Buy and hold with an Asian income fund

Dividend strategies offer protection in volatile market phases. Due to the trade conflict between China and the USA, volatility is back in the market. For Asian investors, a look at dividend funds therefore makes sense. We talked to Christopher W. Floyd, portfolio manager at Legg Mason subsidiary QS Investors.

AsiaFundManagers.com: With the QS Investors Managed Volatility Asia Pacific ex-Japan Equity Growth and Income Fund you have established a dividend fund. How does the investment process looks like?

Christopher W. Floyd: Our investment process employs proprietary fundamental and behavioral models to build a portfolio of equity investments with strong financial health, high sustainable dividends and attractive fundamentals. Our investment process is comprised of four main steps:
We apply liquidity, data quality and dividend screens to the broad universe of stocks to create an investable universe of approximately 1,500 dividend paying stocks.
We use our bottom-up stock selection models to rank securities based on dividend sustainability, return stability and attractive fundamentals. We utilize these scores as inputs to create a diversified portfolio of approximately 115 stocks. We execute trades to keep the portfolio updated with the latest information while remaining within the strategy’s constraints.

AFM: What advantages does your income strategy offer investors?

Christopher W. Floyd: QS Investors Managed Volatility Asia Pacific ex-Japan Equity Growth and Income strategy offers equity market participation while providing downside protection with a more stable equity return and dividend yield than market-cap weight indices. Our strategy is based on extensive academic and practitioner research showing that low volatility and dividend paying stocks tend to outperform traditional market cap benchmarks, by generating a more stable stream of returns while mitigating drawdowns. These features are particularly compelling in lower growth environments, such as the one we are potentially heading towards, following the 10-year bull market in global stocks.

Income strategy has performed well in Asia

AFM: Do income strategies also work in Asia?

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Christopher W. Floyd: An income strategy in Asia may be compelling for investors seeking exposure to Asian equities with a more stable stream of returns. Over the long term, a focus on stocks with strong dividend characteristics has performed very well in the Asian markets.

AFM: How is the fund structured, how does it look like?

Christopher W. Floyd: The fund is comprised of approximately 115 securities within Asia Pacific ex-Japan that exhibit better financial health (more sustainable dividends, higher free cash flow yield), return stability (lower beta, lower predicted risk) and attractive fundamentals (attractive valuation, favourable sentiment). The portfolio is well diversified across sectors and countries within the MSCI Asia Pacific ex-Japan universe.

Elections in Asia may add to volatility

AFM: What is your outlook 2019 for Asia?

Christopher W. Floyd: In 2018 many of the concerns we highlighted late last year such as continued tightening by the Fed and other central banks, peaking economic growth and ongoing disputes over trade barriers and protectionism led to a sharp market downturn after years of lower volatility. Most of those issues are still in the forefront of investors’ minds as we started 2019, with little in the way of resolution expected any time soon. Elections in countries such as India, Indonesia and Australia may also add to the volatility. In the face of these uncertainties, our low volatility approach, focused on a well-diversified portfolio of stocks with growing dividends, low betas, and strong fundamentals, provides a compelling opportunity for investors in search of a degree of protection from drawdowns in equity markets.

AFM: How do you position the fund with regards to the trade conflict?

Christopher W. Floyd: Our process is model driven and more focused on stock selection rather than trying to time country or sector exposure, therefore most changes to the portfolio will come about as data inputs to the stock model change. We run the models daily to capture any data changes and will trade the portfolio should we see significant changes. Portfolio turnover tends to be relatively low (20-30% annually) given that steady dividend-paying stocks tend to have relatively more stable fundamental characteristics over time. We would therefore expect to see changes in the positioning of the fund should the trade wars affect dividend sustainability, volatility, valuation and/or sentiment. Currently we are underweight China and generally have more weight in stocks with domestic exposure rather than those that are more export-oriented.

AFM: Thank you very much for the interview, Mr. Floyd.

Christopher W. Floyd, CFA
Portfolio Manager, QS Investors

Member of the Global Equity Portfolio Management group. Formerly a developed markets Senior Portfolio Manager at Batterymarch Financial Management from 2012 to 2014. At Batterymarch, he also served as a Portfolio Manager from 2003 to 2012 and and Quantitative Analyst from 2000 to 2003. Prior to joining Batterymarch, he performed market analysis at Urban & Associates and worked with retirement plans at Bay State Federal Savings Bank.
Education: BA in Economics from Dartmouth College; MBA in Management from Cornell University.