Quality and value could be coming back into favour: Aberdeen Asian Income
Disclosure – Independent Investment Research. This is independent research issued by Kepler Partners LLP. Aberdeen Standard Investments is a client of Kepler Partners LLP. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
AAIF’s focus on quality and value could be coming back into favour…
Aberdeen Asian Income Fund (AAIF) invests in emerging Asia and Australasia. The objective is to generate a high, and growing income and the strategy is to focus on high quality, cash generative businesses which pay dividends.
AAIF yields 4% on a historic basis. The board has been able to use revenue reserves to support the dividend through the pandemic and actually raised the FY 2020 dividend despite a fall in dividends received from the trust’s portfolio.
As we discuss in the Dividend section, the portfolio revenues seem to have seen a good recovery in FY 2021 so far.
Unlike some of its peers, AAIF pays a dividend from natural income rather than from capital (although the board has that power in reserve). This means that all its holdings are expected to contribute to the yield and dividend growth requirements.
As a result, AAIF has had little in the e-commerce space and more in traditional value sectors such as financials and materials. This has led the performance to be disappointing relative to peers in recent years, but to have been very good over the past year as the environment has changed (see Performance section).
While the discount narrowed at the start of 2021 during the reflationary rally, as Asian markets have sold off this year, it has widened again and stands at 12.7% at the time of writing.
AAIF offers income-seekers a way to diversify their sources of income. As well as the exposure to the fast-growing Asian economies, the portfolio also offers significant exposure to technological hardware, which doesn’t feature heavily in UK equity income funds.
The strategy of focusing on natural income has worked against the trust on a total return basis in recent years, but the current environment has been much more helpful. If the troubles in China continue, this will also help AAIF in relative terms, given its low weight to the country’s markets.
Despite an improvement in relative returns, the discount remains wide and has crept out to 12.7% at the time of writing. This has been a period of risk aversion in Asian markets, with ongoing concerns about the political and economic situation in China and perhaps also the effects of a global delta wave dip.
It is worth noting that despite its being underweight to China, AAIF would be unlikely to escape the impact of a serious slowdown in the country, with the materials sector one vector of possible contagion. Nonetheless, given the ongoing issues in the country, AAIF’s low weighting could continue to be helpful.
On the other hand, there is a cyclical bias via the high weight to financials and materials, which could cause problems if the economic recovery stalls.
|A good track record versus the High Dividend Index||Highly active country and sector positions could lead to periods of underperformance|
|Offers exposure to high-yielding technology stocks||Weight to financials and materials brings exposure to economic cycle|
|Disciplined team-based approach should aid consistency||Tends to run with gearing which increases sensitivity in down markets as well as up markets|