Though Global and European equity income funds have attracted strong inflows, investors have also been turning to high-yielding funds in the IMA Global Emerging Markets and IMA Asia Pacific ex Japan sectors.
In a recent FE Trustnet article we analysed various emerging market income funds as not only are they are useful way to diversify your income stream, but the dividend payments allow investors to be “paid while they wait” for sentiment to turn more positive towards the developing world.
Given that funds within the IMA Asia Pacific ex Japan sector are largely exposed to developing economies, the same holds true for income funds within the sector.
While there are a number of dividend-focused Asia Pacific ex Japan funds available to investors, such as Invesco Perpetual Asian Equity Income and Liontrust Asia Income, Jason Pidcock’s Newton Asian Income fund and Richard Sennitt’s Schroder Asian Income fund have been the leading lights in the sector. Both also have the coveted five crown rating.
Sennitt’s fund has the longer track record, as he took over the £446m fund in 2001, while Pidcock launched his £4.4bn fund in November 2005. However, the former was able to invest in Japanese equities up to December 2009 until its mandate was changed.
On a cumulative basis, the Newton fund has come out on top. According to FE Analytics, Newton Asian Income has been a top quartile performer since its launch with returns of 168.4 per cent.
The Schroder fund has also outperformed over the sector over that time, but sits in the second quartile with its return of 133.9 per cent.
Performance of funds vs sector since Nov 2005
Source: FE Analytics
However, Schroder Asian Income’s relative underperformance could be a reflection of the fact that it used to hold Japanese equities; an area of the market which had, up until last year, perennially underperformed against both global emerging and developed markets.
Nevertheless, while both have been top quartile over rolling three, five and seven year periods, the Newton fund has outperformed Schroder Asian Income over all of those timeframes.
Newton Asian Income has also tended to outperform on a discrete basis as well. Schroder Asian Income did lose slightly less than the Newton fund in the crash year of 2008, but it underperformed in 2009 when markets rebounded. In 2010 and 2011, Pidcock’s portfolio also outperformed.
More recently however, Sennitt’s fund has come out on top having outperformed in 2012 and 2013. In an article earlier this year, Pidcock attributed his recent poor performance to worries over the Fed’s QE tapering and individual stock-specific issues.
However, it has once again bounced back in 2014 boasting top quartile returns and outperforming Sennitt’s fund in the process.
Source: FE Analytics
Given that both funds invest in dividend paying equities, it isn’t too surprising to see that they have had much better capital preservation characteristics than the average IMA Asia Pacific ex Japan fund.
They have both been top decile for their maximum drawdown and maximum drawdown since November 2005, though Schroder Asian Income has outperformed its Newton rival in each of those ratios.
Pidcock’s fund has, however, generated more alpha relative to its benchmark and had a better information and Sharpe ratio over that time.
Like we have mentioned in other articles in this series, income generation should be one of the most important factor to look at when deciding on an equity income fund. Our data shows that the Newton fund has, once again, outperformed on a historical basis in that respect.
If an investor had put £1,000 in each fund in 2005 when Pidcock launched his fund, they would have earned £540.54 from Schroder Asian Income while they would have earned £645.69 from the Newton portfolio. It is the same over other time frames, as the table below shows.
Source: FE Analytics
Currently, Newton Asian Income yields 4.6 per cent, which is 60 basis points more than Sennitt’s Schroder fund.
While the two funds share a number of the same top 10 holdings – Taiwan Semiconductor, HSBC and Transurban – they have quite different make-ups.
Our data shows, for example, that the Schroder fund offers more genuine emerging market exposure.
It holds 24.8 per cent in Australia, which is an underweight position to its benchmark, while Pidcock holds more than 30 per cent in Australian equities. More than 5 per cent of his fund is invested in New Zealand as well; an area to which Sennitt has minimal exposure.
Instead, Schroder Asian Income has a far greater degree of exposure to China/Hong Kong.
The expert’s view
Ben Willis (pictured), head of research at Whitechurch, favours the Newton fund for investors who want an Asian equity income fund and has used it for his clients for a number of years.
“Newton, in terms of the retail space, has the longest track record out there and we have backed Jason Pidcock for quite some time,” Willis said.
“Last year wasn’t great for the fund, but prior to that it has never let us down. We use it as a core holding and will use other growth funds as satellite holdings around it because it can defend you during falling markets and still participate to an extend in rising markets.”
While Willis rates the fund, he points out the majority of its outperformance came about when it was a much smaller portfolio. At £4.4bn, Newton Asian Income is close to 10 times bigger than Schroder Asian Income.
Though he has been concerned about the size of Newton’s fund in the past, having spoken to the manager earlier in the year, he is confident the portfolio can continue to perform well despite its large AUM.
“One of our only issues was the size of the fund and we met him in January and we asked him whether it was impacting on his performance,” Willis explained.
“It’s a question he gets asked a lot and he rightly pointed out that he only runs the one strategy while others in sector run three of four funds plus institutional mandates. Therefore, on an aggregate level, he is running a lot less money than others.”
Newton Asian Income has an ongoing charges figure (OCF) of 0.82 per cent, which is slightly cheaper than the Schroder fund at 0.94 per cent.
