Kate Marshall 18 February 2019
Our investment team has met hundreds of fund managers over the years. It gives us a unique insight into what they do, how they manage their funds, and what's going on in markets across the globe.
As usual, the managers we met last month gave some interesting views. Two of them invest in Asia, but take advantage of the opportunities in very different ways.
Asia for income?
Asia isn't usually the first place people think of when it comes to investing for income. In the past, most Asian companies focused on growth and reinvested their profits back into the business. But more and more companies now pay out some of their earnings as dividends to their shareholders.
There are only a handful of funds that invest in Asia for income. Even fewer are run by managers with long and successful track records. We think Jason Pidcock, manager of Jupiter Asian Income, is one of them and we recently met him for an update.
The fund currently yields 4.0%, though this will vary and isn't a guide to what you will receive in future. The income it pays isn't the only thing that makes it different though. Pidcock mainly focuses on developed Asian markets, like Hong Kong and Singapore, while many other Asian funds invest more in higher-risk emerging markets like China and India.
He also invests a large part of the fund in Australia, currently 26%. He's more positive about the country than some others are.
Australia has enjoyed many years of economic growth. Strong exports of natural resources, a booming property sector, and growing consumer spending have all played a part. The "wonder down under" hasn't had a recession for 27 years.
All economies go through tougher times though. Some commentators think a recession is inevitable at some point and a weaker housing market could be a sign of trouble to come. House prices fell 6.1% last year. And in Sydney, the country's biggest property market, they're down 11.1% from their peak. Household debt has also surged and is at one of the highest levels in the developed world.
But this doesn't put Pidcock off. He sees plenty of positives.
Government debt is low compared with a lot of other economies. And this puts Australia in a stronger position if things do take a turn for the worst. Unemployment is also low at 5% and means most people are paid enough to pay their mortgages.
The manager's also focused on areas that aren't directly related to the housing market. He invests in a number of financial companies like Macquarie Group, Suncorp Group, and Star Entertainment Group, which provides entertainment and hospitality services so it could benefit from rising tourism. Overall he invests in a fairly small number of companies, so each one can have a real impact on performance but it's a higher-risk approach.
We like that the fund is different to most other Asian funds. It could help diversify an income portfolio, or the Asian part of a portfolio. Overall Jason Pidcock is conservative in the way he runs the fund. So it's quite different to the higher-octane approach used by Dale Nicholls, who we also recently met.
The way the fund's charges are taken can increase the yield but reduce the potential for capital growth.
China's Special Situations
Fidelity China Special Situations is a different way to invest in Asia. It focuses purely on Chinese companies and aims to maximise long-term growth, rather than income.
China is gradually moving away from investment-led growth and a reliance on exports, to one that serves the needs of wealthier consumers. Nicholls aims to benefit from this trend.
Similar to Australia, there are concerns China's economy is slowing down. But Nicholls thinks it'll slow for the right reasons. It's created huge amounts of debt over the past decade to help maintain one of the highest rates of growth in the world. The fact China wants to curb its growing debt and let growth slow to a more sustainable level is a good thing.
Consumption has also cooled over the past year. But Nicholls says it's mainly restricted to areas where consumers buy expensive, one-off items like cars. Sales in other areas, such as sportswear, spirits, and other luxury items, have actually been growing. Consumers are focusing less on well-known global brands and more on Chinese brands. Nicholls aims to benefit by investing in companies such as Li-Ning, which makes sporting goods .
As an investment trust, its structure is also different. It has more flexibility to invest in smaller companies, and unquoted businesses that aren't yet listed on a stock market. This offers a lot of growth potential, but smaller companies are higher risk because there's a greater chance of failure.
Investment trusts can also borrow money to invest (known as gearing). This has the potential to increase returns when markets rise, but the reverse is also true, so again this is a higher risk way to invest. Gearing on this trust currently stands at 28% .
Introducing the Wealth 50
Last month we launched the Wealth 50 – a tighter, more focused list of our favourite funds. It aims to help clients build their own investment portfolio.
Over the years we've refined our investment process and become better at picking funds we believe have potential. We're increasingly picky, so the list of our favourites has gradually shrunk in size over time. This also helps meet the needs of our clients, who told us they'd prefer a shorter list of funds.
We also took this opportunity to renegotiate with the fund managers who made our shortlist. As a result several of the funds are now available with larger discounts on their annual fund charges. Our platform charge of up to 0.45% per year also applies. View our charges.
This article is not personal advice, if you are unsure of the suitability of an investment for your circumstances seek advice. Investments can fall in value as well as rise so you could make a loss.