abrdn Asian Income Fund — Income growth and above-average dividend yield

AAIF’s manager seeks quality companies that can grow earnings and dividends over the long term. This means that the company’s performance is likely to lag in a strong market but should prove defensive when markets are weak. What may not be widely understood is that over the last 20 years, more than 50% of Asian equity total returns have come from dividends, and dividend growth has exceeded that in Europe and the US. AAIF offers an above-market dividend yield.

The three highest-yielding markets in Asia are Singapore (AAIF is considerably overweight its benchmark), Taiwan (overweight) and Australia (modestly overweight). June to August is a seasonally strong period for dividend payouts and AAIF’s manager may increase exposure to companies that pay annual dividends ahead of their distributions. As examples, the Hon Hai Precision Industry and MediaTek positions were topped up ahead of their dividend payments.

abrdn believes that ESG factors are financially material and affect corporate performance. MSCI has awarded AAIF an ‘A’ ESG score, and it has higher ratings in all three areas compared with its benchmark: environmental score of 5.7 versus 5.3 (at end-April 2023), social 5.1 versus 5.0 and governance 5.7 versus 5.1; the fund’s 6.6 ESG quality score compares with 5.9 for the benchmark.

Earlier this year, one of AAIF’s managers, Singapore-based Yoojeong Oh, travelled to South Korea to attend Samsung Electronics’ AGM, as part of the investment team’s effort to improve engagement and communications with the independent directors of the portfolio holdings. She highlights how Samsung’s ESG credentials have improved significantly over the last decade. For example, the company has separated the role of chairman and CEO, increased the diversity of experience on the board and now has a corporate sustainability office that reports into Samsung’s board, targeting problem areas such as labour concerns within its supply chain and increasing water recycling in a water-intensive manufacturing process.

As shown in Exhibits 1 and 2, AAIF has a notable underweight exposure to China. A large part of the index weighting is internet companies that do not pay a dividend, and there can be low transparency at those businesses that do pay out, such as banks. This relative positioning has been beneficial to the company’s performance in recent years as investor sentiment towards the country has declined, having weighed on AAIF’s results in the prior five years, when China was viewed as a ‘growth leader’.

There are a number of themes represented in AAIF’s portfolio illustrating the breadth of the Asian market and the significant number of stock picking opportunities. These include:

Global equity markets have rallied this year, with particular strength in large-cap US technology stocks that are deemed to be beneficiaries of the growth in AI. Asia has performed relatively poorly so far in 2023 as the post-COVID-19 Chinese economic recovery has not lived up to consensus expectations. This has been beneficial for AAIF’s relative performance given that it has a meaningful underweight exposure to China. Although Asia has underperformed in 2023, the region provides investors with attractive valuation and yield support and has a vibrant technology sector. For example, while US names are grabbing the headlines, Taiwanese companies including TSMC and Samsung Electronics have good growth prospects and pay dividends.

Looking at Asian corporate earnings, there were negative Q223 preannouncements from some of the technology companies due to a deep downcycle in memory and semiconductor chips. The market view is for a demand recovery in H223 and 2024, while supply reductions should lead to a better supply/demand balance, which should support product prices. Consensus estimated Asian earnings growth for 2024 is +65%, the bulk of which is due to an anticipated recovery in Taiwanese and South Korean technology company earnings that declined over the last two years. Excluding these countries, Asian earnings growth in 2024 still looks healthy at +10–20%.

Following the failure of US regional bank Silicon Valley Bank in March 2023, AAIF’s manager reduced the fund’s financial exposure by selling Macquarie Group (Australia – global financial services), Kasikornbank (Thailand – formerly the Thai Farmers Bank) and Medibank Private (Australia – private health insurance). More recently, the manager has added to the position in AIA Group (China – insurance) to benefit from growth in consumer spending, which should accelerate if the authorities successfully stimulate the Chinese economy. At around 25%, financial stocks remain AAIF’s largest sector exposure, which is modestly ahead of the benchmark weighting.

Tencent is a new addition to the fund. Historically, this company did not pay a decent dividend so was not considered for inclusion in the portfolio. Its share price declined significantly on regulatory concerns, but the company has a wide moat, which is supported by a range of businesses including its online gaming franchise, chat platforms and consumer services. Tencent hiked its 2023 dividend by 50% and returned the proceeds from the sale of its holding in Meituan to shareholders; combined, these actions provided an attractive 6% yield.

