask a company. So if you meet a company in the real estate sector, then it's very easy to see, for the analysts that we've got in the region, what are the big ESG risks and opportunities in that sector? And therefore, what are the key issues for that company? And what should we be looking out for in terms of the way they're managing their ESG. So for every research note we do on a company, we're asking questions around ESG, we're trying to understand the ESG quality of the company, and the way they're positioned for long term sustainable growth. So it’s fully integrated into the investment process in as much as it’s the stock analysts themselves who are doing this research rather than a separate team in a separate region, or relying on third party research providers to tell us how to think about ESG.
Yoojeong: And just to add some additional colour – so David is one of three ESG experts in the region. They all very much fit with the fund managers here in Singapore. So before Covid meant that we were all working from home, David and I used to be desk neighbours for the sharing of ideas and thoughts. And that was very natural, along with all the other ESG Analysts also sitting embedded within the investment desk as well. David and I have been fortunate enough to travel to other countries to attend AGMs together. And I've also been to some virtual EGMs during 2020, with his colleagues here in Singapore. So it's really about sharing meetings, making sure that we can bring out the best engagement, so we take not only the stock owner, but also an ESG analyst that can provide a framework for the discussion that we might be having to have with any corporate at any one time. And that can really help us to focus on what our engagement priorities are on a company by company basis. And so David earlier mentioned just how we use external ESG ratings, as well as what we do internally as well. And I think that's useful because sometimes as he said, an external rating agency might not have the same views that we do, and ours is obviously built from very much a bottom up perspective, having met with the management of these companies over many, many years. So one such example would be Singapore’s Venture Corporation, which is one of the larger holdings that we have in the Aberdeen Asian Income Fund. And they've recently had their ESG rating upgraded by MSCI this year on governance improvements. And this is particularly pleasing for us as a team, as we've been in discussions with Venture on this very topic, and have encouraged the addition of new directors with diverse experiences and backgrounds to provide new perspectives. And this has seen them introduce four new independent Non-Executive directors to refresh the board over the past couple of years. So that action has resulted in them getting an upgrade in their external ESG rating. So really, it's about trying to work with our corporates, and ensure that we can try and lift the ESG rating of our holdings, which obviously benefits the ESG rating of the Fund itself.
Host: Can you just talk a bit about why it's important in helping you identify good quality businesses? Is it about identifying just risks? Or is there a sort of alpha opportunity there as well?
Yoojeong: Yeah, so I think David made a really good point earlier about how we don't use ESG just to filter out what are perceived to be bad sectors. So this Fund, for example, we have decided not to own any tobacco companies, which is traditionally a high dividend yield sector. So that's quite rare for an Income Fund. And perhaps that might come as a surprise. So there is - that's probably the only filtering out that we do. What we try and do is really use our ESG engagement on a forward looking basis, as you say, to drive future alpha as well to identify key scenes, and companies with strong management teams and governance frameworks that show a clear willingness to become ESG leaders in the future. So if we look at a company like LG Chem, for example, this is a Korean company, they were big in the chemical business, but they used the cash flow from that chemical business to invest into large batteries for electric vehicles, and large scale energy storage. So we initiated LG Chem into this Fund about three years ago, and at that time markets were not ascribing much value to these, then loss making businesses. But we've obviously seen good share price growth and dividend growth more recently, as LG Chem’s batteries business is now recognised as one of the global leaders in this space. So it's really about trying to identify these themes, try and think about what might be drivers in the future and what can make a positive impact on to fund performance looking forward.
Host: Okay, and you mentioned that you’re both involved with the engagement with companies. Could you just talk a little bit about what that looks like in practice?
