Don’t worry if you missed last week’s virtual event with Abrdn Asian Income Fund (AAIF), you can watch the whole programme here.

In the 60-minute recording fund manager Yoojeong Oh describes the positive outlook for Asian economic and dividend growth. 

She explains how her team’s base in Singapore is a a good base from which to find quality companies with strong balance sheets in sectors such as technology, financial services, real estate and communication.

In response to questions from Citywire’s Gavin Lumsden and the audience, Oh also comments on TSMC, the Taiwanese chip maker that accounts for 13% of the portfolio, and the potential impact of higher US tariffs.

Can’t watch now? Read the transcript

Gavin Lumsden:

Hello and welcome ‘Asia: More then just a growth story’. A one-hour programme brought to you by Citywire and Aberdeen. My name is Gavin Lumsden. I’m from Citywire. I’m delighted that joining us from Singapore is Yoojeong Oh, manager of Aberdeen Asia Income Fund. A £335m investment trust, looking to generate good returns from higher yielding stocks. It’s a good time to weigh the attractions of Asia, after a year when in sterling terms, both China and India have performed well and after a US election, when the region is being viewed through the lens of higher Trump tariffs. Perhaps there are other factors to consider. 

We have our usual format today. After my introduction, Yoojeong will give a presentation. I’m then going to ask the manager a few questions and after that, it’s over to you for Q&A in the last section of the show. If you have a question for Yoojeong about the trust or investing, you can submit it at any time via the Q&A box in Zoom. I will monitor your questions and put them to the fund manager. After the event, we’d be grateful if you could complete our short feedback form, which will open in your browser when the session ends. That’s enough from me, Yoojeong, good morning. Good afternoon I should say in your case. Lovely to see you, are you ready to begin your presentation?

Growth and dividends

Yoojeong Oh:

Thank you, Gavin. Thank you everyone for joining today. My name is Yoojeong and as Gavin said, I’m joining you from Singapore today, to talk about the Aberdeen Asian Income Fund. It’s a closed-end equities fund that targets the income and growth potential of some of the most successful and promising companies here in Asia. I’ve been manager on this fund since 2016, although I’ve been with Aberdeen since 2005. Today, we’re going to discuss why Asia’s an attractive investment destination for growth and income seekers. Before talking about the benefits of our quality focused investment process, what we believe helps us to put together this portfolio of diversified stocks that gives exposure to the Asian growth story, as well as a healthy dividend yield.

If we go to the first slide, please. This starts our ‘why Asia’ story. Essentially, I think everyone on this call will be very familiar with the growth story in Asia. GDP growth forecasts for the region is sitting above 5% on average, for many of the markets in the region and Asia is forecast to be the largest contributor to global GDP for the next couple of decades, as you can see here on the right. Did you know that the focus on dividends in the region is also growing and already, more than half of the companies in the APXJ region are yielding more than 2.5% in dividends.

The next slide shows that dividend reinvestment in fact, shown here in this light turquoise colour, now makes up more than half of the total returns generated from investing in the Asia Pacific region. We can see here, how over the last two decades, that dividend component has grown from almost nothing to being really quite meaningful today.

I think again, this highlights the importance of dividend growth being sustainable in the region over the coming years as well. On the left-hand side here, you’ve got a chart that shows you balance sheet gearing for different regions across the world. Asia, you can see, is towards the bottom-end of the chart shown again, in that light turquoise colour. Balance sheets here, are much stronger. Particularly relative to the balance sheets you find elsewhere in the US and Europe, for example. Strong balance sheets provide flexibility for company management to run their businesses through different market cycles. It gives them choices so they can invest in growth, or they can choose to pay dividends to shareholders.

On the right-hand side, you get a sense of how strongly funded these dividends are as well. This captures the free cashflow generation that covered that dividend and buyback payouts that corporates are making here in Asia. You can see that for the last couple of years, the company strength in terms of their ability to generate cash to cover those dividends, again, has been very strong. This combination of prudent debt levels and good cashflow generation. That’s a good backdrop for finding income.

The next slide just goes into a little bit about our team and our process. Here at Aberdeen, we’re very much focused on finding what we believe to be the best growth and income opportunities for this income fund. Eric, who’s pictures here alongside myself, the two of us run this portfolio and we’re supported by a team of over 40 in-house analysts and fund managers located on the ground across Asia, who’ve been meeting companies and producing insightful research for the past three decades. Our stock picking has enabled us to deliver 15 years of consecutive dividend growth and we’re not constrained by market-cap.

