abrdn Asian Income Fund — Core Asian fund offering income and capital growth

AAIF’s managers aim to invest in the most successful and promising, reasonably priced, dividend paying Asian companies across the market cap spectrum. They can draw on the deep knowledge base (built up over more than 30 years) of abrdn’s in-house team of around 40 analysts based in six locations in the Asia-Pacific region. This resource provides a competitive advantage, as the local team can identify attractive smaller-cap opportunities that may be overlooked by AAIF’s peers. Investee businesses are easy to understand, they operate in structural growth areas and have reliable earnings, sustainable dividends and strong balance sheets. AAIF’s quality portfolio with its yield bias means that the company should be resilient during periods of share price weakness, but is likely to lag a strong equity market.

One of AAIF’s managers, Yoojeong Oh, provides some perspectives about the Asia-Pacific investment backdrop. She highlights major consumption potential in the region, which should support economic growth and enable Asia to account for more than half of global growth by 2025. The manager suggests that favourable demographic trends in China and India, for example, and dynamic growth in South-East Asian economies including Indonesia and Thailand are not fully appreciated. Dividends are becoming a more important feature in the Asia-Pacific region, where more than 50% of index constituents are now yielding more than 2.5%. Oh believes that there is a low risk of dividend cuts in Asia due to robust free cash flow coverage and strong balance sheets, which can support growing dividends.

In aggregate, valuations in the Asia-Pacific region continue to look very attractive in both absolute and relative terms (Exhibit 1). However, there are wide country differences; for example, at the end of August 2024, the MSCI India Index was trading on a 24.2x forward P/E multiple, while China, which has faced economic headwinds, was trading on a single-digit 8.9x multiple.

The high-quality nature of AAIF’s portfolio is illustrated by its higher profitability, superior return on equity and higher dividend yield versus the reference index. Positions are held for the long term; annual portfolio turnover has averaged 15–35% over the last three years, which implies a three- to seven-year holding period. The fund’s active share is above 70% (0% is full index replication and 100% is no commonality with the reference index).

There are a series of themes represented in the portfolio, which are listed here along with examples of investee companies: Aspiration – AIA Group and Midea Group; Building Asia – Bank Mandiri and Mirvac Group; Digital future – Samsung Electronics and Sunonwealth Electric Machine Industry; Going green – DBS Group Holdings and Power Grid Corporation of India; and Technology enablers – Accton Technology and TSMC.

abrdn believes that ESG factors are financially material and can affect corporate performance. AAIF has an ‘A’ MSCI ESG score, and higher ratings in all areas compared with its reference index: ESG quality score (August 2024) 7.0 versus 6.3; environmental 5.9 versus 5.6; social 5.5 versus 5.1; and governance 5.9 versus 5.2.

At the end of July 2024, AAIF’s top 10 holdings made up 42.0% of the portfolio, which was a higher concentration compared with 38.5% 12 months earlier; eight names were common to both periods. There were 58 positions in the portfolio, which was four less than 62 at the end of July 2023.

In keeping with AAIF’s dividend growth focus, the fund is over or market weight the three highest yielding countries in the Asia-Pacific region: Taiwan, Singapore and Australia. These countries are the largest weightings, making up around 60% of AAIF’s portfolio. Oh explains that Singapore is home to good-quality businesses that are expanding overseas, such as banks, which are increasing their operations in China, while growing their wealth management and digital businesses.

AAIF has underweight exposures to the growth markets of India and China. In India, companies generally use their free cash flow to grow their businesses rather than return cash to shareholders. The managers have been adding to AAIF’s China exposure as some companies are changing their attitudes towards paying dividends. However, investments are selective as some of the high-yielding Chinese companies do not pass abrdn’s quality hurdles; instead, the managers seek businesses with resilient earnings and dividend growth, that are trading on reasonable valuations.

