Liontrust Asia Income Fund

Q4 2019 review

Summary

 

  • ‘Phase one’ trade agreement between US and China marks a shift in the region’s political tone. While we think that tariffs targeting a level playing field in trade have now peaked, we expect continued US efforts to contain security risks from China.
  • Significant investments in alternative protocols are already benefitting many Taiwanese companies such as King Yuan and ASE Technology as China accelerates its 5G rollout.
  • Cyclical holdings such as Xinyi Glass and paper manufacturer Lee & Man also performed strongly as macro data improved through the quarter.
  • While the Australian fires and Hong Kong protests both have significant human and environmental costs, we currently assess the financial impact on Fund holdings to be very low. The coronavirus outbreak in China is a situation we are monitoring closely. 
  • Fund changes include the addition of Australian engineering and construction group Cimic which stands to benefit from A$3.8bn government infrastructure projects over the next four years.

 


 

Performance Q4 2019 Since launch
Liontrust Asia Income Fund, institutional class 1.1% 13.4% 93.0%
MSCI AC Asia Pacific ex-Japan Index 2.8% 14.6% 86.0%
MSCI AC Asia ex-Japan Index 4.0% 13.6% 88.6%

The Fund has an income Target Benchmark of 110% the yield on the MSCI AC Asia Pacific ex-Japan Index. The Fund’s most recent income distribution was announced on 31 December 2019. Its distributions over the 12 months to 31 December 2019 – expressed relative to the Fund’s price on 31 December 2018 – give a 12 month yield of 5.1%. The MSCI AC Asia Pacific ex-Japan Index yield on the same basis was 3.2%.

 


 

Source: Financial Express, as at 31.12.19, total return (net of fees and income reinvested), bid-to-bid. Fund launched on 05.03.12.

 

The fourth quarter marked a shift in the region’s political tone as Trump edged towards what appeared to be a truce in his trade spat with China, which subsequently crystallised as a limited ‘phase one’ agreement in January 2020. This specifies US$200bn of additional Chinese purchases of US goods over two years including US$78bn in manufactured goods, US$32bn in agricultural products, US$52bn in energy and US$38bn in services. The US cancelled new tariffs scheduled for 15th December 2019 and agreed to reduce existing tariffs on US$112bn worth of goods from 15% to 7.5%. Tariffs of 25% on US$250bn worth of Chinese imports to the US will remain.

Confusingly, while trade progress was being made Trump simultaneously launched attacks in other areas. He rankled China by passing the Hong Kong Human Rights and Democracy Bill, which requires certain levels of independence for Hong Kong if China is to retain its current status as a unique trading partner with the US. The Nikkei also reported that Taiwan Semiconductor Manufacturing Company is being encouraged to manufacture military-used chips in the US to reduce the risk of Chinese interference.

China threatened retaliatory measures, but this seemed to encourage Trump more than deter him. He swiftly slapped visa travel bans on Chinese officials linked to mass detention of Muslims in Xinjiang and discussed restricting US government pension fund investment in China.

We believe these measures against China have two separate strands: one that targets a level playing field in trade; and another that aims to contain Chinese security risks to the United States.

The first strand involved the escalation of tariffs, and this has likely passed its peak. While we expect spats to flare up, we do not see this as a long-term threat to either China or Asia. Supply chains adjust quickly to find alternative sources, with Taiwan being the main beneficiary so far.

The latter strand is likely to last longer, as efforts to address a longer-term security risk have some merit. While current risks are probably exaggerated, they are real, and we think there will be significant parallel investment to develop alternative protocols. As China has accelerated its 5G rollout, we have already seen Taiwanese companies benefiting (including testing companies, King Yuan and ASE Technology, in our portfolio) and we think it may continue over the coming decades.

Stepping away from Sino-US tensions, there was evidence of pick-up in regional growth during the quarter. A number of manufacturing indicators softened in October, but November saw a recovery in macro data as China’s manufacturers’ purchasing managers index rose back into expansionary territory and industrial production rebounded.