We use that flexibility provided to us by this closed-end fund structure, to invest across market capitalisation. We own about 60 holdings in this portfolio. Each company, regardless of size is expected to satisfy both the quality and yield criteria of the fund. We don’t take a barbell approach. Each stock is contributing to both quality, growth, and yield.

The next slide, just to highlight how well resourced we are in Asia. This gives you a sense of the headcount of our analysts across the region. We’ve got about 40 dedicated team members located on the ground and they cover a variety of different languages and cultures, to get the most out of our interactions that we have with the companies that we visit and meet with. I’m Korean, so I help to cover a lot of the companies there. On the desk we have mandarin speakers, [unclear 05:59] speakers, Hindi, Thai, Australian speakers as well.  

We really rely on having that big broad base of different languages to try and give us an additional value add on top of the knowledge networks that we have developed over time through having this team presence here. I truly believe that this local presence is one of our key competitive advantages, to find good-quality businesses. Especially for those companies that are not widely covered by the sell-side, which we unearth through filtering the markets ourselves and making use of our presence here in Asia.

Resilient performance

The next slide gives our performance. The data here is until the end of October, but actually, this positive trend has come through to the end of November as well. The fund is outperforming the benchmark across the longer-term time period. So, you can see three and five years. We’re also turning around shorter-term performance. You see the one month here for October, but November has also been good. Importantly, as a quality fund, we want to provide a portfolio that is defensive during the tougher times, but which may not be as high beta during momentum driven market rallies.

You can see that the fund does exactly what I’m explaining. If you look at the discrete annual performance figures at the bottom of this page, when the market is weak and the market here is represented by the MSCI Asia Pacific ex-Japan index, which is the last row on the bottom table. When markets are weak, the fund is more resilient and when markets are strong, we’re still giving you a share of that growth, even though it may not be as high as the broader market. Even for this recent one-year period on the lefthand side, although the fund is behind the index by about two and a half percentage points, investors are getting an attractive 15.7% NAV growth. That’s net asset value growth.

High dividend

Of course, the fund is paying a premium yield versus the index. The fund yields just over 5% today versus the index, that yields about 2.5%. Just the two years on the right-hand side, I would say those are the funny Covid years so, it broke down a little bit then, but what we lost in 2020, you can see that we more than made up for in 2021.

Next slide just gives you a sense of that dividend track record I mentioned earlier. We’ve paid 15 consecutive years of dividend per share growth. Making this an AIC Next Generation Dividend Hero fund. We also have revenue reserves shown in the lighter blue colour to the tune of about 40% of one year’s dividend. That again, gives us some firepower for future rainy days as well.

Slide nine, this shows you how we try and define quality when we’re looking for stocks to invest in across Asia. We’re really looking for companies that are simple to understand. That operate in structural growth areas and we’ll look at some of these interesting growth thematics later on in the presentation. We also look for trustworthy management teams who really emphasise strong balance sheets. i.e., Those that are not overly leveraged and who also prioritise good free cashflow generation. Both of these things support sustainable earnings and dividend growth in the long-term.

The next slide gives you a picture of how that falls out into our portfolio. Having found companies that pass our investment process criteria for quality, this just shows you how our holdings look versus the benchmark index. Both by country on the left and sectors on the right.

[TEN MINUTES]

Underweight China and India

On both charts the fund positions are shown in the lighter blue colour and the benchmark is in the dark blue. I think the most notable difference that you spot straightaway on this left-hand chart is that we have lower positions in China and India relative to the benchmark.

That’s really because these two growth driven markets really don’t need to prioritise dividend just yet because they have a lot of growth to invest in, in their own domestic markets. That’s particularly the case for India. China’s been a little bit more of a dynamic story and we can go into that later because I’m sure it will come up in Q&A. Essentially, we have less in the markets where dividends are lower. We have more in the markets where dividends are higher. Taiwan, Singapore, Australia. The top three biggest positions in the fund on an absolute basis and these are the top three yielding countries within the Asia region.

