Fund of the Fortnight: Newton Asian Income
Jason Pidcock, the fund manager, follows a genuine contrarian approach, heavily investing in Australia and New Zealand, the markets that many managers have been underweight for some time. We agree with Pidcock that business culture in these countries is similar to that of the developed markets and corporate governance is normally strong. Typically stable and investor-focused dividend policies, rarely seen in the developing world, are translated in relatively high yields, adding to investors’ returns. Most emerging markets managers keep praising South African business culture, but Australia and New Zealand are probably at a similar level.
Pidcock has been running money for over 20 years and has built a strong track record. He is clearly motivated to keep performance up, and this large £5 billion-sized fund has a total return focus. He is ambitious and sees himself competing with the likes of Hugh Young of Aberdeen and Angus Tulloch of First State. Pidcock also runs the Newton Emerging Markets income fund, which is much smaller ($217 million) in size, and one segregated sovereign wealth mandate, but his focus remains on Newton Asian Income. Capacity does not seem to be an issue, as according to the manager, there are still ample opportunities in the region to invest in.
The team of two, Pidcock and Caroline Keen, (the fund’s co-manager who has worked alongside him for over five years), has been recently strengthened, and now comprises three members. Cambridge graduate Amy Leung, who has transferred from the broader research pool of Newton, is from Hong Kong and is a fluent Mandarin and Cantonese speaker. This latter quality is particularly useful, as Leung assists with companies’ meetings held in these languages on the ground. The team leverages off the global research pool of 74 analysts, possessing deep sector knowledge and a global perspective. The house’s investment themes, from capturing the growing class of Asian consumers, through to infrastructure and state intervention, forms a starting point of analysis.
The fund’s investment universe of all Asian ex Japan companies (including Australia and New Zealand) is reduced from over 1,500 stocks to around 600 by applying strict yield criteria to all securities in the portfolio. This is achieved by identifying stocks paying a prospective yield in excess of that of the reference benchmark, the FTSE AW Asia Pacific ex Japan Index, attractively valued on both relative and absolute basis. Pidcock selects not only highly yielding stocks, but also those from scalable businesses that have potential to significantly grow their dividend over the medium-to-long term.
The fund has been constructed from the bottom-up to form a bias towards the more developed economies of Australia, Singapore and Taiwan, whilst being significantly underweight China and South Korea. This geographic tilt relative to the peer group and the benchmark, creates a defensive feature which has served the manager well. Containing around 70 holdings, the portfolio is well diversified, and its high proportion of larger companies (c.85 per cent) adds an additional defensive element to the fund.
Focusing on total return and not just relative outperformance, the bold manager has to adhere to only one mandate constraint; keeping the yield high – the fund aims to yield at least 35 per cent over its comparative index. Strict sell discipline ensures that any stock is sold when its perspective yield falls below a 15% discount to the comparative index (for example, when the index yields 3.15 per cent, so all stocks whose yields are below 2.65 per cent, will be sold).
This yield constraint forces the manager to generate a strong return from yield (since 2008 historical yield has been above 4 per cent, and since 2006 yield has been averaging 4.5 per cent). Pidcock aims to generate 9 per cent annual total return, equally split between 4.5 per cent return from income, and 4.5 per cent – from capital growth. As a result, since launch in November 2005 to end October 2014, 55 per cent of cumulative fund’s return of 182 per cent came from income, compared to 39 per cent of the index’s cumulative return of 148 per cent.
If one worries that having around 40 per cent of the fund (against 25 per cent in the benchmark) in Australia and New Zealand, creates high concentration risk in the market highly exposed to commodities, whose prices are expected to broadly weigh on investors’ returns in the next couple of years, the following might sound reassuring. Of the 19 Australian holdings, only one – BHP Billiton – is a mining company, all the rest are well-diversified across sectors, with the common theme gearing up to Asian growth, mitigating the country concentration risk. These holdings range from Transurban – one of the largest toll-road companies in the region and Sydney Airport, to Spotless – a hospital management company and Australia’s biggest employer with around a 33,000 strong workforce, and Telstra, a telecommunications giant. Within financials, just one bank – ANZ Bank – is included, as the team prefers to hold a number of REITs, wealth managers and insurance companies.
Consistently strong performance has been achieved by the unconventional manager combining the conservative approach and high income. The total return focus balances the active approach with capital protection by adhering to high income targets, and we believe in Pidcock’s abilities to steer performance further north, adding value to investors, going forward.