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Accessing growth and income

We look at the range of options for investors who want exposure to Asian companies
Accessing growth and income

From the rise of China to the success of names like Samsung (KRX:005930), the case for investing in Asia can seem straightforward. But investing here is not quite as simple because there are multiple ways to do so. The options available can vary in terms of risk and reward, the level of monitoring required and the form of exposure they offer.

 

Broad Asia funds

Funds may not always offer the runaway returns of a perfect stock pick, but they can be a less volatile route into an unpredictable region. Even very concentrated funds have some level of diversification. Fidelity Asia Pacific Opportunities (GB00BQ1SWL90), the best-performing fund from the Investment Association’s Asia Pacific ex Japan sector over five years to 16 June 2020, had 29 holdings at the end of May 2020. 

Investors wishing for a low-cost, low-maintenance option can always opt for a passive, either in the form of a tracker fund or an exchange traded fund (ETF). This will simply track the returns of the market, minus a small fee. 

That said, the passives on offer can differ in terms of the indices they track. ‘All country’ and ‘All world’ options tend to include emerging markets, giving them a broader range of countries and heavier direct exposure to China. Active funds tend to use the MSCI AC Asia Pacific ex Japan index, whose countries exposures are detailed below, as a benchmark.

By contrast, indices (and trackers) without an ‘all country’ or ‘all world’ designation may only focus on developed markets within the region, while those with an emphasis on the ‘Pacific’ region can have large weightings to Australia, as outlined below.

 

Staying active

While active funds are rightly criticised for not always outperforming markets in a consistent way, Asia is an area where some stand out. Of the 108 funds in the relevant sectors* with a five-year track record to 16 June 2020, 42 have outpaced the MSCI AC Asia ex Japan index in sterling terms. 

There are many different reasons to buy an active fund. As always it is important to look at whether the manager’s process and style appeals to you. But broad portfolio composition can also have a big effect on returns.

Because China makes up such a huge part of the index most active managers seek to outperform, it is good to check how heavily exposed a fund is to the country and which Chinese companies and trends the investment managers focus on.

The dominance of certain companies is not purely a China story. As we show on the next page, the four biggest names in the MSCI AC Asia Pacific ex Japan index made up a huge part of the market at the end of May.

We discuss the outlook for these companies on page 13 of this supplement. If you have strong views on them, it may help to inform your opinion on different funds. Their sheer presence in the index will mean many managers are forced to invest in them. However, the extent to which they invest more or less in such names than the index can influence relative returns.

 

How the big four stack up in MSCI AC Asia Pacific ex Japan

CompanyWeighting (%)
Alibaba6.5
Tencent5.5
Taiwan Semiconductor Manufacturing4.3
Samsung Electronics3.5
Source: MSCI, 29 May 2020

 

Other ways into Asia

Dedicated Asia funds are not your only option. Emerging market funds (both passive and active) have a good level of overlap with their Asia counterparts. However, on an index level emerging markets have tended to underperform Asia in recent years. This may well be because emerging market indices can include especially volatile parts of the global investment universe, such as Latin America and Russia.

Separately, investors interested in individual Asian markets may be tempted by a single-country fund. The selection currently available offers exposure to China, Vietnam, India and Thailand. This may suit individuals who, for example, see Asia mainly as a China play or wish to add something more specific to their Asian exposure.

Here, some familiar caveats will apply. Because of their narrow focus, single-country funds can expose you to greater volatility. Multiple funds focus on India, which has been popular among investors, but the country’s recent difficulties have meant that most lag the broad Asia index by five-year returns.

On a different note, investors should not forget that they can get exposure to Asia via some global equity funds. These can vary in style. In the investment trust space, the managers behind Scottish Mortgage Trust (SMT) have a keen focus on Chinese tech. Murray International (MYI) has around a third of its assets in Asia as part of a focus on well-financed companies operating in high-growth regions.

 

Going direct

Investing overseas does not necessarily prevent you from picking stocks. Particularly when it comes to large, globally influential companies such as Samsung, you may well develop a view and wish to invest directly.

As with UK-listed investments, overseas shares can be bought through investment platforms, although not all of them offer access to Asian equities. Hargreaves Lansdown, for example, lets you buy shares listed on some stock exchanges in Europe, the US and Canada, but not Asia. Interactive Investor, another major platform, does offer access to the region via exchanges in Australia, Hong Kong and Singapore.

Investing overseas can involve extra costs and complications. Some platforms will charge a fee for converting your money into a local currency, although others do allow investors to hold certain foreign currencies in their account.

On top of this, it is worth remembering that overseas stocks may prove more difficult to monitor than UK shares, simply because you can be less familiar with how the underlying market operates. As with any stockpicking approach, you also become vulnerable to the ups and downs of an individual company.

Finally, the global nature of the FTSE 100 means you can get exposure via some domestic stocks. HSBC (HSBA) stands out here, despite its primary listing in London.

 

The income story

Asia is not immune to the devastation being wrought in the dividend space. That said, dividends should hold up slightly better here than elsewhere. Janus Henderson expects that, in a worst case scenario, Asian payouts would fall by 38 per cent this year, compared with 43 per cent for the global equity market and 56 per cent for the UK.

Eleven funds from the IA Asia Pacific ex Japan sector have an explicit income focus, while the AIC Asia Pacific Income sector contains four trusts. These tend to have stated yields of at least 3.5 per cent or so, although the actual payments may fall short of forecasts this year. In the short term, the investment trusts may be able to use revenue reserves to protect their dividend payments.

Some ETFs also focus on dividends. In Asia, the SPDR S&P Pan Asia Dividend Aristocrats UCITS ETF (PADV) buys companies with long records of dividend increases. However, the uncertainty around dividends means going active may seem more prudent. As always, remember that you can also generate income by investing for growth and taking capital gains.

 

*IA Asia Pacific ex-Japan, AIC Asia Pacific and AIC Asia Pacific Smaller Companies. In the case of investment trusts, we are referring to share price total return.

 

Read all nine elements of our Investing in Asia guide here: 

Asia's mega potential

The outlook for Asian economies

Bull in a China shop

India: still a favourite?

Ambitious Vietnam

Thailand: home to oustanding buinesses

Accessing growth and income

Titans of the East

Tech, tariffs and political turbulence