Asia is home to some of the world’s most dynamic economies. While the focus in the West is on China, its neighbours are no less strong. Korea, Singapore, Taiwan, Indonesia, the Philippines and India have shown strong growth rates in recent years. Driven by demographic factors and an unprecedented race to catch up, Asia-Pacific funds offer enormous potential to participate in the growth story.
Asian dividend strategies promise participation in this boom – with higher returns and reduced risk. There is now sufficient evidence that dividend strategies generally work. Where opinions differ, however, is how well dividend strategies work in growth markets. With a dividend approach, investors by definition invest in more defensive, high-yield securities. These are mostly more traditional sectors with limited growth potential. Technology stocks, for example, tend to be underweight in dividend portfolios.
Asia Pacific Funds – Value or Growth?
Particularly in Asia, many investment strategies in recent years have drawn a large part of their performance from technology stocks. Shares such as Alibaba, Tencent or Baidu achieved enormous stock price gains. These heavyweights can be found in the portfolios of numerous Asian equity funds. Dividend strategies largely missed these gains. However, the last 12 months in particular have provided an enormous headwind due to politically influenced financial markets. 2018 was a difficult year for Asian equities due to the escalating trade conflict between the U.S. and China. The MSCI China alone plummeted by 20.7% in 2018.
Particularly in such a scenario of high political uncertainty and highly volatile financial markets, dividend strategies are suddenly in greater demand again. One way of relying on a dividend strategy in Asia is the HSBC GIF Asia Pacific ex Japan Equity High Dividend of the British fund company HSBC Global Asset Management. The fund was launched in 2004 and currently has a volume of $281 million.
HSBC with research capacities in Asia-Pacific
HSBC Global Asset Management is one of the largest providers of Asian funds. What distinguishes the company is a large team of portfolio managers and analysts in the region who have local market knowledge. HSBC’s Asia ex Japan strategies are managed by a team of 16 people. These in turn are supported globally by a team of 70 analysts and portfolio managers in four locations. Such local capacities are a big plus in non-transparent markets.
HSBC GIF Asia Pacific ex Japan Equity High Dividend is based on the MSCI AC Asia Pacific ex Japan Net Index. The fund is managed by a team led by the head of Asian and Indian Equities, Sanjiv Duggal. The fund management looks for undervalued, profitable equities in Asia. Important criteria for stock selection are companies with good management teams and high cash flows. The search is based on HSBC’s strong research capacities in the region.
Asia Pacific Longer-Term Fund
The objective of the dividend fund is to outperform its index over a rolling period of 3 years. In addition, the portfolio should yield a higher dividend yield than the index. This is based on the insight that, especially in Asia-Pacific ex Japan, a large part of the profits since 2000 have resulted from dividends.
At HSBC GIF Asia Pacific ex Japan Equity High Dividend, the fund managers focus on a value-oriented investment process that prioritises profitable companies. The fund has a longer time horizon, which is why patience is key. While this is a dividend fund that is designed to generate a higher return than the index, the fund managers make sure that the return does not come at the expense of value and profitability.
Stock-picking for Asia-Pacific equities
The primary universe of the fund consists of MSCI AC Asia Pacific ex Japan index members. These include approximately 1,020 companies in four developed countries (Australia, Hong Kong, New Zealand and Singapore) and nine emerging markets (China, India, Indonesia, Korea, Malaysia, Pakistan, the Philippines, Taiwan and Thailand). The index comprises around 85% of the free float adjusted market capitalisation in each country.
The universe is ordered according to a combination of valuation and profitability and further tested for dividend attractiveness. The best-placed stocks are then analysed in detail to generate investment ideas. Equity analysis includes business models, shareholder structures, balance sheet strength, profitability factors, competitive landscape and positioning, and earnings outlook.
Focus on Greater China equities
Once equity ideas have been generated, the portfolio is managed in a bottom-up process with limits on exposure to individual equities, countries and sectors. The equity selection process also targets equities to achieve a portfolio dividend yield that represents a premium over the index. A top-down process is used to manage risk at the individual portfolio and portfolio level.
The portfolio of HSBC GIF Asia Pacific ex Japan Equity High Dividend consists of 40-60 equities. More than 50% of the portfolio is allocated to Greater China, i.e. the People’s Republic of China, Hong Kong and Taiwan. Overweight sectors include non-cyclical consumer goods, energy stocks and commodities. Financial services are a main focus with 27.60%, followed by technology stocks (16.24%) and commodities (14.62%). The top positions in the fund include chip manufacturer Taiwan Semiconductor (5.17%), insurance group AIA Group Ltd (4.65%) and Australian commodities group BHP Group Ltd.