Emma Wall: Hello and welcome to Morningstar series, Why should I invest with you? I am Emma Wall and I'm joined today by Mark Williams, Manager of the Liontrust Asia Income Fund. Hi, Mark.
Mark Williams: Hello.
Wall: So I thought we'd start with the big topic of this year and that's energy. I noticed you have a number of energy and basic material names. Does that mean that you are positive on the energy sector?
Williams: No, not the energy sector in its entirety. We do find some opportunities, but they tend to be very much stock-specific, so within the companies that we own. We own BHP Billiton (BLT) and that's much more to do with it stopping its investments in CapEx and starting to potentially throw off significant free cash flows and they have since we invested actually been more aggressive with their annual pricing, which has been a negative.
But we think over the medium-term that's going to be a very strong player and some of the smaller competitors are going to fall out of that market probably. So that would be one example.
Another one would be China Hongqiao, which is an aluminum producer in China and there, again, for their own specific reasons they have an advantage and that they have got direct access to electricity. So they have got, as one of their largest costs, about a 10% advantage from a lot of their competition and they have got much more modern plants than some of the international competitors.
Wall: And because of that those two names can fulfil the income part of the name of the fund?
Williams: Yeah, so we are definitely targeting companies, not just for their income. But for a combination of income and growth and we're saying over the medium-term, both of those fit that very nicely.
Wall: You mentioned that China, I know that you very positive on China, which is perhaps a contrarian view to compare to some other investors within this space. 42% of the portfolio is invested in China. What do you say to the naysayers?
Williams: I think for me, it always comes down to fundamentals and yes, there has been a significant sell-off, particularly in A shares – and we don't invest and haven't invested in any of the A shares – and in the Hong Kong listed companies, that's where we are finding the opportunities and we think trading less than eight times forward earnings with double-digit earnings growth still likely to come through over the medium-term, that looks like a great opportunity.
We don't like what the government has done recently with its intervention in the Asia market. We are disappointed with that. It's definitely a medium-term negative. But, overall, what China has tried to attempt in its transition away from poor investment for production, and particularly low-end manufacturing much more towards a services oriented economy. We still think that, in general, despite the recent setback they are heading in the right direction.
So with that in minds, we don't think that there is likely to be a financial crisis driven from the significant sell-off in the Asia market. Without that, so again, we look at valuations and find some of the best opportunities within the region. But you've got to bear that in context.
We're not entirely positive on China. We do understand that there will be some negatives as they make this transition. It will be difficult and they will be volatile because of that difficulty. Overall, they still seem to be doing pretty much what we would like to see them do.
Wall: Then perhaps moving South in the globe. I know another area that you have some exposure, perhaps are looking to move away from is Australia. There have been some headlines recently to say that Australia is getting – stock market is looking overvalued and you do share that view, don’t you?
Williams: We do. I don't say that we'd be looking to move away from Australia because we've been fairly negative since we launched the fund about 3 and a half years ago. But we do think there are significant headwinds that are going to cause problems in Australia and one of those is the fact that you've – because of as I was saying about BHP not got the same CapEx investment in mining, that will have some knock-on effect or multiplier effect on the economy.
But apart from that, it's also got a very expensive property market, significant amount of household debt and some competitive disadvantages for the retail environment.
So all of these things give us some negatives and at the same time is one of the more expensive markets within the region. The companies themselves are well-managed. We do find opportunities and the ones we're invested in we like. And should you continue to see a sell-off in the equity market and valuations became more enticing than I think it would be more likely to invest in it.
But overall, at the moment, when we compare it – it’s trading at roughly a 100% premium to the Hang Seng-listed Chinese companies I mentioned before and that is one of the reasons why we're not taking that risk at the moment.
Wall: Mark, thank you very much.
Williams: Thank you very much.
Wall: It is Emma Wall for Morningstar. Thank you for watching.
