Liontrust GF Asia Income Fund

Q2 2020 review

Summary

 

  • Asian governments have differed in their responses to the Covid-19 pandemic and have had varying success in containing the virus. North Asia (including China), Singapore, Malaysia and Australasia have fared better economically while other countries such as India and Indonesia have struggled.
  • Australasian institutions were encouraged to hoard cash, which led to a greater number of Australian and New Zealand companies cutting or lowering their dividend payout ratios. The Fund has a small weighting to this region and was less affected by this trend.
  • China’s imposition of new Hong Kong national security legislation is unwelcome, but the portfolio has little exposure to the Hong Kong economy, instead owning Chinese shares listed in Hong Kong.
  • The ongoing efforts to contain the spread of the virus will lead to volatility, but we remain positive on the prospects for the region and continue to focus on areas which will benefit from structural demand trends such as digitalisation and government stimulus.

 



Performance

Q2

YTD

Since launch
Liontrust GF Asia Income Fund* 16.70% -11.30% 2.50%
MSCI AC Asia Pacific ex-Japan index 18.40% -6.10% 20.30%
MSCI AC Asia ex-Japan index 16.70% -4.70% 21.50%

The Fund’s most recent income distribution was announced on 30 June 2020. Distributions for the C3 sterling income share class over the 12 months to 30 June 2020 – expressed relative to the Fund’s price on 30 June 2019 – give a yield of 4.2%. The MSCI AC Asia Pacific ex-Japan Index yield on the same basis was 2.7%.


*Source: Financial Express, as at 30.06.20, total return (net of fees, income reinvested), B4 US dollar share class. B4 share class launched on 23.06.15.

 

Global equities were driven by pandemic developments in the second quarter. Despite being the first hit by the virus, Asia Pacific equities started their recovery simultaneously with the rest of the world on 24th March.

 

Asia Pacific government responses – like their counterparts in other regions – have been extraordinary. Each has reacted slightly differently, with varying degrees of success, but generally the Asia Pacific ex-Japan region seems to be divided along three approaches: North Asia, Singapore and Malaysia with one; Australia and New Zealand another; and a third for the rest (which would include India and South-East Asia). Although there are differences in approach within these blocks (i.e. within North Asia China closed its industry, whereas South Korea and Taiwan did not) there are enough similarities for the groupings to be relevant.

 

The first two groups – including North Asia, Singapore and Malaysia and Australasia – fared well in their containment of Covid-19. They were swift to react to developments, putting social distancing measures in place and closing consumer outlets. Outside of China, businesses continued to function, while regional travel ceased. New Zealand took full advantage of its island status and rid itself of all cases. A difference in financial approaches came as the Australasian countries encouraged institutions to hoard cash until the full economic impacts of lockdowns were known, which the Asian economies did not. This translated to a greater number of Australian and New Zealand companies cutting or lowering their payout ratios, while those in the rest of Asia were more willing to maintain the proportion of earnings returned to shareholders. With more than 70% of the Liontrust Asia Income portfolio invested in North Asia (China, Taiwan and South Korea) and relatively little in Australia, this has suited the portfolio well.

 

The rest of Asia fared worse in its control of the infection and continues to struggle.  Last month, we wrote about the dangers of India’s relaxation of lockdown. With near to a million cases, India continues to see new incidences rise, as does Indonesia, although with the total reported so far much less. The lower income per capita and financially weaker governments, which need international capital to fund their current account deficits, provide a more difficult environment for these countries to operate in.

 

Around the region we have also seen huge government stimulus packages: forgoing debt foreclosures, deferring interest payments, lowering interest rates and in some instances subsidising discounts to kickstart consumption and clear inventories that built up during the lockdown. Again, these differ by country but by May, Australia, Hong Kong, India, Malaysia and Thailand had all announced fiscal support and stimulus packages amounting to more than 10% of GDP and Singapore more that 20%. China’s appeared lower, but if other forms of financial support unique to China were included, such as its stabilisation fund, the percentage too rose to double digits.

