The Chinese mainland equities markets, known as A shares, may be getting investor attention following precipitous falls after months of strong rises, but they are not the main area of focus for Matthew Dobbs, manager of Schroder Oriental Income Fund (SOI).
"I don't obsess about short-term moves but rather focus on companies with sustainable cash flow and the ability to make payouts," he says. "And we have never had a lot of our assets in China as we can't find many companies that offer sustainable returns there. We find that there are companies with better prospects in other markets.
"For example, many companies listed in Hong Kong are transparent, have good corporate governance, offer attractive yields and have strong balance sheets, as well as the ability to continue paying dividends."
The trust's largest geographical exposure is Hong Kong, which accounts for 23.8 per cent of assets, with China only accounting for 5.8 per cent.
Schroder Oriental Income's largest holding, accounting for 5.6 per cent of its assets, is Fortune Real Estate Investment Trust (HKG: 778), which owns and operates shopping malls in Hong Kong. Financial services provider BOC Hong Kong (HKG: 2388), meanwhile, is also among its 10 largest holdings, accounting for 3.1 per cent of assets.
The Hong Kong market didn't rise as much as Chinese mainland shares earlier this year, but conversely it has not experienced the same degree of correction recently. But Mr Dobbs did use the fall in Hong Kong as an opportunity to add to holdings when that market sold off.
Matthew Dobbs CV Matthew Dobbs has run Schroder Oriental Income since launch in July 2005, and also runs Schroder Asia Pacific Fund (SDP) and open-ended funds including Schroder Asian Alpha Plus (GB00B5V2VR34). Mr Dobbs is head of global small-cap equities at Schroders, which he joined in 1981 as a UK investment analyst. He has run Asian specialist portfolios since 1985. |
Schroder Oriental Income holds long-duration, interest-rate-sensitive holdings such as real estate investment trusts (Reits) and telecoms companies, which provide a more defensive yield, but alongside these has companies in modestly cyclical sectors such as IT, industrials and consumer discretionary. "Shareholders value lower volatility but also like the Asian growth story," explains Mr Dobbs. "Unlike UK equity income, which is largely defensive, Asian equity income shares are a mix of defensives and ones that offer exposure to economic growth."
When looking for investments, Mr Dobbs reviews all ideas from analysts, whether they are high-yielding or not; income and capital growth are the key features taken into consideration. Many of the stocks will already have attractive yields, but he also looks to exploit opportunities in stocks that are set to benefit from improving capital efficiency, rising returns and increasing shareholder distributions.
"I like good-quality managements, the ability to sustain returns, lower debt, companies that are growing and a focus on shareholders," he adds. "I am very wary of high but unsustainable dividend yields. And, ultimately, yield is a function of the share price - not something you can control."
Like a number of Asian equity income funds, Schroder Oriental Income has substantial exposure to Australia, with nearly a quarter of its assets invested in the country, its second-largest geographic exposure. However, good returns in local currency terms have been more than cancelled out by the weakness in the Australian dollar, given the deterioration in the terms of trade and looser monetary policy.
"Weaker commodity prices have eroded the terms of trade for some of these companies and a couple of years ago we were very concerned on the Australian dollar," says Mr Dobbs. "We don't have a lot of direct commodity exposure, but we do have domestic earners such as toll roads, airports and banks. We also have some Australian industrials, but these are international businesses that have benefited from the Australian dollar.
"To deal with this we took all our gearing (debt) and transferred it to Australian dollars, and so hedged our Australian exposure by borrowing in Australian dollars. This meant that we could keep our domestic earners in this country, some of which have done very well."
The trust currently has gearing of 4 per cent.
The Australian domestic holdings include banks and infrastructure stocks such as National Australia Bank (AUS: NAB). "We like banks in Asia because they tend to be very well capitalised and have good profit generation abilities," says Mr Dobbs.
The trust also holds Sydney Airport (SYD:ASX).
Although he picks companies according to their individual attributes, the fund is more invested in some markets than others. For example, he does not have much in South Korea. "We don't see much appetite for rising payout ratios there," he says. "We also can't have much in India for similar reasons."
Mr Dobbs has not made many changes to the portfolio over the past year, although he is constantly on the look out for new opportunities. "But we are now taking money out of interest-rate-sensitive areas such as Reits," he says. "US interest rate rises could be an issue for these."
