2020 may have been a fallow year for income investors overall, but much depended on investors’ sector and geographic exposure. Sectors such as pharmaceuticals had no trouble sustaining and even growing payouts to investors. At the same time, companies in specific regions, notably Asia, saw fewer cuts to payouts. Investors with sufficient diversity have managed to side-step the worst of the falls.
Martin Connaghan, Investment Director and Deputy Fund Manager of Murray International Trust, points out that payouts across Asia were flat for the full year 2020, compared to falls of over 40 percent in the UK. Chinese companies even managed to grow their dividends in aggregate. Within Murray International, around 70 percent of its holdings maintained or increased their dividends last year. As the world starts to recover from Covid-19, there are reasons to believe this strength can continue.
Unloved income
It is not news to say that until the latter part of 2020, investors were very narrow in their focus. While markets recovered from their major wobble last March, they were led by a handful of high growth technology stocks in the US and China. The type of mature, solid businesses that make up an income portfolio were on the wrong side of trade and generally neglected by investors, even though earnings and dividends proved resilient during the crisis.
This has left many interesting income ideas trading below their long-term trend valuations, particularly in niche areas such as frontier markets. Andrew Lister, Head of Closed Ended Fund Strategies and Co-Portfolio Manager of Aberdeen Emerging Markets Investment Company comments: “This is a contrarian entry point. At the moment, we expect a recovery in income from emerging markets and we see plenty of areas where income is extremely attractively valued today.”
For investment trusts, not only is there this ‘discount’ on the underlying investments, there is also a discount on the trusts. As it stands, both Aberdeen Asian Income Fund and Aberdeen Emerging Markets Investment Company are trading on discounts to net asset value of more than 10 percent. The trusts also employ low cost gearing (debt) to take advantage of the range of opportunities identified by the fund managers. While this brings risks if the market turns, we believe the trusts could benefit from an improvement in the rating of the underlying businesses, the rating of the trust and the gearing.
Earnings recovery
Yoojeong Oh, Investment Director and Manager of Aberdeen Asian Income Fund, sees the potential for earnings recovery among many Asian companies: “We have seen earnings pick up quite markedly already this year, that bodes well for dividend announcements. It goes without saying that earnings growth is positive for dividend growth, so we see better prospects for 2021.”
There is also an important consideration on debt. Excessively high corporate debt acts not only as a break on growth, but also on dividend payments. The crisis has also shown how debt can leave companies vulnerable. Yoojeong points out that Asian companies generally have more balance sheet strength than their Western peers: “Leverage on balance sheets for Asia is generally much better controlled and maintained than in the rest of the world. As such, Asian companies are in a better position to keep paying dividends, while also investing in their business for growth.”
For this reason, Murray International Trust, which has a flexible global mandate, has a sizeable exposure to emerging markets across Asia and Latin America. Martin says: “We continue to make full use of the global remit and not to be constrained. We invest in any business that meets our criteria, regardless of where it is.” He believes relative valuations in Latin America and Asia are far more attractive today.
Future growth
Less constrained by debt and operating against a backdrop of higher economic growth, companies in Asia and emerging markets are often growing faster than elsewhere. This is particularly true when investors are looking through an income lens. Asian and emerging markets have brought new companies and sectors for income investors. Andrew says: “Twenty years ago, global income mandates were quite heavily skewed to oil and gas, materials, utilities and telcos. These were cyclical and ex-growth in many cases. We’ve seen that change.”
However, many investors may rightly ask when this is likely to change. What will prompt valuations to adjust? To some extent, the process has started already. As economic recovery has seemed possible, there has been a nascent recovery in some ‘value’ and economically-sensitive parts of the market. Equally, many of the usual income options for investors – particularly higher grade government and corporate bonds – look very challenged. The income available is negligible or non-existent. Eventually, we believe, this will drive investors to those parts of the market that offer the most compelling value.
Important information
Risk factors you should consider prior to investing:
· The value of investments and the income from them can fall and investors may get back less than the amount invested.
· Past performance is not a guide to future results.
· Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
· The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
· The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
· The Company may charge expenses to capital which may erode the capital value of the investment. · Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.
· Movements in exchange rates will impact on both the level of income received and the capital value of your investment. · There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
· As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
· The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
· Certain trusts may seek to invest in higher yielding securities such as bonds, which are subject to credit risk, market price risk and interest rate risk. Unlike income from a single bond, the level of income from an investment trust is not fixed and may fluctuate.
· With funds investing in bonds there is a risk that interest rate fluctuations could affect the capital value of investments. Where long term interest rates rise, the capital value of shares is likely to fall, and vice versa. In addition to the interest rate risk, bond investments are also exposed to credit risk reflecting the ability of the borrower (i.e. bond issuer) to meet its obligations (i.e. pay the interest on a bond and return the capital on the redemption date). The risk of this happening is usually higher with bonds classified as ‘subinvestment grade’. These may produce a higher level of income but at a higher risk than investments in ‘investment grade’ bonds. In turn, this may have an adverse impact on funds that invest in such bonds.
· Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
· Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.
Other important information:
Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment trust should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments.
For more information, please visit www.murray-intl.co.uk, www.aberdeenemergingmarkets.co.uk and www.asian-income.co.uk.
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