David: Sure, there are probably two components of engagement that I'll talk about, we usually divide engagement into either protecting the value of our clients assets, or enhancing the value of our client assets. If you look at protecting the value of client assets, then those tend to be engagements where we are trying to ensure that the companies that we bought, which we think are high quality companies, continue to be high quality companies, and our engagements where we're continuing to get more information around the way the company manages its ESG risks. So these engagements could be around better understanding the way the company manages, for example, its risks, if you look at semiconductor manufacturing, and one of the companies we own across a number of funds is TSMC, a semiconductor manufacturing company in Taiwan, obviously, semiconductor manufacturing is a very water intensive process. And we think that the ability to manage water stress and water risk is a competitive advantage in terms of your ability to operate over the long term. So that discussion is ongoing and helps us better understand and better protect the value of our clients’ investments. The other part of engagement is around enhancing the value of investments. And that's where we work constructively with companies around structures or processes, or around capital allocation, to better understand why decisions are being made. And also to provide constructive feedback as to ways we think that processes or structures or cap allocation could be improved for the benefit of minority shareholders. Now, that's not to say that, that we know everything about running a business, but it's about asking provocative questions around capital allocation, around return hurdles, around why companies continue to invest in in x business or y business, and also drawing on our expertise around this region example where we've got around 50 fund managers on the equities team to say, well, look, we're seeing this trend in this sector in another country, is that something that you're seeing in your sector, or by saying we're seeing this trend or this development at this part of the supply chain - is that something that's affecting you? And how do you think you can manage that? Or even drawing on the work we do globally. So we may own a competitor to an Asian company, in an American fund or European fund, for example, and be able to say, Well, we've seen this happen in the US or in the UK, for example. Is that something that we're seeing in your market? And is that something that you seem to be well positioned to take advantage of? So we can see those two types of engagement, both protect and enhance engagement, and obviously these should be of interest to fund managers and stock analysts, because these have the potential to impact the fundamental value of the companies that we're looking at. So obviously, this is something you do collaboratively with the people that cover the stocks in our portfolios.
Host: Great, Yoojeong, do you have anything to add?
Yoojeong: No, I think David's covered everything very well, I think it's also worth noting that his team will suggest an idea for us to focus on - so he mentioned water and water consumption in semiconductor manufacturing processes, and how that needs to be sustainable in the local communities. And then him and his team will give us this thought and then it's up to the sector team as well as the stock owners to really go and find out what is going on in terms of water recycling and water usage at these companies so that the meetings can be held together. So it will be the analyst as well as an ESG analyst will go and they'll discover that someone like TSMC recycles over 85% of the water used in its plant so that each single drop of water is used three and a half times - or that Samsung Electronics plant is the first semiconductor plant to get water footprint certification from the UK’s carbon trust. And so all these things are things that add to our picture of the ESG rating of the company as a whole. And it's something that we can monitor, as David mentioned, within our regular sector review, and set them up against the other semiconductor players that we own globally throughout our other portfolios. So it's really about being able to share that data, having all this data available to us - to all the fund managers, and being able to benefit from the collective knowledge of having these 50 analysts and fund managers on the ground here in Asia, to provide that level and depth of coverage.
Host: Okay, and David, just finally, from you. I mean, what do you think is unique about the approach that you've helped build at ASI?
David: I think what's unique is the degree of integration ESG has into the investment process, both in terms of the process itself, and the individuals who are embedded within the equities team around the world. So as we've mentioned, there are three of us in Singapore who work with the 50 or so fund managers across the region. I think what's unique is the degree of integration we have into discussions and understandings of companies around the region. So it's not easy to discuss ESG from a knowledgeable perspective and an experienced perspective, understanding a company's unique position in an industry, position in a value chain, what are the key drivers of value, and competitive pressures that that company may be facing? It may be easy to send the odd letter to a company to say, we think you should do X or Y better, otherwise we're going to sell you, as in, it's a lot more difficult to fully understand the way that the company makes money, what the risks are around that company, what the competitive pressures are that that company is feeling, how industries are going to evolve, and how positioned that company is for these changes to the industry. So it's a lot more hard work than having a separate ESG function. But we think ultimately, it gives us a richer insight. I think the other unique facet of what we do is just the length of time we've been doing it. So this isn’t something that we've been doing just over the last couple of years. We've been doing this for the last couple of decades, and we've been able to build on the experience we've gleaned looking at ESG for the last two, three decades to iterate forward to where we are now in terms of our industry understanding. So a few things have been unique. But I think I would certainly point to the degree of integration we've got both in terms of the people and the way that it's looked at in terms of investment process.
