Abundance of earnings recovery

At end-March 2021 the portfolio had 54 holdings within its 50–60 range. Exhibits 1 and 2 show the fund’s exposures by country and sector at end-March 2021 and illustrate active management of the portfolio in the preceding 12 months. The largest underweight position is in Hong Kong & China, at 8.2pp lower than the index (compared to 6.4pp lower at end-March 2020). Given the strategy is to populate the portfolio with undervalued companies, IAT’s underweight stance is perhaps expected as China is the third strongest performing emerging market of 2020 and currently represents half of the benchmark. The three notable country overweight positions are Taiwan (3.5pp), South Korea (1.6pp) and India (2.5pp). The manager believes that India should in due course see a recovery, as the current COVID-19 rate subsides, aided by higher vaccination rates and the in-house ability to manufacture vaccines.

Over the 12 months to end-March the manager continued to trim financials (-2.3pp, see Exhibit 2), bringing the position to 21.5%. This 3.2pp overweight relative to the benchmark is a result of Hargreaves’ selective additions to the sector. The weight of the financials sector swung from 33.9% at July 2019 through to as low as 17.8% in July 2020.

Consumer discretionary sector exposure grew 2.0pp. Autohome, a consumer discretionary name held by IAT, is China’s largest online platform for automobile buyers and sellers. The company looks to shift monetisation away from advertising and dealer lead generation, toward data services acquisition in the tech sector. This highly cash generative business has net cash on its balance sheet.

Exposure to the real estate sector was up by 3.2pp from a very small position, bringing it in line with the index (4.1%). The manager initiated a position in China Overseas Land & Investments, a real estate company with the lowest financing costs among its peers. The team believes that this advantage will allow the company to benefit from the recovery in China’s property market and grow by acquiring land banks/projects from overleveraged developers should opportunities arise.

The team also bought CK Asset, a Hong Kong listed real estate business, amid uncertainty over the outlook for Hong Kong property and its UK pub business Greene King. Hargreaves points out that diversification of CK Asset’s income base outside Hong Kong should enhance earnings, particularly as the lockdown in the UK is being lifted. Management has been building a war chest balance sheet over the last few years and is now looking to grow the business either organically or through M&A.

The technology sector increased by 1.0pp over the 12 months and the manager is 2.0% overweight the index. Additions to the less COVID-19 pandemic sensitive tech hardware sector included Largan Precision, a Taiwanese smartphone cameras lens maker and market leader, as flagship phones continue to adopt higher-spec cameras.

As Asia began to navigate the crisis in the spring and summer of 2020, Hargreaves increased exposure to selective cyclical economically sensitive businesses, given their undemanding valuations and strong balance sheets. One example is Pacific Basin, a bulk shipping company (small cap). In the smaller ships market, where the company operates, freight rates are at the highest point since 2010, as demand exceeds supply. The team reckons that earnings will be more than double the level predicted by analysts, even after recent consensus forecast upgrades.

Hargreaves also added companies with a more defensive stance, on favourable valuations. These include Uni-President Enterprises, a conglomerate in Taiwan and owner of Uni-President China, a food and beverage company that also owns a franchise in the Philippines (noodles). Other new introductions to the portfolio included ENN Energy, as the team took the view that strong growth in gas volumes and new residential connections over the medium term were not reflected in the company’s market valuation.

The team has been steadily taking profits from outperformers, particularly within the communications services sector (down 4.1pp), taking profits in Tencent and Baidu, as well as selling Indian software services company Infosys and trimming Jiangsu Yanghe, JD.com and MediaTek. MediaTek was bought in Q117 as an out-of-favour stock, and the share price has appreciated some 500% over the holding period. Following such a run, Hargreaves is wary about sustainability of earnings, and has gradually reduced the position to c 20% of the maximum IAT held in the stock. The holding in Woodside Petroleum was sold, reducing the energy sector exposure by 1.0pp.

Following the challenging first six months of 2020, IAT is back to consistent outperformance of the benchmark over all periods longer than three months, shown in Exhibit 3. Following the timely portfolio restructuring in Q220, in response to the pandemic-hit markets, the manager picked the right stocks to drive the outperformance. Over the past six months (to end May), a number of the top 10 holdings were among the best contributors. These included Samsung Electronics (the largest holding of 7.6% at 31 March 2021), Alibaba (4.8%) and ICICI bank (3.1%).

COVID-19 sensitive cyclicals were among the biggest drivers of relative performance since November 2020, following positive vaccine news in November 2020 and the approval of further stimulus packages. These included Indian and ASEAN (Association of Southeast Asian Nations) financials, selected real estate holdings and other cyclical names such as Pacific Basin Shipping. Their share prices responded positively to faster than expected recovery in earnings. Stock selection in the technology sector also continued to be a positive driver, including contributions from technology giants Baidu and Tencent Music Entertainment, as well as holdings in technology hardware companies, such as Asustek.

Five-year discrete performance data in Exhibit 4 illustrate the visible relative performance recovery over 12 months to end May 2021.

In Exhibits 5 and 6 we present performance and a few other metrics relative to peers.

IAT ranks top over one-, three- and 10-year periods within its Asia Pacific equity income peer group of five funds, and second over five years, on a net asset value (NAV) total return basis. This strong relative performance is complemented by a competitive yield of c 4%.

Within the Asia Pacific group IAT ranks well as well: it is among the top 50% of the seven funds over one and three years (Exhibit 6).

The Association of Investment Companies moved IAT from the Asia Pacific sector into the Asia Pacific equity income sector. Considering the board’s August 2020 initiative introducing a regular six-monthly dividend equivalent to 2% of NAV, we believe, the reclassification is justified.

In August 2020, the board announced a dividend enhancement initiative to pay a regular six-monthly dividend equal to 2% of NAV on the last business day of September and February. In 2020 the board approved the use of revenue and capital reserves when necessary to smooth dividend payments in years when they are not fully covered by revenue income.

On 23 October 2020 the company announced a first interim dividend of 6.7p per ordinary share in respect of the year ending 30 April 2021. 6.7p is equivalent to 2% of the company’s NAV on the last business day of September 2020. A second interim dividend of 8.40p per ordinary share in respect of the year ending 30 April 2021 was announced on 25 March 2021 and paid on 27 April 2021. This gives a total distribution of approximately 4% of NAV over the year.