I’m going to have a slide, in a moment, talking about why we are so heavily overweight Singapore, but if you just bear with me, I’ll talk about sectors for a second. If you look on the right, I think again, the main thing to point out is that unlike traditional developed market income funds, our highest position is actually in information technology, where we find globally dominant hardware and equipment businesses that have very strong business moats that manage very strong balance sheets and pay good dividends as well. An example here, would be our biggest holding, which is TSMC. They give us both earnings growth as well as dividend growth. Financials and real estate, I think, are more usual to find in terms of an income fund and again, they’re well represented within this product, just given their attractive dividend profile.

Singapore gateway

If we go one more slide, please, I’m going to skip back to that Singapore overweight. As Gavin mentioned, I’m based in Singapore. So, I’m well aware of the physical size limitations of Singapore as an island. Singapore as a developed Asia market has a prudent financial regulator that really encourages transparent disclosures from the corporates that list on the Singapore stock exchange. It has a really well-developed pension system and that helps really fuel that demand for income from the corporates that are listed in Singapore. A lot of companies listed in Singapore have also grown outside of the domestic market into their neighbouring higher growth countries like Thailand, Malaysia, Indonesia.

We’re really getting a Singapore wrapper for a Singapore listed company with good disclosures. Who have grown into higher growth ASEAN markets, who also have that pressure to pay dividends as well. Here, you see three companies that I’ve selected.

OCBC is one of the big Singapore banks. Here, you can see that others, in terms of ex-Singapore, are about 40% of the revenues they make. They bank Indonesia. They bank China. They’re really trying to broaden out where their revenue collection comes from.

Venture in the middle, is an industrials company. They make widgets that go into bigger industrial machines. They manufacture components that go into genome sequencing machines. That go into 5G base bands, tower units.

It’s really very diversified in terms of who they sell to. Not just by end-sector, but also by end-country. You can see here that other component of ex-Singapore revenue is actually as big as 75%. Then lastly, on the right, we have Capitaland India Trust. I mentioned earlier, we struggle to find yield in India, but we can invest in companies like this, which is listed in Singapore. It pays a 6% dividend yield and all their assets are actually office space in India and their tenants are the blue-chip global IT services companies, as well as some of the big domestic Indian companies as well. We’re getting very good rental income. We’re getting access to that India growth story.  100% of their revenues come from rental income in India so, this is 100% others. Again, as I mentioned, it pays us that 6%. Singapore really seen as a gateway to a lot of these higher growth markets, rather than a play on Singapore itself.

The next slide gives you our top ten holdings. We’re going to cover a couple of these later because I have a thematic slide. Two things I would just draw on here is that our top holding is Taiwan Semiconductor Manufacturing. That’s TSMC. This company, if you look today, yields about 1.5%. Pre-Covid, five years ago, this stock was a 4%-plus dividend yield stock. Over the last five years, TSMC has actually paid a growing dollar dividend per share every year, but the yield has dropped because the share price has increased much faster than the rate at which they increase their dividends. We, as shareholders, over the entire holding period, we’re actually getting higher revenues per share that we own in TSMC. That’s helped us grow the dividends that we pay to our own shareholders as well.

Tencent dividend

I think it’s important to look at stories in terms of how that growth has come about, rather than just looking at the snapshot of dividend yields in the portfolio today. The second one I want to speak about is Tencent, which is number nine on this list. We actually didn’t own Tencent because they didn’t pay a yield. We didn’t own it during the big China rally that we saw in 2017, 2018 and the first time we bought into Tencent was in 2022 because (a) the share price has corrected alongside the rest of the China market. Also, that was the year that Tencent formalised a dividend policy linking their payout to free cashflow generation. That’s the kind of trigger we need to see, even for a company that we liked for its strong gaming franchise. We really needed to have that dividend yield in place as well. Now, you can see that Tencent is just above 2% in the fund.

The next slide shows you the outcome of this quality investment process. I talked to you a lot about how we pick stocks, but does that actually show through in the portfolio afterwards? Here, you can see that the fund, shown in dark blue on a look-through basis, our holdings in the fund have higher profitability and higher return on equities relative to the benchmark and these are clear quality indicators. We also have that higher dividend yield on a look-through basis, relative to the benchmark as well. That’s obviously what you would like to see as income investors.

Smaller companies important

The next slide gives you a breakdown of the fund by market-cap and again, we spoke about how closed-end fund structures are very good for giving us that liquidity freedom to go up and down the market-cap spectrum. I think what’s interesting about this fund is that we have about 15% of our net asset value invested in companies that have market capitalisations smaller than USD2.5bn. You can see that that’s a strong overweight relative to that size bucket within the benchmark. Again, I think that really highlights the strength of our local analyst network here in Asia. That we’re able to find these less well-covered companies that are still running net cash balance sheets. That still generate good free cashflow and that still pay that dividend yield as well.