 

The impact of the above has been that the Asia Pacific economies, particularly those in the first two groupings mentioned, are broadly recovering from the pandemic crisis. We believe that investors panicked initially, then recovered their composure – which was reflected by the global market bounce – and now they are being more discerning as fundamentals begin to dominate. We think that there will be a significant divergence from here in any recoveries, both globally and within countries.

 

Asia’s earlier entry into – and swifter response to – the crisis has been evidenced by a shorter economic contraction and swifter recovery. This is particularly true in China, where Beijing (along only with Berlin) has seen traffic increase to levels prior to the lockdown. Other measures such as June’s Purchasing Managers Survey show similar positive signs of recovery, but anywhere requiring a physical presence, such as restaurants and shops, are proving slow to recover.

 

We have made a few changes to the portfolio to reflect these changes in the global environment. We bought into BHP, an Australian mining company which will benefit from the global investment in infrastructure projects being used to stimulate economies, particularly within China due to its iron ore consumption. Another portfolio addition was CNOOC, a Chinese oil explorer which should benefit from any global growth that will raise oil prices from the multidecade lows seen in April. We also added Dexus, Australia’s largest office landlord, which was trading at a significant discount to underlying valuations and pricing in an overly pessimistic outlook.

 

The other significant portfolio change was selling out of King Yuan, a Taiwanese testing company which generates 25% of its sales from HiSilicon, a Huawei affiliate. It may find it hard to replace these orders when US restrictions bite. This is an important development because, with both China and the United States ratcheting up both rhetoric and actions, we have to be wary of the implications of security, trade, and the treatment of Hong Kong.

 

For our portfolio these are not immediately significant, as the Liontrust Asia Income Fund has very little exposure to the Hong Kong economy despite over 40% being listed there. All the Hong Kong listed companies we own are Chinese companies and so the immediate impact of developments is limited. However, the Chinese imposition of new Hong Kong national security legislation, effectively giving extra-judicial powers to mainland China which can be exercised in Hong Kong, is not a development we welcome. It furthers the increasing likelihood of separate global blocs developing, both politically and economically, which we would rather not see.

 

That said, it still does not remove the rationale we have for investing in well-managed, Chinese companies that pay dividends to shareholders and which we believe will grow their earnings over time. As at the end of June, our exposure to Hong Kong and China remained over 40%.

 

The other area worth highlighting in the portfolio is our Taiwanese exposure, almost 20% of the portfolio and largely invested in technology companies. In general, these have been beneficiaries of the trend towards working from home, which has required upgrades to companies’ and individuals’ PC capabilities and server capacity.

 

Some of our investments, such as Lotes and Wistron, are seeing demand in the usually quiet first half of the year equal to a typical run up to Christmas. While there is bound to be a lull in the second half of the year, there is a significant chance that we will see an ongoing long-term increase in technology investment. The companies have good yields, with dividends already announced based on last year’s strong earnings numbers.

 

Looking forward we remain positive on the outlook for Asian equities, while expecting volatility to be high, driven in part by increased geopolitical tension and in part by the ongoing attempts to contain Covid-19. Localised lockdowns are expected in response to new cluster outbreaks and will mean that consumption recovery will continue to lag and be non-linear. We continue to focus on areas which will benefit from structural demand trends such as digitalisation and government stimulus measures. 

 

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

 

 

Jun-20

Jun-19

Jun-18

Jun-17

Jun-16

Liontrust GF Asia Income B4 Acc USD

-4.6

0.0

5.8

17.3

-11.7

MSCI AC Asia Pacific ex Japan

-0.3

0.8

9.6

25.0

-10.3

MSCI AC Asia ex Japan

1.7

-0.5

9.9

26.7

-12.0

Source: Financial Express, as at 30.06.20, total return (net of fees, income reinvested), B4 US dollar share class. Discrete data is not available for five full 12 month periods due to the launch date of the portfolio

 

For a comprehensive list of common financial words and terms, see our glossary here.


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.

Thursday, July 16, 2020, 3:28 PM