Yoojeong: It is a lot of hard work. But we do believe that a strong governance track record bodes well for good environmental and social policy frameworks to be embedded into our investment companies as well. And a good management team, of course, is also respectful of minority shareholders, and more prudent with capital allocation, which is supportive of dividends. So this is very much aligned with the interests of our stakeholders, including the unit holders, as well as the board of directors of the Aberdeen Asian Income Fund, who have been very supportive of our embodiments of ESG within our investment process.
Host: Great. Okay. Thank you, David, Yoojeong, for those insights today. And thank you to our listeners for tuning in. You can find out more about the trust at www.asian-income.co.uk. And please do look out for future episodes.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. 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 returns. Return projections are estimates and provide no guarantee of future results.
A global income podcast
In this podcast we are joined by Yoojeong Oh, manager of Aberdeen Asian Income Fund, Bruce Stout, manager of Murray International Trust and Iain Pyle, manager of Shires Income. They discuss how they have managed their respective income mandates in 2020, as well as the prospects for income seekers in 2020.
Recorded on 3 December 2020.
Podcasts from Aberdeen Standard Investment Trusts. Invest in good company.
Interviewer: Hello, and welcome to the latest in the Aberdeen Standard Investment Trust podcast series. On today's income panel, we have fund managers Bruce Stout, Yoojeong Oh and Iain Pyle to talk about how they've managed their income mandate this year, and the prospects for 2021. Welcome, everyone. Now, Bruce, we'll start with you. It's been a tough year for income seekers. I wondered if you could give us a global view on the dividend picture, which areas have been resilient and which have been weaker.
Bruce: Yeah, tough is one word to describe it. It is probably the hardest year, I think we've ever seen in terms of income in global financial markets. We were just having a look back and dividend recessions are actually not that common in history, there's probably been about half a dozen in the last hundred years. But when they're concentrated all around the world, like they have been in the last 12 months, they are very deep and very painful. What we saw in terms of resilience, I guess, was sectors such as telecommunications continued to be okay. Consumer staples on the whole were good and tech companies that pay dividends, the ones that we're interested in, things like Taiwan Semi, and Samsung and GlobalWafers have continued to pay good dividends. As did healthcare and I suppose one of the surprise areas of strength for dividends was in commodities, particularly things like copper and iron ore, and also lithium. But where dividends were weak, they were very weak. And we saw draconian cuts in banks, in energy companies, insurance. And the more sort of consumer discretionary industries such as airports, travel and tourism. The final thing I would probably say about the past year for dividends is it's really been an attack on all fronts, because we've had companies that have been leveraged, and they've had no cash and had to cut. Thankfully, we don't have exposure to those types of businesses. But we've also had some companies where they've had strong balance sheets and good cash, but they’ve still cut because of the uncertainty. And then the more difficult areas have been areas where regulators have demanded cuts in things like banks and insurance, which make up about 25% of global dividends in the past so that was tough. And politicians have weighed into the argument as well, demanding cuts in some partially state owned companies. So an absolute tsunami for dividends over the past 12 months in a tough environment to negotiate.
Interviewer: And what are you seeing now from companies as there's more visibility on earnings? Are you starting to see some dividends restored? And is that focused on certain sectors?
Bruce: Yes, it's quite interesting. I mean, we don't blame any companies for suspending or cancelling dividends last year because there was so much uncertainty, it was very difficult for them to get trading statements, it was very difficult to see what was happening. And of course, they wanted to maintain liquidity. And, and that was just the nature of the environment that we were in. But there's a bit more confidence coming back to some visibility and transparency in recovery, particularly in Asia and emerging areas that don't have the overhang perhaps that the developed world has. And we’ve seen a couple of specials actually recently, one in Indo Cement in Indonesia and Sociedad Quimica Y Minera in Chile, and we've had one or two companies that are talking about restoring the dividends in the first half of next year. So hopefully it will be a more positive outlook the next year when we start to see recovery take hold.
Interviewer: Okay and finally, do you have any views on the outlook for 2021? Any themes you have picked up for that?