That portion of the fund, I think, is very interesting not just for yield, but also for growth as well. Capitaland India Trust, for example, that I spoke about on the Singapore slide, that’s actually a small-cap stock and that would fit into this bucket as well. It’s really about finding these ideas, regardless of where they’re listed, as long as they give us exposure to that growth trend that we want to see.

The next slide gives you portfolio turnover statistics. The turnover on the fund is about 35%. That’s really because we’re constantly looking to improve the yield and quality profile of the portfolio at the right price. When markets are volatile, like during the Covid years in 2020 and 2021, you can see that we were a little bit more active because there was opportunity in terms of mispriced stocks because people were really just acting fast and thinking about valuations later. I think similarly, this year, it’s been quite a volatile year. There was quite a strong start to the year for China. Then we saw that fizzle out. We’ve had the tech thematic be very strong and that’s trying to find its own way as well.

Elections across the whole of Asia. Globally as well, but if you think about the percentage of population globally that lives in Asia and the elections that we have been through in India, Indonesia and obviously, now the US elections as well, which has really affected a lot of stocks in Asia as well. I think that uncertainty creates that volatility. Uncertainty creates opportunity for us, given we are long-term buy and hold investors and we have a good pipeline of stocks that we would like to get into the fund at the right price when the yield is attractive.

[TWENTY MINUTES]

The next slide gives you that structural growth trends picture that I referred to earlier. Again, you think of income funds and you think it’s just going to be banks and utilities, but I actually think, in Asia, there is so much diversified opportunities to play this income and growth angle within this region. I think if you look at the going green thematic, then we’ve got Power Grid, which is the National Grid equivalent within India. Again, what we like about Power Grid, we can talk about later because I have specific slides on this company.

If we look at some of the other stocks like AIA. I put that in here as part of the consumer aspiration theme. If you think about selling financial products into a growing middleclass, into a market where wealth is growing for the first time and you’ve got families who have assets that they want to protect for the first time. They want to buy savings products for the first time. Then AIA is really able to penetrate into a new market through their business in China, even though it’s Hong Kong listed. We really use this as a way to play that aspirational consumer trend in China.

Cool digital

If I look at some of the tech stocks in Digital Future, we all know the big technology names, but companies like Sunon. This is a small-cap company. It has a very strong balance sheet. It generates very good cashflows because it makes the cooling fans that cool down datacentres.

As AI gets more complex, they require more complex cooling solutions and Sunon are able to develop and deliver those cooling solutions for the bigger and bigger AI datacentres. Sunon, again also yields about 3.5%. We’re getting good dividend yield above benchmark average and we’re getting access to that AI growth thematic through a stock that actually makes the cooling systems, instead of trying to play some of the software names, which are very expensive and don’t pay dividends. That’s very similar to Accton, which you see on the bottom right corner. Again, a Taiwanese company in that supply chain for AI, but they make the logic switches in AI chip circuits. Again, I think we’re just trying to find different ways of playing these themes through companies here in Asia, where we feel we can add value by getting access to that quality and income story.

India’s grid company

The next slide should be the Power Grid example that I have discussed. Power Grid of India. This is the national grid company in India. What we like about Power Grid is that it’s benefiting from India’s electrification goals. Given the increasing capex budget to link up all these renewable generation assets to the main grid, Power Grid are really benefitting from making those energy corridors to link up the renewable assets to the national grid. Power Grid are paying a very attractive 4% yield in a domestic market, which has an average yield of 1%, as you can see on this chart. That’s a really good yield stock within India. Even though India is a difficult market for yield investors, there’s opportunities if you have that time and resources to find the right stock.

We were fairly early investors into this story. If we go down one more slide, you can see that we have enjoyed about three times growth in our holding in Power Grid, given we initiated back in 2020. That’s a great example of a growth story that gives us that capital appreciation, as well as giving us that 4% yield.

The next slide just gives us another stock example in Midea. I’ve really tried to focus on India and China because obviously, these are markets where we are underweight the benchmark. I wanted to give you all a sense of what we can find, even in these markets. I think again, Midea is a really good example of a China listed company that again, has very strong free cashflow generation and that’s supported their long running dividend policy. They make home appliances that are globally competitive. I can buy them in Singapore and they are around in the US. They’re also really well-positioned to benefit from that aspirational consumption trend in their home market.

