During our week of income-focused content, we're canvassing the views of fund managers who invest for income. In this comment piece, BNY Mellon's Zoe Kan argues that investing for growth in the region is a 'phallacy' that investors should avoid. Instead, she says, there are plenty of reasons to support an income approach
Investing in Asia has historically been purely focused on growth opportunities. And little wonder. People perceive investing in the region as a play on global gross domestic product and export growth.
We believe this is a fallacy.
Instead, better risk and reward characteristics can be found by focusing on income as well as growth in the region. In the next decade, investors might want to think more carefully about the type of strategy they are invested in.
We advocate diversification into Asia and focus on companies that can continue to pay dividends during times of macroeconomic uncertainty. Dividends play a key role in total returns for Asian investors, and are the bedrock of income strategies.
Key Morningstar Metrics for BNY Mellon Asian Income
• Morningstar Medalist Rating: Neutral
• Process Pillar: Average
• People Pillar: Average
• Parent Pillar: Average
Overweight Singapore, Overweight Taiwan
In our view, a focus on income in Asia can better align investors with companies whose cashflows which are able to pay dividends. In the new regime of higher interest rates and inflationary pressures, there will likely be more volatility. As such, we think it's important to be selective within any dividend-focused approach.
Coupled with a change in growth dynamics, investor perspectives on investing in Asia could also be changing. Over recent years, China's internet platform companies have become a large part of the benchmark. However, valuations have been impacted due to wider factors. We think this illustrates one of the pitfalls of focusing only on growth strategies in the Asia region, where valuations are not grounded by dividends.
By way of example, we are overweight Singapore, which plays host to many companies with strong balance sheets and decent payout ratios. There is a lot of wealth and trade that goes through Singapore from its neighbouring nations. Banks in the region also have well-capitalised balance sheets and the ability to sustain higher dividends for years to come.
Another overweight in the portfolio is Taiwan, due to the opportunity around its many technology companies. We also see merits in Indonesia, which in our view emerged from the Taper Tantrum of 2013 stronger from a current account and fiscal perspective. We see strong growth coming out of that economy and think this is likely to continue.
We also believe India offers significant potential given its long-term demographics, strong consumption and household income growth, as well as growing levels of urbanisation. Asia's ageing population is supportive for income strategies because, as people grow older, there is a higher need for income to fund them in retirement.
Chipping In
On a thematic level, the technology sector provides investment opportunities. We believe artificial intelligence, or more specifically companies supplying the hardware for AI, present interesting opportunities. The technology companies held in our portfolio all have net cash balance sheets and pay dividends, and we expect the AI industry to increase dividends as profits grow in the coming years. One of our largest holdings is Asia’s largest chip manufacturer: Taiwan Semiconductor Manufacturing Company (TSM).
Overall, we're broadly looking for balance sheet strength, strong business models, and companies that have economic moats that give a competitive advantage. In other words: quality franchises, with a degree of pricing power, which maintain profitability and margins – and pay dividends at the end of the day. Especially with Asia, we think the capital growth component of a portfolio's total return is more volatile and less dependable than the income component.
By harnessing the potential of dividends and dividend growth, it is possible to compound total returns in a more consistent fashion than by trying to target growth on its own.
Zoe Kan is portfolio manager of the BNY Mellon Asian Income fund