Bruce: Yeah, I mean, apart from the general recovery in an environment where people might start to get back to normal, I think there are two aspects here that are very, very important for the future of dividends going forward. One is corporate balance sheets, and that the companies are strong enough to invest and to return more cash to shareholders, and there's absolutely no doubt on a global basis that leads us to Asia, because the debt to equity, in general in those areas is much, much lower than a place like the United States, for example, where companies have been aggressively borrowing in a low interest rate environment for the last five years. And debt to equity on the S&P 500 is up about 70%. So the affordability’s not there in the US and the will’s not there as well. But the other thing that's also very important is the shape of the yield curves in various countries going forward from here, because, again, in a place like Asia where a 10 year bond might be 4 or 5% in India and Indonesia, then an equity yield of 4 or 5% is perfectly normal. And those are the sort of levels that are very attractive. But in the developed world where 10 year bond yields are practically zero, then it will be very interesting in the next five years, to see at what level companies restore dividends, do they go back to the traditional 4 or 5%? Or will they be lower? And that's a question we can't answer at the moment. But it will be very important for the future level of dividends going forward.
Interviewer: Okay, great. Thank you, Bruce. Yoojeong, what's been the picture on dividends in Asia?
Yoojeong: Yeah, so I can just pick up on some of the points that Bruce has just made. As one of the fastest growing areas of the world, Asia really entered the crisis with a lower base as far as dividend yields were concerned. And so dividend cuts within the region have been more modest relative to more developed regions. And of course, Asia has sold down too in March and April. And we've also seen lockdowns and travel restrictions here as well, which hurt the tourism related businesses in particular. However, the recovery in markets since then has been very strong, earnings growth, and hence dividend growth, for the region is driven by consumption. And that hasn't gone away. So favourable demographics, and the rising middle income story remains very much intact.
Interviewer: And what steps have you been taking to kind of navigate this environment, sort of steer the portfolio to the winners and avoid those that are cutting?
Yoojeong: When the pandemic hit, I didn't think there was much time to try and reposition the portfolio. But fortunately, less than 5% of the Asian Income Fund was invested at the time in companies who ended up suspending their dividend. And these were, as Bruce mentioned, those that were mandated by the regulator rather than a result of financial distress. Turnover in the fund remained low during the year. So we're still looking below 20%. And the reason we were able to avoid the bulk of dividend cancellation is due to our investment process, which focuses on good quality companies that have strong business franchises, and cash flow generation along with robust balance sheets. We spend quite a fair bit of time looking at ESG factors as well, and how resilient these frameworks are, which often tie into prudence and that culture of respecting total returns for minority shareholders as well. So dividend growth on an absolute basis is lower this year, as expected given the disruption seen to earnings growth over the summer months in particular, but actually, earnings recovery in Asia has been quick. The Asian Income Fund has enjoyed some dividend increases this year as well, as well as special dividends and cash returns from the companies that we invest in.
Interviewer: Okay, and where are you finding those sources of resilient income? I mean, are they across multiple sectors? Or do they tend to be in certain areas?
Yoojeong: Yeah, so we're looking for resilient income and income growth. And again, as Bruce touched upon at the beginning, Asia is really home to the global leaders in technology, and that's been a huge beneficiary of the working from home trade that we've seen this year. So whilst we don't invest in the internet stocks that don't pay dividends, we've banked some pretty strong share price gains from the semiconductor manufacturers TSMC in Taiwan, and Samsung Electronics in Korea to sit on cash balance sheets and they pay good dividends. And they’re looking at a strong cyclical recovery as we head into 2021 as well. So these two stocks are our largest positions within the fund. But we also invest selectively in the supply chain as well, where we see dominant market share and dividend growth. So an example there would be the mid cap company GlobalWafers in Taiwan, who make the silicon wafers that are the raw material for both Samsung Electronics and TSMC. And, as mentioned earlier there, consumption remains well supported in Asia. And we've benefited from dividend growth this year from a more diverse range of sectors than just technology. So we've seen special dividends from convenience store operators in Hong Kong, to e-commerce companies in Taiwan. And we've been invested very broadly across petrol station REITs in Australia, to equipment suppliers for COVID testing kits in Singapore. So there's been a lot of positive dividend news over the year as well from a wide range of sectors. And we're able to collect income from this broad range of sectors and markets, which has been particularly important during these volatile times such as the one we’ve all lived through this year.