With premiumisation pushing up prices for a lot of their high-end products, that’s really benefitted Midea over the past several years. Again, a very good stock that we decided to buy in China, given that opportunity to get dividend growth and access to that consumer trend that we want in this portfolio as well.

The next slide gives you a sense of what all these 40 people in Asia, including myself and Eric, are doing. These are figures for the last calendar year. I think what I really want to focus on is that we have had 680-odd proxy voting events across the team. That applies to this fund as well. We vote for all AGMs and EGMs across our portfolio holdings. We consider this to be a core part of being stewards of our clients’ assets. That’s supported by the 75 unique ESG engagements that we’ve had as well and additional ESG engagements from what we may discuss in our company meetings during the 750 companies that we have seen and the 1,400 visits that we’re had over the year. Really very active in terms of meeting with our holdings, trying to find new ideas and staying on top of governance issues across our portfolio range.

The next slide is a summary slide and it’s to really give you a summary of what we’ve discussed today. We’re really looking to provide access to that growth and income opportunity in Asia and we hope that this presentation has provided some colour on our process, as well as our strength of relationships and knowledge network across the region that we’ve built over the past three decades.

Is TSMC under-estimated?

Gavin Lumsden:

Thank you very much, Yoojeong. Before we go into Q&A, I’m going to ask you a few questions, but I will take the opportunity to remind our audience, do send your questions in and I will pick them up later. Yoojeong, I wonder if I could start with asking you about your top holding in TSMC. Currently 13% of the portfolio against 9% in the benchmark. Does that indicate that you think the market is underestimating this giant growth and dividend potential?

Yoojeong Oh:

As you say, it is a high weight in our fund and it’s a high weight in the benchmark. We have to own at least 9.3% to be neutral to what it is in the index and as an active fund manager, the active share of this portfolio, for example, is just over 70. When be believe a company has above market potential to deliver growth and yield, then we want to reflect this conviction by holding an active position. In order to do that, we have to own at least 9.5% and we’ve chosen to go to something a little bit higher because TSMC is globally competitive. If I think about their market share, then they’ve got 55% market share in semiconductor foundry or manufacturing and then in that leading edge semiconductor foundry, they’ve actually got over 90% share.

So, they’ve got a very strong moat for a product that is going to see very good growth, driven by artificial intelligence, as well as a lot of other end-application. Again, I would just reiterate that even though that dividend yield on this company looks low today, we’re getting good earnings per share growth and that is leading to good dividend growth as well. It’s not purely just looking for high yield stocks. We really want that growth factor to make sure that we can keep paying higher dividends to our own shareholders as well.

How important is TSMC’s US subsidy?

Gavin Lumsden:

Sticking with TSMC, how significant is this $11bn support the Biden administration has agreed to support the company’s manufacturing in the US? Will Trump stick to that agreement?

Yoojeong Oh:

The subsidies are really there to help US consumers who are, ultimately, US voters. If you think about it, TSMC has built a really strong ecosystem in Taiwan. In the form of supply chains, production efficiencies, intellectual property as well. In making them build a factory in the US, the subsidies are there to help offset the cost of relocating talent and really, rebuilding a US-centric supply chain from scratch. Why would a rational US company—assume, Apple, Nvidia, Amazon,  AWS, etcetera, are rational.

[THIRTY MINUTES]

Why would they choose to buy the same chip made in the US at a higher price than what is currently available in the market from their existing Taiwan factory?

Will these American companies be happy to absorb the higher cost of the chip or will they pass it on to consumers? I think that’s why the subsidies have come in, to really try and help offset that increased cost inflation at the consumer level. Even if Trump decides not to stick with these subsidies and we know that he’s pro-tariff. Again, with higher tariffs, the end-result is that there’s going to be higher prices for the US consumer or US voter. Assuming again, that there are no subsidies given to the likes of Apple or Google to buy higher prices chips just because they’ve been made in the US. I think the good thing for TSMC, as we discussed, their market share in that leading edge foundry is so high that they have a lot of bargaining power when they enter pricing discussions with their customers.