As a result, stocks with cyclical characteristics were another feature among the Fund’s better performing companies. Weichai Power (heavy duty motors), Lee & Man (paper manufacturer), Xinyi Glass and SITC (a intra-regional shipping and logistics company) all registered good returns.

Significant issues continue to affect the financial sectors in India and Australia. A non-bank Indian financial default earlier in 2019 continued to reverberate in the fourth quarter, while economic growth has slowed significantly, causing S&P to flag risks to India’s sovereign ratings without a recovery. There is little reflection of these concerns in the stockmarket, which has continued to meet new highs. We think this is unlikely to continue and we maintain the Fund’s underweight allocation to the country.

In Australia there is concern about the level of fines likely to come to the banking sector following the Royal Commission enquiry. This was highlighted as the Australian Securities and Investments Commission sued National Australia Bank, alleging that it broke the law more than 10,000 times by charging fees for no service, leaving it exposed to a theoretical maximum penalty of almost A$10bn. Meanwhile Westpac was ordered to hold A$500m extra capital by the regulator as it investigated a breach of anti-money laundering laws.

This was partly offset by the recovery in Australian house prices, which have now been rising since halfway through 2019. This provides a tailwind to engineering and construction group Cimic, a new addition to the Fund, which also benefits from the ongoing infrastructure spending that the government has targeted; Australia PM Scott Morrison is set to fast track A$3.8bn of infrastructure projects over the next four years. Overall, the government is spending A$100bn on transport infrastructure over the next 10 years.

There are three other headline grabbing ongoing events in the region, all of which come with significant human cost although should impact the portfolio little. The first is Hong Kong’s ongoing demonstrations, which we updated on in December. The impact on Hong Kong’s economy has been brutal, with GDP growth of -2.9% in the third quarter, retail sales -25.3% in November, and companies such as Swire being forced to cut rents (while Cathay’s chairman was sacked) but the portfolio has no exposure to the Hong Kong economy.

There are also the enormous fires raging in Australia. As these are yet to hit any major areas of industry, finance or settlements the financial toll is likely to be small. Environmentally and in human terms this is obviously not the case.

The third event is the recent outbreak in China of a new strain of coronavirus causing pneumonia which, at the time of writing, had infected more than 2,700 people, killing 80, including cases in the Middle East and United States. This may well impact retail sales, tourism and consumption until the situation is contained. Wuhan, the source of the outbreak, has curtailed travel from the city. If SARS is taken as a comparative situation, then the impact was both significant (particularly in obvious sectors of public consumption, hit negatively, and staples and pharmaceuticals which were positively impacted) and short-lived. As the SARS outbreak reached its most acute level, the stockmarket dropped, but it rebounded swiftly as the disease was contained – as did demand for affected sectors. Obviously there if far too little information to fully appraise the current situation, but we will continue to monitor it closely.

During the quarter, Thai telecom companies – including Fund holding Intouch – gave back some of the year’s gains due to renewed concerns over a resurgence in price competition led by TRUE, which intends to fight Advanced Info and DTAC with various packages.

We made few changes to the portfolio, buying Cimic and Pacific Textiles, funding these with sales of Downer, Silverlake and Sunlight REIT. We also sold G8, due to risks of increasing competition, and CK Hutchison, the rump of Hutchison Whampoa following corporate restructuring.

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

 

 

Dec-19

Dec-18

Dec-17

Dec-16

Dec-15

Liontrust Asia Income I Inc

13.4

-8.3

16.7

33.3

-3.3

MSCI AC Asia Pacific ex Japan

14.6

-8.6

25.1

27.3

-4.1

MSCI AC Asia ex Japan

13.6

-9.1

29.5

25.8

-3.9

IA Asia Pacific Excluding Japan

15.8

-9.8

25.3

25.7

-3.3

Quartile

3

2

4

1

3

 

Source: Financial Express, as at 31.12.19, total return (net of fees and income reinvested), bid-to-bid, institutional class.

 

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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. 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. 

Disclaimer

The information and opinions provided 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. 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.

Monday, January 27, 2020, 2:06 PM