Income strategies can be a profitable way to play Asia

Nine funds in the 91-member IMA Asia Pacific excluding Japan sector have an income mandate, while a further two income funds sit in each of the IMA Asia Pacific including Japan and IMA China/Greater China sectors.

Of these 13 products, 10 have a three-year track record and in that three-year period all have comfortably outperformed their respective sector averages.

But 2013 posed a significant challenge to these strategies.

Within the IMA Asia Pacific ex Japan sector, all eight funds with a sufficient track record – Fidelity did not launch its Asian Dividend fund until August – underperformed the MSCI AC Pacific excluding Japan index.

Richard Sennitt, manager of the £396.3m Schroder Asian Income fund, says: “High-yielding stocks performed poorly post-tapering talks and that has acted as a headwind.

“It impacted more on highly-rated, high-yielding, low-growth stocks.”

Mr Sennitt’s fund lost 8.84 per cent in the 12 months to March 7, which takes into account the selloff at the start of this year, compared with the index’s 9.89 per cent loss.

The higher-risk, high income ‘Maximiser’ version of the fund, run by Thomas See, fell even more, losing 11.31 per cent. These losses were typical among income funds.

But in spite of the collapse in short-term performance terms, IMA statistics show there was no huge withdrawal of retail money from Asian funds.

The IMA Asia Pacific excluding Japan sector saw net outflows in only two months in 2013, although monthly net inflows in the second half were noticeably much lower than in the first half of the year.

The main question is whether or not the current level of markets represents a buying opportunity. But while specialist fund managers are often to be heard talking up their own asset class whenever a setback is encountered, this time the rhetoric appears a little more cautious.

Jason Pidcock, manager of the £4bn Newton Asian Income fund, argues that Asia “looks cheap” but adds that the likelihood of outperformance is dependent on the performance of US equities.

“By the end of 2013, the valuation differential between the US and Asia looked very stark,” Mr Pidcock says.

“The US multiple is very high and Asia is low by historic standards.

“We have come into this year with the view that the US looks toppy and would not take much to derate, but Asia looks cheap.

“It could be a funny year where the Asian market is able to outperform. It doesn’t happen very often.”

Mark Williams, co-manager of the Liontrust Asia Income fund, has an overweight position in China but is wary of major headwinds to the world’s second biggest economy.

In particular, he cites the fallout from Chaori Solar, which on March 7 became the first Chinese company to default on a domestic bond since the market became regulated in the late 1990s.