When investing in certain parts of the world, “geopolitical concerns come with the region”, according to BNY Mellon’s Zoe Kan, but that’s not a problem when investing in the right companies.
In her Asian Income fund, she is underweight China, a country that has so far failed to deliver the returns expected by the market, but she doesn’t shy away from being heavily invested in companies such as Taiwan Semiconductors, despite the turmoil in the chips market and the competition with the US.
The FE fundinfo four-crown rated fund has £893.2m of assets under management and employs a bottom-up strategy, combined with the manager’s recognition of the power of thematic tailwinds.
The fund has recovered as sentiment towards Asian equities has improved since the end of 2022 and over the past 12 months, it has managed to come out on top of its sector peers, as illustrated in the chart below.
Performance of fund over 1yr against sector and index
Source: FE Analytics
Below, Kan discusses why Asian income is a good strategy for investors who have a long-term interest in the region, why she’s underweight China despite it being a good dividend payer and where she sees the best opportunities.
Can you describe your investment strategy?
The overall fund is a proper dividend portfolio, so we stick to companies with high yields on the one hand and commodity stocks on the other – we’re not buying companies like Alibaba, for example.
Then we also have stock-level discipline. When we buy companies, we make sure that they’re at a minimum of 85% of the benchmark dividend yield and if that falls to a 40% discount, we are forced to sell it.
We are also looking for companies within well-defined industries with a consolidated market share, strong balance sheets and management with a track record of being disciplined allocators of capital, and we also want a strong structural thematic element. It's very hard to find companies that tick all those boxes, but we are constantly looking.
Why should an investor pick your fund?
History shows that income investing outperforms over the long term because of the compounding power of dividends, and that works well in Asia where you've got a lot of volatility in share prices and the capital elements is always fluctuating.
If you're investing over the long term in Asia, income investing is the best way to do it because firstly, it puts you in all the right places and the right kind of companies with good cash flows and secondly, the capital allocation decisions made by those companies are getting sounder and more thought-out in terms of rewarding shareholders. So what you get at the end of it is a more defensive portfolio with low volatility in what is normally a very volatile part of the world.
What are your main over- and underweights?
To some extent, we do tend to be allocated towards certain countries and industries according to the dividend yields available, although this is purely a bottom-up strategy. So for example, we don't have a top-down view on Singapore but we have a high allocation towards it because of the good governance standards and high dividend yields on offer, the rigidity of the banking system and the level of conservatism and balance sheet spreads.
In terms of underweights, the benchmark is heavily skewed towards China but we’ve gone the opposite way, not because there aren't enough dividend-yielding companies, but rather on account of the quality of the dividends, and because we're also less comfortable with the governance standards.
Chinese banks are big dividend payers, but the majority is owned by the Chinese government itself, so we've always had a structural underweight. Geopolitical risks haven't made me want to invest more in China either.
At 6.5%, Taiwan Semiconductors is the biggest holding in the portfolio – is that worth the geopolitical risk?
TSMC is a technology leader and one of the best companies in Asia, providing what the rest of the world needs. It has a robust balance sheet, a very disciplined approach to investments and is very shareholder friendly.
Geopolitical concerns come with the region and sometimes these storms blow up, but the position of Taiwan is something that the world is fully aware of and nobody wants to get to a situation which rocks the boat too much. In the meantime, TSMC has enough moat to protect itself and continues to make very good profits.
What were the best and worst contributors to performance of the past 12 months?
A very strong performer was ITC (Imperial Tobacco Company), a blue-chip Indian consumer company with a net cash balance sheet and very high returns. After a period of underperformance during Covid it’s had a double-digit recovery and was up 54%, adding 1.93 percentage points over the past year.
ESG considerations have weighted on its valuation, but if you exclude the tobacco element it's one of the highest-rated companies on ESG metrics. It generates lots of cash flow and pays it out to the shareholders. That position is one of our largest holdings.
And then among detractors were REITs [real estate investment trusts], one of them being Dexus, which owns office and commercial real estate in Australia and has been affected by CapEx [capital expenditure] and increasingly, the bond yield environment.
What do you do outside of fund management?
I’ve got two daughters and two dogs, making me really busy. I love gardening and I’ve recently taken up the piano.