Their ability to share the higher cost of production is probably higher than you expect. They’ve also been quite smart in terms of trying to diversify their production facilities through investing in the US, but also, in Japan and these different locations can help them manage their capacity across multiple political scenarios.

Does TSMC protect Taiwan?

Gavin Lumsden:

TSMC is such an important company and it plays a key role in the global IT supply chain, turning to geopolitics, is that enough to prevent China from invading Taiwan?

Yoojeong Oh:

It is important and it’s really been at the core of the US Chips Act. I would agree with the sentiment of the statement, but it’s not really my area of expertise to comment on geopolitics. I suspect there are many different reasons currently preventing China from invading Taiwan. We’re in a very delicate balance and hence all this ongoing speculation. If you think back over the last 20 years that this fund has been investing in Asia, then the reason we have chosen to focus on quality through all cycles, is that we want to find businesses that can survive in the long-run. Whether it’s through economic cycles, through political cycles, through inflation cycles. I think that’s really why we’re trying to focus on quality.

I think that China/Taiwan is a scenario risk for us, as it is for many investors. It’s similar to the other risks we have, whether it’s US/China, North and South Korea for the Koreans amongst us. I assume if the China/Taiwan issue were to happen, that would be a lot of red lights flashing across the board for a lot of people. We really try and invest regardless of what view we take on a geopolitical basis. We want to find the companies that will do the best they can, given their market share, given their balance sheets. Given what they make and how they sell it to their customers. That’s what we’ll continue to do.

How big is intra-Asia trade?

Gavin Lumsden:

With all the attention on potentially higher US tariffs, how significant is intra-Asia trade?

Yoojeong Oh:

Intra-Asia trade should see strong demand growth driven by trade localisation and diversification of supply chains. In fact, this is one of the reasons that we back a company called SITC, which is a Hong Kong listed intra-Asia focused shipping company. As a first mover, SITC benefits from better utilisation rates and freight rates, given their better ability to manage capacity in terms of full and empty container ships working across their network. I think that’s really key is to be able to really maximise capacity utilisation on your fleet, regardless of whether they’re going to a network or coming back from a network node point.

SITC also have been very disciplined about returning excess cash to shareholders as special dividends, when the freight cycle works in their favour. We’ve actually enjoyed two bumper years of dividends, driven by this trade war uncertainty through investing in stocks like SITC, which really looks to benefit from some of these types of risks that we are looking at from a top-down perspective. We look at the same sorts of criteria that you do, to see what we think will drive trends top-down. Then we see from a bottom-up perspective, which companies give us the best exposure to that.

What are ‘demographic dividends’?

Gavin Lumsden:

You referred to demographic dividends earlier on. Can you say a bit more? What exactly are you referring to, Yoojeong?

Yoojeong Oh:

In many of the emerging markets in Asia, especially China and India, there’s strong economic growth potential from that future shift or change in population demographics from a youth dominated population today, to one where the share of working age population becomes bigger than the share of non-working age population. That points to increased productivity, higher contribution to GDP growth in the future. One of the key long-term growth thematics that we’re trying to access is precisely that through that aspiration vertical that we saw on the thematic slide. Demographic dividend’s really referring to the opportunity set in markets like China and India.

What else do you hold in real estate?

Gavin Lumsden:

That makes a lot of sense. Real estate. You referred to one of your India related real estate investments. Second biggest overweight after IT. What are you holding in real estate and why?

Yoojeong Oh:

Real estate is a good sector for dividends. We really try and find the companies that offer good underlying growth trends within their property portfolios. This can be office space India through Capitaland India Trust that we mentioned with that 6% yield or it can be industrial and residential assets in Australia via Mirvac, which gives us a 5% yield. Even within this sector, we apply the same quality stock picking rule. For example, in China, we have held a Chinese property company for the past decade. It’s called China Resources Land. This company funds a very conservative development pipeline with the cashflows from its investment properties portfolio.

that share price journey for China Resources Land has been much more boring and stable over the past ten years relative to some of their higher leveraged peers that have really taken all the global news headlines during this property crisis that China has faced. China Resources Land has been a steady investment for us. We like them because they run that prudent balance sheet. They pay us a 6% dividend journey and obviously, even though we didn’t share in the big spike in property prices in China, we also didn’t share when that corrected because China Resources Land is not one of the speculative over-leveraged property companies. I think again, having people on the ground, who can find and differentiate companies, even within the same sector, that again leads back to that core strength that I spoke about earlier.