AAIF is overweight technology stocks, which is the largest sector in the reference index, holding companies with a broad range of market caps including TSMC at TW$23.8tn versus Sunonwealth Electric Machine Industry at TW$24.8bn. Oh says that there are many good-quality, dominant global technology companies in Asia that have cash on their balance sheets and strong free cash flow. There is an above-index allocation to real estate stocks, which generally offer attractive dividend yields. AAIF is underweight some of the traditional high-yielding sectors including healthcare. Within Asia, rather than major pharma companies, healthcare companies tend to be generic drug or contract research organisations, which are capital intensive, commoditised businesses that do not pay dividends. AAIF also has a notable underweight exposure to the consumer discretionary sector.

Within the technology sector, AAIF’s managers sold AEM Holdings and Hana Microelectronics, using the proceeds to invest in other hardware businesses that they consider have better business outlooks. This includes a new position in SK Hynix, which is one of the largest global suppliers of high-bandwidth memory chips that are used to power AI servers.

Other new holdings are Mirvac Group, which is a high-quality Australian property group, and Australian toll-road operator Transurban Group. Taiwanese media company momo.com and ASX, the Australian Stock Exchange operator, were sold as their valuations were no longer considered attractive. Meanwhile, Chinese automotive company SAIC Motor was sold with the proceeds reinvested in new holdings in other Chinese businesses that the managers consider have attractive yield prospects: Fuyao Glass Industry, the number two global player in the automotive glass industry; Inner Mongolia Yili Industrial, the country’s largest dairy brand, with an economic moat and growing free cash flow; and PICC Property & Casualty, which is the largest property and casualty insurer on the Chinese mainland.

AAIF is the third largest of five funds in the AIC Asia Pacific Equity Income sector (Exhibit 5). Its NAV total returns are above average over the last one, three and five years, ranking second, second and third respectively. Despite this creditable relative performance, AAIF has the second-widest discount in the sector, where one fund is trading at a premium. Due to the recent fee reduction, AAIF now has the joint second-lowest ongoing charge. It has the highest level of gearing. AAIF’s dividend yield is second only to Henderson Far East Income (HEFL), which is expected to continue with its progressive dividend policy.

Some income managers take a barbell approach of investing in businesses with a high yield and others that do not pay a dividend. In contrast, all of AAIF’s portfolio companies contribute to the fund’s overall dividend yield, with exceptions made for IPOs or a spin-off company that is committed to future dividend payments.

Morningstar classifies three members of the AIC Asia Pacific Equity Income sector as large-cap blended funds: AAIF, JPMorgan Asia Growth & Income (JAGI) and Invesco Asia Trust (IAT). The other two – HFEL and Schroder Oriental Income Fund (SOI) – are classified as large-cap value funds. Looking at market cap breakdowns, unlike its peers who generally hold more than 90% in large-cap stocks, AAIF has a notable 25% exposure to small- and mid-cap companies. In terms of cyclicality, AAIF’s breakdown between cyclical (c 40%), sensitive (c 55%) and defensive (c 5%) sectors is not that dissimilar to those of its peers.

Exhibit 6 shows AAIF’s relative returns. It has outperformed the MSCI AC Asia Pacific ex Japan Index over the last three and five years in both NAV and share price terms.

In H124, AAIF’s NAV and share price total returns of +6.8% and +6.9%, respectively, trailed the MSCI AC Asia Pacific ex Japan Index’s +9.6% total return (currency adjusted). AAIF suffered from its underweight exposure to some of the growth markets, such as China and India, which performed relatively strongly. However, over the longer term, a below-index Chinese weighting has proved beneficial. Due to economic headwinds, the Chinese stock market has been in a downtrend since the beginning of 2022.

The low beta nature of AAIF’s portfolio is highlighted by its upside/downside analysis, where the capture rates are less than 100. Over the last decade, its cumulative upside capture of 86.3% is very similar to its downside capture of 86.0%, implying that the fund should move around 15% less than the MSCI AC Asia Pacific ex-Japan Index during both rising and falling markets.