Newton Asian Income suffers from New Zealand holdings

This is largely due to underperformance in the third quarter, in particular linked to its holdings in New Zealand shares. Newton Asian Income has a holding in Chorus, New Zealand's largest telecoms company, but the company's share price fell 47.5 per cent between the end of October and early December after the government reneged on an agreement regarding copper pricing.

"Chorus is rolling out a fibre network and had committed to making huge investments into this," says Jason Pidcock, manager of Newton Asian Income. "To fund this it simply required constant pricing for its copper network, but the regulator said that it had to reduce copper prices and the government, which had always previously indicated that it would overrule the regulator, wobbled, and now can't get support to override the regulator.

This is similar to reducing the coupon on a government bond. It has caused a lot of upset in the investment community and many other share prices in New Zealand have been affected in the wake of this, unfortunately including our other holdings in this country. We own two utilities, renewable power generator Meridian Energy which has fallen 17.6 per cent and Mighty River Power down 13.4 per cent."

The fund also owns Z Energy which fell 10.4 per cent and Telecom New Zealand which fell 6.26 per cent.

"Our weighting in New Zealand which briefly touched 5.3 per cent at the beginning of October has now fallen," says Mr Pidcock. "This is due to some selling but market falls have been the main reason. We are not going to invest in New Zealand for the foreseeable future as we now have to associate this country with political risk and rank it with places like Pakistan. It is a shame because New Zealand has many stocks which are yielding quite a lot. The four holdings we have other than Chorus have yields of over 6.3 per cent. I don’t see a prolonged effect but we will be much more wary about this country in future."

Also, Australian oil and gas services company WorleyParsons pulled back after management tempered expectations for the next half in a profit warning, despite some recent contract wins. Some of its industrial contracts have been pushed out a bit. "But we like this company very much, it is high quality, its customers are very happy, its balance sheet is strong, its commitment to paying dividends remains strong and its payment ratio will probably go up," says Mr Pidcock. "But it is in a cyclical space and we have to bear in mind slightly lower earnings. We have not sold any at this level because it is quite good value and its earnings should grow from next year onwards."

Meanwhile the fund's October dividend payout is down year on year due to currency effects, and the year on year payment is likely to be down about 1.5 per cent. Sterling has been strong against the currencies the fund invests in but Mr Pidcock expects the dividend to go up a bit next year, unless Sterling appreciates further.

"It has been strong and we do not expect the underlying currencies in Asia Pacific to fall by a lot more against sterling," he adds. "But we will not engage in hedging: ultimately currency moves are worked through in equity valuations, and if countries like Australia have lower currency valuations, typically after some lag that means higher equity prices."

The 12-month yield of 5.4 per cent is still one of the highest in the Asia ex Japan fund sector. And Mr Pidcock expects to do much better going forward, due to the valuations of portfolio holdings. "Overall the valuations look good in terms of price-earnings ratio: they are the lowest all year and the yield is the highest it has been for sometime," he says.

He is reasonably positive on the medium to long-term outlook for the Chinese economy. "If there is an improvement the fund could benefit via its exposure to Australia and other countries in the region," he says. "There should be a pick up in Australia in 2015 as it begins to increase its gas exports. This should underpin the currency."

He adds that Australian government debt is low and he does not expect quantitative easing in that country, while companies are offering good yields and corporate governance is good. "A number of indicators out of Australia suggested a pick up in activity and confidence since the recent election, consequently the Reserve Bank of Australia kept rates on hold at 2.5 per cent," he adds.

He also invests in some companies in Hong Kong and China, and the best performing company year to date (as of early December) was the fund's largest holding, Sands China. This Macau casino operator has benefited from strong revenue numbers, and reported record numbers. "This is one of the best ways to play Chinese consumption growth," he says. "When we can find suitable direct exposure to China we are very happy to invest in it."

Meanwhile analysts are not concerned about recent underperformance.

"Investing in any fund requires a medium to longer-term investment horizon so I don't look at performance over one year but the manager's longer term track record. In the case of Newton Asian Income, this is very impressive," says Adrian Lowcock, senior investment manager at Hargreaves Lansdown.

"Equity income funds also focus on strong businesses with good cash flows and a healthy dividend, so there will be some differences with the index, while even the best managers have periods when they lag the index. And investing in Asia is a long-term strategy, so investors should take a five to 10-year view on the region."

Source: Morningstar

Source: Morningstar as at 13 December 2013

Top 10 holdings as at 30 November 2013

Geographic breakdown as at 30 November 2013