Gavin Lumsden:

Very interesting that there’s a lower leveraged Chinese property company. Your reference earlier to Capitaland India Trust made me alert to your reference to the slide on Power Grid Corporation. Referred to the IPO, the flotation of Power Grid infrastructure Investment Trust. I wondered what’s that? Is that part of the investment in Power Grid Corporation?

Yoojeong Oh:

Yes, it is linked, but it’s not a part of our investment thesis. We bought Power Grid initially, for access to India’s electrification strategy. As we took that view that there was going to be growing capex from the government. Power Grid has been winning about 70% of the new tenders that have come out linked to electrification just this year alone. Part of their plan, subsequent to our investment, as to monetise some of these long-term assets that they operate through this infrastructure investment trust. Which is like created a REIT structure to really benefit from the long-term contracts that they have entered into on the utility assets. This was something that the regulator encouraged state-owned utilities to do back then, as a way to monetise their assets.

Actually, since then, the government has done U-turn and decided that they don’t recommend these investment trusts for utilities anymore. Power Grid have actually used those assets and securitised them in order to pay the dividends that they wanted to pay. For us, as investors, we’ve actually not missed out from this turnaround in government strategies.

[FORTY MINUTES]

I think what we like about Power Grid is that that management team has always been very clear about their willingness to share surplus capital with shareholders. We’ve seen that. You’ve seen the yield on this company is 4% in a market where dividend yields are 1%. It was part of their strategy, it is not anymore, but we, as shareholders, still benefit from that growth that Power Grid is delivering and they are still finding new ways to make sure that the dividend yield stays attractive.

How is DBS bank ‘green’?

Gavin Lumsden:

It sounds like that’s been keeping you on your toes. Last question from me. Following on the clean energy transition, perhaps, going back to that slide of some of your holdings and your themes, why have you put Singaporean bank, DBS in the ‘going green’ bucket?

Yoojeong Oh:

DBS, a Singapore bank, as you say, that could go into several of the mega-theme buckets. It’s providing financial services to that growing base of middle-class customers across Southeast Asia and into parts of China as well. It’s building its own digital infrastructure to support online transactions and customer acquisitions. Their digital infrastructure is actually deemed worldclass by other banks. We’ve had DBS really open their doors to welcome Indian banks, as well as some of the UK listed banks, to come and share in what they’ve been able to develop in that space. We’ve actually put DBS in the ‘going green’ bucket because we just want to really highlight the fact that they were first mover in Southeast Asia to commit to very complete and comprehensive targets to reduce lending to seven key carbon intensive sectors.

They’ve also stopped financing new thermal coal mining projects and they plan to exit thermal coal lending entirely by 2039. Again, they’re one of the first Singaporean banks, definitely, but one of the first banks in Asia to commit to such firm targets. I think once we have the market leaders committing to these going green targets, then that’s certainly a trend that flags on the other regional banks across the region. We hope that it sets off a nice chain reaction, as we would really want to be supportive of this trend as well.

What’s the turnover in top stocks?

Gavin Lumsden:

Thank you very much, Yoojeong. Let’s turn to the questions from the audience. Thank you very much for sending those in, we’ve got quite a few. You referred to the 35% typical portfolio turnover. One viewer’s wondering whether that applies to the top ten stocks as well. What’s the average holding for those?

Yoojeong Oh:

Actually, in our top ten stocks, a lot of them have been there for more than the four years or so that you would expect from a 30%, 35% turnover. It’s not purely driven by initiations and exits. Even if we take a little bit of money out of TSMC, then that trade will also be reflected within the turnover figures. We are constantly changing the weights of the holdings in the fund, depending on where valuations are. Depending on our conviction for shorter-term growth. Longer-term, we hope to see that the quality that we invest in means that these companies can stay in the portfolio for a longer time. As you saw in that slide that you’re referencing, we are fairly active along the margins as well.

Usually, when we exit a stock, it’s because it has already fallen to about 1% of the fund. As we lose conviction or as we find better quality stocks, we’ll have to fund that by trimming companies elsewhere. By the time we exit something completely, usually it’s not from a 10% position, it’s from something much smaller, as we do it step-by-step. That’s very much the same for initiations as well. Companies like Tencent, that I mentioned we initiated in 2022, it’s made its way to a 2% position and that’s taken about a year and a half and companies that we exit. I’ll mention momo.com. It’s again a Taiwanese small-cap company. It was the first ten-bagger within this fund, within the space of five years.

