Liontrust Asia Income Fund

Q4 2017 review


  • The region’s strong equity performance was fundamentally underpinned by two factors: the ongoing improvements in earnings expectations; and global acknowledgement that China doesn’t seem to be teetering on the edge of a financial abyss.
  • Solid performances from Fund holdings such as Gigabyte, Xinyi Glass and China Communications Services were outweighed by strength from Tencent, which alone accounted for half the discrepancy between the fund and benchmark performances. The latter’s minimal yield make it unsuitable for the portfolio.
  • 2018 should see consumer spending and government investment in Thailand rise following the end of a year- long mourning period for King Bumibol in October.
  • This year could see more bravado from Donald Trump, but we continue to believe that it remains unlikely that the US will allow a long-term escalating trade war.


 Performance   Q4  YTD

 Since launch

Liontrust Asia Income Fund, institutional class  4.7%  16.7%  85.6%
 Liontrust Asia Income Fund, retail class  4.5%  15.8%  77.8%
 MSCI AC Asia Pacific ex-Japan Index 7.0%  25.1%  77.6%
 MSCI AC Asia ex-Japan Index  7.3%     29.5%   82.6%

Source: Financial Express, as at 31.12.17, total return (net of fees and income reinvested), bid-to-bid, institutional class. Fund launched on 05.03.12.

Past performance is not a guide to future performance. Investment in the Fund carries the risk of potential total loss of capital. Investment in the Fund involves a foreign currency and may be subject to fluctuations in value due to movements in exchange rates. A portion of the Fund’s expenses are charged to capital. This has the effect of increasing the distribution and constraining the Fund’s capital performance.


The fourth quarter of 2017 gave further strong Asia Pacific equity returns. Tencent, being the largest company in both the MSCI AC Asia Pacific ex-Japan and MSCI AC Asia ex-Japan indices alone accounted for almost half of the performance discrepancy versus the Fund as it rose another 20% in sterling terms during the quarter, taking the return for the year to 94%. While there were some notable successes in the portfolio over the quarter - Gigabyte +43%, Xinyi Glass +31%, China Communication Services +29% - it was not enough to offset such a large index weighting as Tencent, which provides only a token yield of 0.17% and is therefore unattractive for an income fund.


The one active holding with a significant negative impact on the portfolio was G8, where an unexpected increase in small competitors and higher labour costs for temporary staff dragged down its full year profit guidance. While we were not keen to sell after an initial sell-off, we are reassessing our expectations for the company and the likelihood of a lasting impact on the competitive environment in the Australian childcare sector.


While equity performance has been strong, we believe it has been fundamentally underpinned by two factors: the ongoing improvements in earnings expectations; and global acknowledgement that China doesn’t seem to be teetering on the edge of a financial abyss.


This means that, despite the good returns (rising 25% or 29% in sterling terms depending on which index is used, with both reaching new all-time highs in 2017), Asian equities still do not seem stretched at their current valuations and are trading at 13.8x 12 month forward P/E, slightly ahead of historical average of 13.3x. Admittedly the region’s valuations are mixed, but we find certain areas of attractive value – largely in China, Taiwan and Korea – offset by others that are more expensive than we can stomach. This, combined with the ongoing rise in free cashflow, continues to give diverse opportunity in a broad selection of companies across various countries and sectors.


The significant recovery in corporate earnings was supported by a better than expected economic backdrop. Growth did not tail off much in the second half of the year and although inflation rose slightly, it did not reach levels that concerned markets. This in turn meant there was little need for central banks to try to temper enthusiasm with rate rises. Korea raised rates by 0.25% and China tried to dampen down its exuberant property market and lending practices, but otherwise there was little to signal government concerns.


China’s Communist Party confirmed its confidence in the country’s economy at the 19th Party Congress, prioritising ongoing economic rebalancing and more sustainable growth for the next five years. Importantly there was a move away from its old habit of announcing GDP targets, which have sometimes led to unhelpful decisions (and dubious data). The country’s main challenge was identified as having “imbalanced and inadequate” growth. Aims were given to build China into a global innovation leader with a much cleaner environment, expand the middle class, provide adequate public services and reduce inequality. This is to be achieved by deepening supply side reforms by upgrading its manufacturing base, services and infrastructure. It will also further reduce leverage and over-capacity.


Although grandiose and difficult to deliver, we agree that this is what is needed for China’s economy, and even if there was little new coming from the Congress it confirms our positive view on selective companies.


In a less positive longer term development, Xi Jinping also failed to announce an obvious successor, causing some worry he is heading to a dictatorial role. His stature came into relief as the party revised its constitution to enshrine Xi’s political theory, elevating him to status of ‘core’ leader indefinitely, and giving Xi final say in policy debates.


The manifestation of Xi’s authority was made clear by the unpleasant-sounding Minister of Supervision at the Central Commission for Discipline Inspection, who reported that during Xi’s first five-year term, 1.53 million officials have been punished, more than double the 668,000 censured in the second term of Hu Jintao. While bad news for those hoping for democratic developments, it does give greater chance that the difficult reforms mentioned above could be delivered.


Outside of China growth was also good. Of these countries Thailand may have the most predictable improvement next year, being boosted by the end of a year-long mourning period for King Bumibol in October. This may unfetter some delayed consumer spending, which should also be supported by increased investment. The country’s 12th plan, covering 2017-2021, will see public investment soar to approximately 12% of GDP compared to recent spending which has been minimal, with less than 2% in 2000-2005 and nothing in 2005-14. We are also hoping for export growth to achieve nearer 7% for 2017, well ahead the 1% growth of the last three years. 


This all paints a positive picture for the region. We maintain our selective but positive exposure to China, our large position in Thailand, significant technology exposure in Taiwan, and an increased South Korean weighting. We continue to look for signs of rising corporate capital expenditure as this could provide yet another leg to the rally.


As always risks remain, but we are happy to see some moderation in the situation with North Korea at the time of writing. We believe it remains unlikely that the US will impose sanctions which would lead to a long-term escalating trade war. We do, however, think that 2018 may see greater bravado from Donald Trump – and corresponding increase in volatility – as we move towards America’s mid-term elections. While there are some immediate tariff measures that can be implemented by Trump, which could play well to a domestic American audience, we believe even if they were used to gain local support, their negative longer-term implications for the US would make them unlikely to remain.


Discrete years' performance (%), to previous quarter-end:








Liontrust Asia Income I Inc






IA Asia Pacific Ex Japan













Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

Investment in Funds managed by the Asia team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation.  The Fund invests primarily in Asian companies, which may be less liquid than companies in more developed markets.


This content should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Thursday, January 25, 2018, 3:11 PM