Another new holding is SITC International Holdings Company, which is a Hong Kong-based shipping logistics company operating through two segments: container shipping and logistics, and dry bulk and others. It operates in strong Asian trade routes and is well positioned for an acceleration in global trade. SITC’s current double-digit dividend yield is expected to normalise at around 6%.

The manager recently bought and sold a position in Astra International, which is an Indonesian conglomerate with a wide range of businesses such as automotive (including electric vehicles), financial services and heavy equipment. Subsidiary company United Tractor had a windfall and paid out a special dividend. This potential opportunity was identified as a result of abrdn’s regional presence. When the Astra position was initiated, the manager had a positive outlook for the company’s businesses and its shares were reasonably valued. The shares appreciated in the run-up to the special distribution, so the manager collected the dividend and then sold the Astra position.

This transaction is an unusual event as AAIF generally has a long-term holding period. Portfolio turnover in 2022 was 14%, which was in line with the five-year average. This implies an average seven-year holding period.

AAIF’s overweight financials and real estate positions are not unusual for a high-income fund; these two sectors make up around 40% of the portfolio. However, around a quarter of the fund is held in technology stocks, which is above the benchmark weighting. AAIF’s two largest positions are TSMC and Samsung Electronics and they are held because of their quality attributes including strong balance sheets and cash flow. The company has no energy and healthcare exposure as in Asia these stocks either do not meet the manager’s quality criteria or they do not pay attractive dividend yields. Within the region, energy stocks in the index tend to be state-owned companies, for example, in Korea, India, Thailand and China, which are run to maximise the benefit to nations rather than shareholders.

At end-June 2023, AAIF’s top 10 holdings made up 36.7% of the portfolio, which was modestly higher than 35.2% 12 months earlier; eight names were common to both periods. The top 10 is a mixture of higher-yielding stocks; for example, utility and real estate companies and dividend growth names such as TSMC and Samsung Electronics.

Exhibit 4 shows the five companies that make up the AIC Asia Pacific Equity Income sector. Three invest for income as well as capital growth: AAIF, Henderson Far East Income Trust (HFEL) and Schroder Oriental Income Fund (SOI). These companies have straightforward yields as their dividends are paid out of income. The other two funds, JPMorgan Asia Growth & Income (JAGI) and Invesco Asia Trust (IAT), have high distributions, which may be paid out of capital.

AAIF does not hold any companies that do not contribute to the fund’s overall dividend yield unless the business is an IPO or a spin-off and has committed to a future dividend payment. The manager does not take a barbell approach of investing in some businesses with a high yield and others that do not pay a dividend.

Looking at the peer group NAV total returns, AAIF’s are above average over the last three and five years, ranking third out of five funds, while ranking fourth over the last one and 10 years. The company’s discount is currently the widest in the group, which is somewhat surprising given its above-average mid-term performance. AAIF’s board employs an active share repurchase programme aiming to manage the discount. The company has the second-highest ongoing charge, but no performance fee is payable. AAIF has the highest level of gearing and the second-highest dividend yield of the whole sector and of the three companies that pay a dividend based purely on income.

AAIF’s relative returns are shown in Exhibit 5. It has outperformed the MSCI AC Asia Pacific ex Japan index over the last one, three and five years and the MSCI AC Asia Pacific ex Japan High Dividend Yield index over the last three and five years in both NAV and share price terms. The company’s performance has been less successful over the last decade, partly due to the portfolio’s underweight Chinese exposure.

Chinese stock market weakness in H123 was positive for AAIF’s relative performance. The company also benefited from its overweight exposure to Taiwan and Thailand, which performed relatively well, while the below-index position in South Korea detracted from performance. In Thailand, positive contributors included consumer financing firm Tisco Financial Group, which offers a c 8% dividend yield. Defensive business Taiwan Mobile also added to AAIF’s performance and has a c 5% dividend yield.

Positions that detracted from the company’s performance in H123 include its Singaporean holdings. The Singapore market was relatively strong in 2022, led by value stocks. Its banks’ dividend handcuffs were removed last year, and these stocks have underperformed so far this year in an environment of rising interest rates and system-wide concerns following the problems at Silicon Valley Bank and Credit Suisse. Venture Corporation is an electronic manufacturing services company based in Singapore. It is a high-margin producer of value-added products across a wide range of end markets including 5G infrastructure, genome sequencing and consumer items. Its stock price has corrected this year, but the manager still likes the company as it fulfils AAIF’s quality criteria.

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