The UK stock market has historically offered some of the highest equity yields, but is highly concentrated, meaning only a few companies account for a very large part of the dividend haul. If only one of them cut their dividend it could have a serious effect. And with some UK companies paying out more than they are taking home, their scope to grow payouts is looking stretched, with some FTSE 100 companies not expected to earn enough in the coming year to cover their forecast dividends.
- Good long-term returns
- Attractive yield
- Exposure to Asian growth
- Asian dividends growing
- Experienced manager
- More risk than developed market funds
So it might be a good idea to include some non-UK income sources in your portfolio. "Income investors should focus on funds invested in areas where you can expect long-term income growth," says Sam Lees, head of research at FundExpert.co.uk. "Middle-class consumers are the key to economic growth, and in less than 20 years from now Asia will have 10 times more middle-class citizens than the US, and five times more than Europe. Asian nations are growing more quickly than their older, indebted counterparts in the developed world."
And Asian companies are increasingly paying dividends to their shareholders. "These factors will drive company profits and provide growing dividends to investors for many years to come," explains Mr Lees. "The key for income investors is the income growth potential that Asia represents, which is outstanding. Since mid-2009, the size of dividend payouts has lagged behind the earnings generated by Asian businesses, so there is still plenty of scope for dividends to grow."
A good way to tap into these could be Schroder Asian Income fund (GB00B559X853), which aims for income and capital growth over the long term.
It has a 12-month yield of 3.7 per cent and has increased its annual payout in three out of the past four years. And the fund has beaten MSCI AC Pacific ex Japan index over three and five years, and the Investment Association (IA) sector average over five.
Schroder Asian Income has an experienced manager in Richard Sennitt, who has run it since 2001 and covered Asian markets since 1993. When selecting holdings, valuation and the sustainability of a company's dividend are important factors, and also contribute to Mr Sennitt and his team's sell discipline. They then conduct qualitative analysis on potential holdings, including company visits.
The fund typically holds 60 to 80 shares in Asia ex Japan companies, with substantial allocations to Hong Kong, Australia and Taiwan, and sectors such as information technology and financials.
"The investment process is well thought out and has been implemented with diligence and skill," say analysts at research company FundCalibre. "[Mr Sennitt's] experience, combined with the strength and depth of Schroders' analyst team, make this fund stand out. It may add diversification to an income portfolio."
However, as the fund invests in Asia, which includes many developing markets, it is likely to be more risky than a developed market equity fund such as a UK income fund, and as with any overseas investment you incur currency risk. Schroder Asian Income has also underperformed MSCI AC Pacific ex Japan index and the IA sector average over one year.
However, analysts at FundCalibre add: "The manager's preference for income-paying stocks means the fund is likely to be less volatile than some other Asia-focused funds."
And one-year returns are not a problem if you hold for the long term - as you should with an Asian equities fund - especially as this one's long-term returns are strong.
So if you want to diversify your income stream and tap in to a fast-growing region over the long term, then Schroder Asian Income fund looks like a good way to do this. Buy.
SCHRODER ASIAN INCOME (GB00B559X853) | |||
---|---|---|---|
PRICE | 71.01p | MEAN RETURN | 14.54% |
IA SECTOR | Asia Pacific Excluding Japan | SHARPE RATIO | 1.07 |
FUND TYPE | Unit trust | STANDARD DEVIATION | 12.36% |
FUND SIZE | £1.09bn | ONGOING CHARGE | 0.93% |
No OF HOLDINGS | 71* | YIELD | 3.68% |
SET UP DATE | 19/02/1990* | MORE DETAILS | www.schroders.co.uk |
MANAGER START DATE | 01-Nov-01 |
Source: Morningstar, *Schroders.
Performance
1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | |
---|---|---|---|
Schroder Asian Income | 36.32 | 49.11 | 82.18 |
IA Asia Pacific Excluding Japan sector average | 39.87 | 49.55 | 70.23 |
MSCI AC Pacific Ex Japan NR USD index | 41.67 | 45.97 | 67.95 |
Source: Morningstar as at 12 May 2017
Top 10 holdings as at 28 April 2017 (%)
Taiwan Semiconductor Manufacturing | 5.9 |
Samsung Electronics | 3.5 |
HSBC | 3.3 |
Hon Hai Precision Industry | 2.8 |
China Petroleum & Chemical | 2.7 |
China Mobile | 2.3 |
Bank of China (Hong Kong) | 2.2 |
National Australia Bank | 2.2 |
Transurban | 2.2 |
HKT Trust and HKT | 2.2 |
Source: Schroders
Geographic breakdown (%)
Hong Kong | 21.1 |
Australia | 18.2 |
Taiwan | 16.4 |
China | 12.20 |
Singapore | 11.50 |
South Korea | 8.70 |
Thailand | 4.70 |
UK | 2.00 |
New Zealand | 1.40 |
Other | 3.80 |
Sector breakdown (%)
Information Technology | 19.50 |
Financials | 19.20 |
Real Estate | 13.50 |
Telecommunication services | 12.10 |
Materials | 10.70 |
Consumer Discretionary | 8.10 |
Industrials | 6.80 |
Energy | 4.40 |
Consumer Staples | 1.40 |
Utilities | 0.50 |
Other | 3.80 |