What is your background in Asian income investing?

I’m new to Aberdeen, having arrived in May, but I’ve spent 15 years investing across Asian and emerging markets. The majority of those years were spent at JP Morgan Asset Management, first in the Singapore office and then in London. There, I managed the JP Morgan Global Emerging Market Income trust. It was rated strongly by Morningstar, and I aim to replicate that success and more at Aberdeen.

Even though the trust was focused on emerging markets, the overlap between Asia and emerging markets on the income side stands at about 80%. The key difference now is that Aberdeen Asian Income Fund (AAIF) invests in developed market Asia as well – Singapore and Australia, for example.

What do you believe is most important when investing in Asia?

Asia has a lot of growth. Its economic growth is driving over half of the world’s GDP growth. There is real strength in technology, while Indonesia and India have young populations and a natural demographic dividend. Growth comes readily to Asia, but that growth comes with a wider range of outcomes.

It's like driving a car down a highway. The road is winding, but the car can only go fast. While getting home quickly is great, the car needs a well-functioning set of brakes. That’s what we’re trying to do. We’re trying to pursue the growth of Asia in a balanced way with a quality income approach.

The AAIF portfolio aims to own good quality businesses over the long run, businesses that generate a lot of free cash flow that can be returned to shareholders as dividends. Dividends are a form of corporate governance. Asian companies have a wide range of outcomes because some of them are still quite immature compared to developed markets. They are in their teenage years and like all teenagers, they need some guardrails in place.

You talk about ‘quality’ businesses – what does that look like in practice?

We want to get access to Asia’s growth. That means owning strong businesses with the capacity to generate high returns on equity over long periods of time. These companies tend to generate value as they grow. They also need strong cash flow generation. This leads us to companies that are efficient with their capital and reinvesting effectively in their businesses. We want to see companies with a strong capital allocation policy that are committed to paying out dividends over time, as a signal of corporate governance.

Does that lead you to certain countries or sectors?

Certainly, there are some pools of income where it is more natural for us to fish. There are countries that are natural income generators – Taiwan, Indonesia or Thailand for example. These countries are home to high quality companies with structural growth on their side, that pay out a reasonable amount in dividends. This might include the Taiwanese semiconductor companies, for example. There is a clear need for chips to support AI development. Equally, this is a complex field, so the companies tend to be well-managed.

Countries such as Singapore or Australia may be slower growth, but they provide a very consistent income. This is important for portfolio balance: you can have the growth from emerging economies, with a more consistent dividend yield from the developed economies. Asia offers that unique combination.

Do you plan to make any changes to the trust?

The style of the trust will remain the same. We invest in high quality companies and target an aggregate income superior to the benchmark (the MSCI AC Asia Pacific ex Japan index). That said, we are evolving the process around how we invest across a range of dividend yields. While we want to maintain AAIF’s average dividend yield, we want to spread out those opportunities and take a total return view, looking at dividend yield plus growth.

For example, if we invest in a low yielding stock, our requirement for earnings growth will be higher and vice versa. We own TenCent, a very fast-growing internet company in China. It has 10-11% earnings growth, but only yields 1%. We also own DBS bank in Singapore, which is only growing at single digits, but it has a dividend yield of 7%. From a total return standpoint, these companies are similar, but by holding them both, we can capture the growth opportunity in a balanced way.

This brings a broader opportunity set. India, for example, has traditionally been a difficult market for dividend investors. Its yield is low, and it is a high growth market. We are now less underweight India because of this shift.

The trust’s dividend is high, at 7% – is that sustainable?

We have recently set out a new enhanced dividend policy of 6.25% of net asset value. The trust is trading at a discount, which is how the yield is now 7%. We have grown dividends per share every year for the last 16 years and we believe we can continue to do so, even with the high starting point. The core portfolio yields around 4.5%. We boost this by 2% by tactical trading around ex-dividend dates. It is a covered dividend, so we are not paying out capital. The current yield appears sustainable and compares favourably to the AAIF’s peers.

Why is now a good time to look at Asia?

We think Asia is undervalued and underappreciated. Asian markets are trading at the widest discount to developed markets in their history. There is also a cyclical argument. Asia’s earning power has only just returned to pre-Covid levels and companies are poised to grow from a healthy base. In the US, metrics such as return on equity or valuations are at all-time highs. While the US technology giants are very good businesses, there are questions over their valuations.

In Asia, there is also a substantial impetus from policy changes. China is emerging from four years of restrictive policy. In late 2021, the government came down hard on the internet and education sectors in the name of ‘common prosperity’. That’s not mentioned any more. China’s style is trickle-down, rather than the US shock and awe approach, but there are incremental changes supporting corporate growth.

It is not just China. In South Korea, the Corporate Value Up policy has been a real success story. South Korea had been a low-quality market, with weak corporate governance and poor capital allocation. This policy framework has helped companies improve and there have been real changes, particularly in the financial sector.

Asia is also the underappreciated home of global technology. Semiconductor companies in Asia provide the necessary infrastructure to make AI happen. Without them, AI would cease to exist. Nvidia creates the blueprint for chip design, but it needs to pass through Asian semiconductor companies to make it a reality. Yet the Asian companies are far cheaper. We believe investors will, at some point, acknowledge that.

Discrete performance (%)

Total return; NAV to NAV, net income reinvested, GBP. Share price total return is on a mid-to-mid basis.
Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value.
Source: Aberdeen and Morningstar.
Past performance is not a guide to future results

(A) Including current year revenue

Important information

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG, authorised and regulated by the Financial Conduct Authority in the UK.

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