Dividend strategies can help investors take advantage of Asia’s long-term growth potential. Yu Zhang, Portfolio Manager at Matthews Asia, talks about the potential and outlook of the Asian market.
AsiaFundManagers.com: What are the current arguments for a total return approach in Asia?
Yu Zhang: Asia’s economies are renowned for their growth potential. Nevertheless, over our quarter-century of investing in Asia, we have seen investors pay too high a price for fast growth stories. Many investors face the challenge of distinguishing companies with solid corporate governance from those who pay insufficient attention to the interest of minority shareholders. We believe dividends are an underrecognized component of equity investing in Asia. In our view, consistent payment of dividends helps reduce some of the volatility in long-term returns and is an effective gauge of a company’s overall strength, stability and quality of corporate governance.
Number of Asian dividend-paying companies expanded significantly
Yu Zhang: Dividends have grown at a significantly faster rate in Asia than the U.S., with the yields offered by Asian companies having the tendency to be higher than the U.S. Moreover, over the past decade, the universe of Asian dividend-paying companies has expanded significantly. At Matthews Asia, we pursue dividend-growth opportunities in areas investors may dismiss as ‘low yielding, poor governance’ markets. As Asia’s markets continue to evolve, companies’ dividend policies have changed substantially, often for the better, and companies in the Asia Pacific region offer some of the highest dividend pay-out ratios worldwide.
AsiaFundManagers.com: What is your dividend approach for Asia?
Yu Zhang: Our approach to dividend investing balances stable, high dividend-yielding stocks with slightly more cyclical, but higher dividend growth stocks. This flexible approach not only allows us to capture attractive opportunities, but has also helped to navigate market volatility, such as we saw in 2018.
Many constituents of the MSCI Asia ex Japan Index offer healthy yields alongside growth. We believe this is partly due to the ownership structure of many companies in Asia, which in contrast to Western companies consists mainly of family owners. Oftentimes the original founder/family is still the majority shareholder and for them dividends are a significant source of income and cash flow. In comparison, the dividend culture in the U.S. is often more nuanced.
AsiaFundManagers.com: How do dividend strategies work in the growth-oriented Asian economies?
Yu Zhang: Our Asia dividend strategy remains predominantly a growth strategy. Yet we tackle growth from a slightly different angle compared with pure growth products. Whilst others will be looking for earnings-per-share growth, we are more focused on dividend-per-share growth.
Asia dividend strategies favourable for long-term investors
Yu Zhang: This means that volatility plays a slightly different role in our portfolio. We do not specifically manage downside volatility, but we focus squarely only on companies able to generate sustainable free cash flow. Considering that dividend-paying companies in Asia tend to be conservative in terms of how they manage their balance sheet with low financial leverage, a lot of the companies we invest in have a large net cash position. This is a good position to be in when the market goes through a volatile period. In addition, if some of those companies pay a significant portion of their earnings in dividends, the dividend yield tends to become a buffer in terms of holding up the stock’s valuation during periods of a drawdown. That tends to produce a slightly lower level of volatility for the portfolio.
For investors who want to participate in Asia’s growth, particularly over the longer term, dividend strategies offer a lower volatility way to do so. It offers core exposure to Asian growth for patient investors.
AsiaFundManagers.com: Asian small caps are considered to be under-researched. How do you deal with this problem?
Yu Zhang: Small companies in Asia have always been an integral part of the region’s economy. As capital markets have deepened the investment universe has grown considerably. At Matthews Asia, we have been investing in smaller-cap companies throughout our history and firmly believe our fundamental, bottom-up investment process lends itself to unearthing attractive investment opportunities. In our view, the key to successful small-cap investing is to research companies thoroughly to find the winning combination of a sustainable business model and quality management team.
AsiaFundManagers.com: Thank you very much for the interview.
Yu Zhang is a Portfolio Manager at Matthews Asia. He manages the firm’s Asia Dividend and Asia ex Japan Dividend Strategies and co-manages the China Dividend Strategy. Prior to joining Matthews Asia in 2007 as a Research Associate, Yu was an Analyst researching Japanese companies at Aperta Asset Management from 2005 to 2007. Before receiving a graduate degree in the U.S., he was an Associate in the Ningbo, China office of Mitsui & Co., a Japanese general trading firm. Yu received a B.A. in English Language from the Beijing Foreign Studies University, an M.B.A. from Suffolk University and an M.S. in Finance from Boston College. He is fluent in Mandarin.