At the recent Jupiter Investment Conference held at Claridge’s Hotel, London, Jason Pidcock, Head of Strategy, Asian Income, discussed why his focus on some of the largest, most liquid companies in the Asia Pacific region can offer great growth potential, as well as attractive income streams. While many investors are aware of potential for growth in small Asian companies, the growth potential of some of the largest companies in the Asia Pacific region is often underappreciated.
- Asia is a dynamic and compelling investment universe offering you and your clients strong portfolio diversification.
- Jason focuses on seeking out large, liquid companies, with strong fundamentals and growth potential, which have both the ability and willingness to pay dividends.
- Historically, the Jupiter Asian Income Fund has outperformed in months when the market fell, due to its more defensive, relatively low beta composition.
Jason started by highlighting some of the reasons why he believes Asia is the most exciting region in the world to invest in. The largest Asian companies are still just a fraction of the size of the largest US companies - and they have much further to grow. But this growth potential is often underappreciated, despite many companies across the region offering scalable business models with strong growth prospects, as well as attractive dividend yields or dividend growth. The Asia Pacific region can offer you and your clients three-way diversification, through country exposure, currency exposure and source of income.
Exciting structural growth themes
Travel & tourism
Jason particularly likes the travel & tourism structural growth story. Travel expenditure is the fastest growing category within the consumer universe. China is leading the way, as the population's disposable income and freedom to travel grow. Due to their proximity, Hong Kong and Macau attract the greatest number of Chinese tourists. Southeast Asia and Australia, as well as the US and Europe, have also benefited from growth in travel. Chinese outbound tourist expenditure is expected to reach as much as $300bn this year alone, up roughly 6.5% year-on-year.
One way of capturing this structural growth story is through casino operators. Sands China, for example, has the largest physical footprint in Macau, and its assets include 13,000 hotel rooms and a 15,000-capacity sports arena. It is one of just six companies with a casino licence in Macau, which is the only legal gambling destination in Greater China.
Sands China ticks all the boxes for Jason. Its business model is easy to understand, it's very scalable, it's cash-generative, and it has high barriers to entry. Jason regularly meets with the company's management team and believes it's very well-managed. Sands offers a dividend yield of around 5.7%, it has a market cap of around $38bn, and its shares are very liquid.
Technology & tech-enabled financial services
The technology sector, including tech-enabled financials, is another key area of underappreciated growth in Jason's view. Hong Kong-listed Ping An Insurance is one of the Jupiter Asian Income Fund's top 10 holdings. It's the largest life insurance business in Asia, with a market cap of approximately $227bn and double-digit dividend growth. Jason frequently meets with members of its senior management team, and he believes its management is strong. The company's first-half operating profit was up 24% year-on-year, it already has over 191m retail clients in China, and its client base and average number of products per client are growing steadily.
Overview of the Jupiter Asian Income Fund
Jason aims to maximise total return by investing in high-quality companies that have an ability and willingness to pay dividends. Since launch, the portfolio has had a bias towards developed markets: its five key markets are Australia, Hong Kong, Singapore, Taiwan and South Korea. The portfolio comprises 30 holdings, across a range of countries and sectors, and Jason is fully transparent about each position. Most of the companies held in the fund have strong balance sheets, and eight are in a net cash position. Of the other 22, most have low levels of gearing, but those with higher levels have less volatile cashflows.
Liquidity is a key focus. Assuming 20% of daily traded volume and three-month daily average volumes, Jupiter has calculated that 78% of the portfolio could be liquidated in three days. In Jason's view, we're likely to see regulatory change regarding liquidity, and he's confident the fund would be well ahead of any hurdle rate that might be enforced. Roughly half of the fund is held in companies with a market cap of more than $30bn, and Jason doesn't invest in companies with a market cap of less than $2.5bn or in unquoted stocks.
The top 10 holdings make up nearly 50% of the fund, but Jason won't hold more than 7% in any single holding. He also won't invest less than 1% in any stock because he only wants to hold meaningful positions. Cash levels stay between 0% and 3%, and there is no use of derivatives, currency hedging or gearing.
Jason's investment approach combines a mixture of top-down and bottom-up analysis. He holds lots of face-to-face meetings with companies: between the end of August and the beginning of October, he will have met with 11 of the 30 companies held in the portfolio. Collaboration with other colleagues at Jupiter also helps to generate ideas and increase conviction, but Jason has the freedom to invest in what he believes to be the best investment opportunities.
Portfolio turnover is very low. Only one new holding has been added to the portfolio this year: India Office Parks REIT. It is the first India-listed REIT; it has a market cap of over $4bn; and it owns, manages and rents out top-quality office property. It charges below-market rates, so Jason is confident about its earnings growth. Since its IPO in March, it has paid its first dividend and has significantly outperformed the Indian stock market.
Asia for income
The fund aims to deliver a dividend yield that is 20% higher than that of the FTSE AW Asia Pacific ex Japan. It currently yields around 3.7%, while the index yields 3.0%. At least 80% of the portfolio yields at least as much as the index, and Jason expects those stocks in the portfolio that offer lower yields to have much higher dividend growth rates.
The average yields the fund is achieving in each of its five key markets are considerably higher than their 10-year government yields (or ‘risk-free' rates). Government bond yields are expected to stay very low, and Jason expects to see strong dividend growth from companies held in the portfolio over the longer term.
Outperforming in challenging market conditions
Since launch, the Jupiter Asian Income Fund has returned 58.7%, compared to a return of 59.7% for the FTSE AW Asia Pacific ex Japan Index (to the end of August 2019). Given the fund's relatively low beta composition and the unusually strong period for emerging markets, the fund underperformed in the first couple of years; however, over the past 12 months it has returned 9.5% compared to 1.4% for the index. On a relative basis, the fund is better suited to more challenging market conditions: since launch it has outperformed in 87% of months when the index fell and has outperformed in approximately a third of rising months.
To conclude, Asia is a dynamic and compelling investment universe offering investors attractive portfolio diversification. Economic fundamentals that underpin cash-generative Asia Pacific stocks from across the region can offer an attractive investment proposition in the medium and longer term.
The fund invests a significant portion of the portfolio in emerging markets, which carry increased liquidity and volatility risks. This fund invests mainly in shares and it is likely to experience fluctuations in price which are larger than funds that invest only in bonds and/or cash. Quarterly income payments will fluctuate. All of the fund's expenses are charged to capital, which can reduce the potential for capital growth. The Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request.
Important Information: This document is intended for investment professionals and is not for the use or benefit of other persons, including retail investors. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. Past performance is no guide to the future. The views expressed are those of the Fund Manager at the time of writing, are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Company examples are for illustrative purposes only and are not a recommendation to buy or sell. Quoted yields are not guaranteed and may change in the future. This document contains information based on the FTSE AW Asia Pacific ex Japan Index. ‘FTSE®' is a trade mark owned by the London Stock Exchange Plc and is used by FTSE International Limited (‘FTSE') under licence. The FTSE AW Asia Pacific ex Japan Index is calculated by FTSE. FTSE does not sponsor, endorse or promote the product referred to in this document and is not in any way connected to it and does not accept any liability in relation to its issue, operation and trading. All copyright and database rights in the index values and constituent list vest in FTSE. Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ are authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM or JAM. 24376