Newton Asian Income - earnings growth should boost dividends

Kate Marshall | Thu 01 March 2018

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• Asian income funds have tended to underperform the broader market over the past year
• A lack of exposure to high-growth technology companies has not helped
• The team remains focused on companies with sustainable cash flows, earnings, and dividends

Our View

This fund combines exposure to the long-term growth potential of Asian markets, with the attraction of a regular income. Zoe Kan, the fund’s lead manager, has been involved in running the fund since 2005 and has the support of a broader team of portfolio managers and analysts at Newton.

In our view, the team adopt a sensible investment approach, which they have followed for many years. They remain focused on the long-term sustainability of the businesses they invest in, and the earnings and dividends they generate. The fund currently yields 4.3%, although this is not an indication of the fund’s future income.

Several Asian income funds underperformed the broader Asian stock market over the past year, including the Newton Asia Income Fund. We believe the fund has the potential to deliver good long-term returns for investors, but it doesn’t currently feature on the Wealth 150+.

Performance and positioning

Asian stock markets delivered exceptional returns over the past year. A lot of this performance was driven by a relatively small number of companies, including many in the technology sector. A number of large Chinese internet companies, such as Alibaba and Tencent, performed particularly well.

These companies don’t tend to pay high or regular dividends to shareholders. Instead they often reinvest their earnings in order to finance new projects or enhance future growth potential.

Most Asian income funds don’t invest in these companies due to the lack of income on offer. As a result, they’ve tended to miss out on the recent gains made in these higher-growth areas. Over the past year the Newton Asian Income Fund still delivered a positive return of 7.3%*, but underperformed the FTSE AW Asia Pacific ex Japan Index, which grew 20.6%. Please remember past performance is not a guide to future returns and the fund can invest in emerging markets, which increases risk.

Newton Asian Income - one year peformance

Past performance is not a guide to the future. Source: Lipper IM to 31/01/2018

Past performance is not a guide to the future. Source: *Lipper IM to 31/01/2018

On the other hand, no exposure to Australian banks helped performance as share prices in the sector performed poorly. The fund has historically had a relatively high exposure to Australian companies, given the attractive yields on offer. However, the team has concerns some companies have borrowed too much money in order to sustain their dividend payments, so they’ve reduced this exposure to 30% of the fund. Investments recently sold from the fund include AMP, an Australian financial services company that provides investment, insurance, and banking products.

Outlook

The team is optimistic about both the income and growth potential of Asian companies. In their view, Asian businesses are increasingly willing to pay dividends to shareholders. Earnings growth across the region has also improved over the past year, and this could support rising dividends.

Company valuations are higher than they once were given the strength of share prices over the past year. This means some companies can no longer be purchased at such an attractive price in comparison with their growth prospects. The team therefore focus on companies they believe remain sensibly priced, which have continued to generate strong cash flows and the potential to steadily grow their dividends.

Long-term growth across Asia should also be supported by a young and growing population, a high degree of innovation, and the willingness of governments to implement well-needed economic and political reform.

Please note the fund's charges are taken from capital, which can increase the yield, but reduces the potential for capital growth.

Find out more about this fund including how to invest

Please read the Key Features/ Key Investor Information in addition to the information above.