Interviewer: Great. Okay. Thank you, Yoojeong. Coming to you Iain, now the UK has definitely been one of the toughest areas this year. I wonder if you could talk a bit about how you've navigated this environment?
Iain: Yeah, of course. So with the UK being a fairly income focused market compared to Asia, I think it's felt dividend cuts this year, more than many other places. And I think dividends for the for the market are down about 45%, which is obviously a pretty significant cut. In terms of how we've navigated it in Shires, I think we came into the cuts in a reasonably good position, the weighting towards higher quality companies, and a strong position in preference shares where dividends have been absolutely rock solid has definitely been helpful. And it means we've had less exposure to the sectors that Bruce mentioned where you've seen the bulk of the cuts, but clearly along with any income portfolio in the UK, they haven't been immune from dividend cuts this year. And in terms of managing through those, we've tried to bucket the dividend cutters in three sectors. So first of all, you've got the ones where balance sheet is okay, cash generation still okay, but there's a regulatory requirement to suspend dividends. And that's primarily the banks in the UK, so in our portfolio, things like Standard Chartered and Close Brothers. And in both those cases, actually, cash generation has remained strong, capital positions remain in a pretty good place. And we're confident that when dividend bans are lifted, hopefully early next year, we'll see dividends resume. So it's fairly easy to sit and hold on to those first kind of companies. The second bucket is the companies where you've got a really sharp, short and hopefully temporary shortfall in cash generation, and they can be things that are consumer facing, something like Howden Joinery selling kitchens in the UK is a good example, where no one is buying a kitchen in the second quarter of this year. There's no cash generation, the right decision is to suspend dividends, but when the market normalises we'd expect cash generation to come back, the balance sheet is in a good situation and dividends will resume and in fact, Howdens is one which has resumed paying dividends already. And again, where we like the companies where they're high quality names, we're going to hold on to those positions and be a bit patient. And the third bucket is a difficult one – it’s where actually, even when the world normalises next year hopefully, there will be some structural change and where balance sheets have deteriorated to such an extent that we don't see income coming back from those companies within an investable timeframe. And we had very few of those in the portfolio but Cineworld is probably an example where that industry may well structurally change. And from an income perspective, it's time to move on. So we've managed, we've managed through it that way. But I think the nice thing is that income within Shires has been down substantially less than the market. So we've come into it in a good position and that has paid dividends.
Interviewer: Alright. And you’ve seen some of the biggest UK dividend payers cut. Is there a sense that the pandemic could reshape the dividend landscape in the UK, moving away from some of those old economy companies that have dominated in previous years?
Iain: I think there is certainly going to be a little bit of a shuffling of the pack. If you think about the big income constituents of the index historically, then actually a lot of those names have been very resilient. So, utilities, health care, tobacco, telecoms and even the miners actually have all been very resilient through this year. The two areas where we've seen dividend cuts have been the banks and the oil companies. And the banks, I think is, a temporary thing, it will come back probably at a slightly lower level than it was pre crisis. The oil companies is a more of a structural thing, I think that they transition through an energy change over the next few decades. And if you look at the top dividend payers this time last year, then the top five, or the top three, were HSBC, Royal Dutch Shell and BP and they have now all slipped out of the top five. So that's obviously quite a big shift in the makeup of income within the UK market.
Interviewer: Okay, and a question to everyone now, about the extent to which you've had to draw on reserves to shore up dividend payments to shareholders this year, and the impact that's had on reserves going forward. Bruce, could I put that to you first?
