Funds to watch in the lands of the rising dividend

OBTAINING dividend income from outside the UK has become a popular option for many investors in recent years – a trend fuelled by the pandemic and the collapse in dividends paid by many British companies.

This search for dividends has resulted in investment funds with a broad global income bent becoming increasingly popular. Income funds concentrating on specific regions or countries of the world – for example, Asia, North America, Japan and emerging markets – have also attracted investor interest.

According to the latest data compiled by investment house Janus Henderson, global dividends are expected to grow this year by nearly 11 per cent with Europe, the UK and Asia Pacific leading the way.

One investment trust, described by analysts Edison as ‘doing what it says on the tin’, will confirm the buoyancy of Asian dividends when it announces its annual results this week. Henderson Far East Income – one of a stable of funds run by Janus Henderson – will state that it has managed its 13th consecutive year of dividend growth.

Yet, although the expected 1.7 per cent increase in the annual dividend to 23.4pence a share will be welcomed by income-hungry shareholders, it will be offset by the trust’s poor overall performance. The shares ended Friday at £2.96.

Over the past one, three and five years, the fund has lagged behind its peer group, in the process registering respective meagre overall returns (capital plus income) of just 3.9, 5.9 and 16.8 per cent.

In other words, any income returns have been undermined by the underwhelming poor share price performance of the trust’s 40 holdings.

Over these same three time periods, only one similar stock marketlisted trust – JP Morgan Asia Growth & Income – has an inferior record, albeit only over the past year (its record over longer periods is better).

As the table shows, all those Asia Pacific Income funds not listed on the London Stock Exchange have outperformed Henderson Far East Income over one, three and five years. Mike Kerley, who has run the £440 million stock market-listed fund since 2007 (and more recently in conjunction with Sat Duhra), admits the trust’s returns have been ‘disappointing’.

‘If we go back to pre-pandemic times, the trust’s total returns were in line with those of its peers,’ he says. ‘But the underperformance of dividend yield as an investment strategy has hit the trust hard.’

The trust’s shares are currently yielding close to 8 per cent, an extraordinary figure – especially when measured against its peers where yields of 4 per cent are more the norm.

Kerley says the shares of the top 25 per cent of income-yielding stocks across Asia are currently standing at a 60 per cent discount to the rest of the market.

In other words, their share prices are seriously depressed. This is a result of investors’ huge appetite – fuelled by lockdowns and working from home – for alternative growth stocks such as Chinese technology giants Tencent and Alibaba and companies involved in the drive towards a net-zero carbon global economy. ‘There is a lot of hope built into the valuations of some of these growth stocks,’ Kerley cautions.

He believes that at some stage, a catalyst will emerge that will reward fund managers like him who prefer to focus on well-run companies that are cash generative and profitable.

‘It’s frustrating,’ he adds, ‘but the backdrop is in place for our investment strategy to work to shareholders’ advantage. It’s just a question of waiting for the shift in investor sentiment.’

If the trust’s share price were to increase strongly, the 8 per cent yield would fall – although the dividend payments would continue to rise.

TWO big themes dominate the trust’s portfolio – mining and financials. Kerley believes strong demand for commodities such as aluminium, copper, cobalt and nickel – driven in part by the greening of the global economy – is a ‘big positive’ for mining companies such as Rio Tinto and BHP that are among the trust’s top ten holdings.

Asian financial stocks, he argues, will do well if interest rates rise as expected, pushing profits up.

In recent weeks, the trust has decreased its exposure to Chinese stocks on the back of an expected slowdown in the economy, triggered by higher energy costs and rising commodity prices. Although Kerley – and Henderson Far East Income shareholders – are patiently waiting for cash generative businesses in Asia to come back into favour, he believes the dividend outlook for the region is a positive one.

He says: ‘Asian dividends fell back only 5 per cent as a result of the pandemic, compared to 30 per cent plus in the UK. With Asian companies traditionally using less of their profits to pay dividends, there is scope for future dividend growth, especially if the region also benefits from economic growth.’

It’s a view shared by Darius

Underperformance of dividend yield has hit the trust hard

It’s a question of waiting for shift in investor sentiment

McDermott of fund scrutineer FundCalibre. He says: ‘Asia is one of the few areas of the world offering investors access to a decent dividend. It’s a vast region, embracing many world-class companies which are really starting to embrace the dividend culture.

‘Not only will UK investors taking the plunge benefit from diversification of their income sources, but they will gain exposure to some excellent companies in growth mode.’

McDermott’s favourite funds in this area are Jupiter Asian Income, Guinness Asian Equity Income and Schroder Oriental Income.