A raft of new income funds predominantly investing in Asia have been launched on the stock market. These funds provide the opportunity to diversify your income stream and, with income contributing a greater proportion of total returns than capital gains, it's an opportunity worth taking - even if only in the short term.
After all, Asia is now one of the highest-yielding regions anywhere in the world, and dividend payments are expected to continue growing for the foreseeable future. In fact, Asian companies are estimated to pay out around $69bn in 2005 - around twice as much as in 2003. As Andrew Beal, manager of investment trust Henderson TR Pacific, argues, the financial crisis of 1998 "has really bludgeoned Asian managements into treating capital as something that costs". They are doing this by paying shareholders dividends and returning cash through share buy-backs.
Mr Beal also points out that risk-averse domestic investors are beginning to shift their savings from the banks into shares because, "when you have a stock market that's yielding 4-4.5 per cent and growing, it's a very attractive place to put your money".
However, not everyone is convinced. Justin Modray, at adviser Bestinvest, argues that Asian companies have not traditionally been known for producing consistent dividends. Despite cash-rich balance sheets, rewarding shareholders has always been a low priority for them. He admits that dividends are strong now, but says that is no guarantee that companies will not revert to type and cut them.
Funds to watch
For this reason, Mr Modray likes the Morant Wright Japan Income investment trust. The trust expects to pay a gross yield "approaching 4 per cent", but a large part of this is generated by a currency swap that aims to exploit the yen/sterling interest-rate differential - effectively borrowing yen at a low rate and depositing in sterling at a higher rate. This does mean, however, that the trust will not benefit from an appreciation of the yen against sterling.
But it's still the only Japanese investment trust, apart from Martin Currie Japan, currently paying a yield, and this currency swap should offer some protection against underlying volatility in the portfolio. The managers will be incentivised by a performance fee of 10 per cent of total returns over and above a 10 per cent a year absolute hurdle. Morant Wright specialises in Japanese equities and uses a value-based investment strategy that has worked well in the past - the Morant Wright Japan Fund has returned more than 90 per cent since launch in 1999, during which time the Nikkei 225 has fallen by more than 20 per cent. Mick Gilligan, associate director of research at broker Killik & Co, also recommends this fund.
Another fund awaiting launch is the Aberdeen Asian Income Fund - also an investment trust. The fund will aim to pay a gross yield of 4.5 per cent, generated predominantly through equities, but also through some fixed-interest exposure. It will be managed by Aberdeen's highly rated Asian team, led by Hugh Young, who runs a number of sector-topping funds investing in the region. Unusually, the managers are incentivised on the basis of the trust's capital performance rather than its total return. The trust should start trading in mid-December, when its opening net asset value will be greater than the issue price. Given that Henderson Far East and Schroder Oriental Income, the only other two trusts in the sector, are trading on premiums of 5 per cent and 7.4 per cent, respectively, getting in early would appear to be a sensible option.
Two open-ended fund alternatives are Jupiter Japan Income and Newton Asian Income. The Jupiter fund, managed by Simon Summerville, has grown more than 6 per cent since its launch in September. The Newton fund, meanwhile, which is managed by Jason Pidcock and was launched last month, is targeting a yield of over 4 per cent with quarterly distributions. It employs strict buy and sell criteria - a stock must have a yield in excess of the FTSE Asia Pacific ex Japan and have good growth prospects, and any stock whose prospective yield falls below a 15 per cent discount to the index will be sold.
Another interesting fund offering income from an unlikely source is the Merrill Lynch Commodities Income investment trust, managed by Richard Davis. But, again, Mr Modray urges caution. He says that high oil prices mean a number of companies operating in the sector have enough cash to pay dividends but, if oil prices fall or those companies choose to spend that cash on new development projects, these dividends may well dry up.
Merrill Lynch, however, is confident that it can produce a yield of around 4.25 per cent by investing in mining and energy stocks. The case for investing in commodities is certainly strong, as dwindling supply and increasing demand from developing economies such as India and China drive up prices. Indeed, the excellent Merrill Lynch World Mining trust has returned 186 per cent over the past three years. So, if you want to get an income as well, this could be a worthy alternative. The fund is due to start trading in mid-December.
