Oct 282011

This is the second part of a review of Asian income funds and emerging market income funds for UK investors, focusing on investment trusts. Click here for Asian income funds – unit trust and oeics.

Asian income funds – investment trusts

There are three Asian income investment trusts in the UK market. And it shows how keen investors now are on the income theme that none trade at a significant discount to net asset value (NAV) – for most ITs, a small discount to NAV is normal.

The Aberdeen Asian Income Fund (LN:AAIF) has a rather different geographic focus to the funds we’ve already looked at in part one – it’s much more geared to Southeast Asia. Singapore is the single biggest holding at 20%, followed by Australia and then Malaysia and Thailand. It doesn’t include a sector breakdown in its factsheet, but I estimate that the biggest holdings are the familiar duo of financials and telecoms at 25% and 20% respectively

The total expense ratio is 1.4% and the annual management fee is 1%. For an investment trust there is no entry fee and instead we look at that discount to NAV, which is this case is actually a premium of 3.5%. The yield is 4%.

I generally rate the Aberdeen emerging market team highly for their focus on good quality companies. This trust is likely to be the most reliable of all the Asian income funds. It coped well in the 2008-2009 crisis.

The only flaw is the fact it trades at a premium to NAV; it’s always better to buy trusts at a discount. Unfortunately that rarely happens with this particular fund, so if you’re especially interested you may be obliged to pay the premium. It’s certainly one to have on your buy list if it switches to a discount during a sell-off.

Next, there’s the Henderson Far East Income Trust (LN:HFEL). China is the largest holding here at 20%, followed by Australia, Taiwan, Singapore and Thailand. Major sectors are financials (20%), closely followed by industrials and telecoms. The yield is 5.6%, the total expense ratio is 1.89%, including a management fee of 1%. The share price is roughly in line with NAV.

From the same table, there’s also the Henderson Asian Dividend Income Unit Trust, which is run by the same manager with virtually the same portfolio. That has a TER of 1.55% and an annual fee of 1.25%, which can be cut to 0.75% through discount broker Cavendish.

This fund has been a respectable enough performer, but it’s lagged the Aberdeen Asian Income fund noticeably over the years. It certainly had a much tougher 2008, though it came back strongly after the crisis. It’s a decent enough fund – the Aberdeen one just looks that bit better.

Lastly among the Asian income investment trusts, there’s the Schroder Oriental Income Fund (LN:SOI). This has a different manager to the Schroder Asian Income Fund covered in the first part of the review, although the geographical breakdown looks quite similar: Australia is the largest holding at around 20%, followed by Singapore, Hong Kong and Taiwan.

The yield is 3.9%. The total expense ratio is 1.57%, which includes an annual management fee of 0.75% and a performance fee of 10% of any gains above 7%. The share price is trading roughly in line with NAV.

I don’t like funds that charge performance fees except in very specific circumstances and there’s no justification for it here. So personally, I would rule this one out on those grounds.

This has been the most volatile of the three – it got hit hard in 2008 during the crisis and came back strongly in 2009 (see below). That kind of pattern usually indicates a riskier portfolio and in general I would say that its holdings look less high quality than the Aberdeen fund. Whether it will outperform in the future – as it has over five years – is unclear, but it will probably be less steady either way.

3 yrs
5 yrs
Aberdeen Asian Income Fund7.88%2.72%-3.11%40.05%30.77%3.86%29.66%15.38%
Henderson Far East Income Trust9.53%23.71%-22.07%55.5%19.36%-15.71%23.31%10.65%
Schroder Oriental Income Fund5.1%23.75%-40.39%89.22%35.64%-6.52%46.93%13.89%

Emerging markets income funds – investment trusts

There are also two fairly new emerging market income investment trusts, one with a narrow mandate and one more global. First, there’s the Aberdeen Latin America Income Fund (LN:ALAI). Like most Latin America funds, this is heavy on Brazil at almost 60% of the portfolio; Mexico is next at 30% leaving little room for anything else.

Financials, telecoms and natural resources are the major holdings. The total expense ratio is 1.9%, with an annual management fee of 1%. It yields 4.9% and trades at a slight premium to NAV.

The fund is likely to be solid enough given the team behind it, but the heavy concentration in Brazil puts me off. This is essentially a single country IT and if you’re looking for an emerging market income fund, you want to be a bit more diversified.

At the other extreme, there’s the JP Morgan Global Emerging Markets Income Trust (LN:JEMI). This is one of the more diversified of the Asian and emerging market income funds on this list, in a similar style to the Somerset Emerging Dividend Growth Fund covered in part one.

The largest country holding is Taiwan at around 12%, closely followed by Brazil, Hong Kong and South Africa. Major sectors are telecoms (20%), financials and IT.

It has a total expense ratio of 1.32%, including an annual management charge of 1%, and currently trades on a premium to NAV of around 3%. The yield is around 4.5%.

Emerging market income ETFs

Lastly for this review, Asian income seekers also now have the option of a couple of ETFs – the db x-trackers MSCI AC Asia ex Japan High Dividend Yield Index ETF (LN:XAHG). There’s no Australia within this benchmark; the top holdings are China (30%) followed by Taiwan, Hong Kong and Singapore. Financials are again the largest section at 25%, with telecoms and energy coming next.

Dividends within the index must have a yield that is at least 30% higher than the average for the MSCI Asia ex Japan Index. Dividends must also be growing and the payout ratio must not be excessively high; this attempts to screen out apparent high-yield stocks that can’t sustain their dividends.

The estimated dividend yield is 4.1% and the total expense ratio is 0.45%. This is a synthetic ETF, which means it doesn’t hold the shares directly, but use swaps with Deutsche Bank as the counterparty (put simply, Deutsche Bank will pay the ETF the same total return that it would have got from holding the shares that make up the index).

I have reservations about using trackers for most emerging markets due to the poor quality of many emerging market indices; that goes double when you’re weighting by value factors such as dividends. In this case, you end up with a top ten holdings full of Chinese banks – not the basis for a good quality portfolio. I’d avoid this fund.

Another alternative is the iShares DJ Asia/PAcific Select Dividend 30, which selects  high-yielding stocks from the developed markets in Asia. Australia accounts for 50% of the portfolio, followed by Singapore, New Zealand, Hong Kong and Japan. Telecoms in the largest sector, with financials and industrials also featuring heavily as usually.

This is a physical ETF – meaning it invests directly in the relevant shares – with a TER of 0.59%. It currently yields 5%. I would say there are less quality issues with this ETF compared with the x-trackers one, but it is obviously heavily geared to one single country.

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