Bruce: Yeah, so obviously, the very attractive aspect of the investment trust as a business is that the trust has reserves in order to cover this and Murray International has a lot of reserves, I can't give you the exact number for the simple reason that I don't know it yet. The year end is the end of December. But the board have already committed to maintaining the dividend, you know, through this difficult year. And over the last 5 years, or 10 years, or whatever we've constantly been adding to the services and in fact have added 30 million in the last 10 years. So that’s what the reserves are there for - they’re there for a rainy day. And this has been an absolute downpour this year. So hopefully, you know, next year, we'll get back into a more stable situation. And we'll just use whatever reserves we have to use this year to through it.
Interviewer: Okay, and Yoojoeng, same question to you.
Yoojeong: Yep, very similar for Asian Income. We started 2020 with close to two thirds of dividends covered by reserves, so a very healthy safety buffer that we’ve built up over the years. For the past 12 years, the Asian Income Fund has grown the dividend per share paid to shareholders. And we would also very much like to maintain this trend, even during this downpour that Bruce alludes to. So this will mean we will dip into reserves for the first time this year, but it will still only be very modest, given some of the dividend trends I spoke about earlier. And the majority of the reserves will remain untouched for future rainy days.
Interviewer: Great. And finally you Iain?
Iain: Yeah, very much the same again for Shires - we came into this year with around one year of dividends covered by reserves. And this year, clearly, we're going to have to draw down on that slightly. But actually, it'll be at a pretty low level and going forwards I think we – we’ve got an outlook which will hopefully allow us to build back towards coverage within the next few years. So the drawing should be relatively modest.
Interviewer: Great. And then just finally, Iain, I'll come to you first on this. If you had sort of one or two things that an income seekers should really bear in mind for the year ahead, what would they be?
Iain: I think, have a little bit of patience on income. As Bruce alluded to earlier, a lot of companies are going to come out of this year with a balance sheet slightly more stretched. And we're probably going to go into a restocking cycle, which is going to have a draw on cash through next year. And therefore it might take a little bit of time for companies to restart dividends and to get dividends back up to prior levels. So we'll need to be patient. That doesn't mean those aren't very good investments and will still generate a good level of income. But we're not going to snap back to 2019 level straight away. And also, I think be aware of a bit of a change of mix of how we earn income going forwards, in that the sources of income will be different as we've already discussed. And we'll probably see a shift away from high levels of ordinary dividends to more something more flexible going forwards because companies will not want to put themselves in a position where they need to cut anytime in the near term. So those things we need to think about as investors but hopefully with dividends, we're going to be in a period where we can see some decent dividend growth over the next few years and that's actually when income as a style performs better.
Interviewer: Okay, great. Yoojeong, would you add anything to that?
Yoojeong: Yeah, so there's a lot of macro stories coming out that people are focusing on. We're talking about vaccines, we're talking about all this - all these stimulus measures globally unwinding and also the risk of inflation as we talk about trade frictions, particularly impacting regions of Asia, with supply chains having to reorganise as a result of that, so these are all things that markets are worried about. And we are worried about too, as well. But in the context of that, in the context of the macro noise, I think what we have consistently done over the past 10 plus years is really stick to what we do. And that's to continue to invest in good quality companies that are generating strong cash flows, who can support good dividend yield, as well as dividend growth. And that will hopefully enable us to continue delivering a good total return package to shareholders in Asian Income.
Interviewer: Great, thank you. And a final word from you, Bruce, if I could on that.
Bruce: Yeah, I guess – one thing that we've learned over the years is that when you have concentrated sources of income, you’re always very vulnerable. So it's something that at Murray International we've tried to avoid for a long time and, and the world has changed to the point where there are many more companies and markets that have embraced total return to shareholder and do pay higher and growing dividends, perhaps the US is the one anomaly there. So we will continue to focus on diversification because diversification is key in terms of countries and sectors, and different types of businesses, so that you have a spread of income sources throughout the portfolio. And it's not just dependent on one sector or one industry where if something happens, then you get into difficulty. So diversification for us continues to be key. Not by yield, but by good balance sheets so our dividends can grow.
Interviewer: Great. Okay. Thank you everyone for those insights today and to our listeners for tuning in. You can find out more about the Aberdeen trusts at www.invtrusts.co.uk and please do look out for future podcasts.
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