Obviously, it got very expensive. The yield more than halved. That’s a company where we didn’t see such good growth expectations. It’s an online retail business. That was something we were taking money off after such a strong share price rally. Again, we exited it because we found a better opportunity for dividend growth in sectors like banks, once we came out of COVID, because these companies now had their dividend handcuffs released and were able to pay high dividends. We’re really constantly trying to look at what’s available in the region and find the best blend of good quality, good yield, good dividend growth stocks at that current price, to be reflected in the portfolio.

How concentrated are other stocks?

Gavin Lumsden:

Sticking with the top ten. You’ve got 40% held in the top ten currently and the question is, ‘Can you tell me a little bit about the stock concentration in the portfolio in terms of how much the top ten holdings make up?’ Could you say a bit more about the concentration because obviously, there’s a lot in TSMC. Is the remainder concentrated or not, in your view?

Yoojeong Oh:

TSMC, as we discussed, we want to be able to show that we have strong conviction in TSMC’s market positioning. In order to do that, we have to own more than 9.5% to have that reflected versus the benchmark weighting. That’s really the reason TSMC has become such a big weight. If you look down the rest of the list. The second biggest holding is 5% and then after that it gets quite small quite fast. Even though 40% of the portfolio is in the top ten holdings, we have about 60 holdings in total in the portfolio. That gives you a sense of the types of weights we have for the rest of the fund. We ideally don’t want to have positions that are really small.

We try and have a floor at that 1% level. Just given the work that we do to initiate these holdings in the first place, we would like to have at least 1% of conviction in these holdings. It’s pretty well-diversified as an income fund. You see through that country and sector profile, that we really try and hold a good collection of diversified stocks. Especially with diversified revenue streams. Even though it looks like we’re heavily exposed to Singapore, we’re really going for revenue growth in a lot of different countries within that.

Why no Vietnam?

Gavin Lumsden:

Talking about countries, one viewer sees that Vietnam appears to be absent from the list of countries. Is that the case and what’s the reason for it? What’s your longer-term view of the country?

Yoojeong Oh:

Vietnam, again, is covered by this team of 40 that we have here in Asia. We actually have other non-income constrained funds that invest in Vietnam. The idea generation is already there and we’re already looking for companies that give us that dividend yield, but also, give us quality. The issue with Vietnam is that it still has that foreign ownership premium. Especially for stocks that are well-loved by foreign investors. That means if you invest in a company today, the share price that you see on the screen, you have to pay an additional 10%, 15% as a foreigner and only when foreign quota becomes available. That’s immediate 15% loss that you take on your NAV the second you buy it.

Depending on where Vietnam is in terms of favourable cycle to foreign investors, there are times when that premium gets bigger. It gets smaller as well. It’s really about finding the right point in the cycle, where we have a company that we’re interested in. That is committed to growing its dividend. That is currently out of favour. That doesn’t require us to take that immediate write down. Really, a lot of things have to come together for us to invest in Vietnam, but Vietnam is actually open for this fund and we don’t rule it out. It’s currently not in the benchmark, but that has not stopped us going into markets before. When we see something we like, that will be something we would love to share with you.

How much gearing do you use?

Gavin Lumsden:

Can we talk about gearing, the borrowing that the trust uses and that you use to invest more on behalf of shareholders. Got a question here about the credit facility the trust has and how much is drawn on what the viewer says is a £50 million facility. I wonder if you could talk about that and just how you approach gearing in general and how much you’re using?

[FIFTY MINUTES]

Yoojeong Oh:

We are currently about 7% geared on this portfolio. We are allowed to go up to 25%, but we’ve never historically been above 15%. Usually, gearing moves between 5% to 12% in terms of range over the 20-year life of this product. At the moment, I think we are slightly at the low end of the usual gearing range and that’s really to reflect the higher borrowing rates that we have on the facilities that the viewer mentioned. We borrow against three different currencies and we try and get the best rate possible so we can be flexible between pounds, US dollars, which is a good proxy for a lot of Asian currencies and Hong Kong dollar as well.

It’s really trying to find the best blended rate of borrowing for this fund. We’re actually quite active about gearing. If you think back to COVID, 2021, we actually raised gearing quite fast because rates were low. Markets were coming out of the lockdown phase. We had a big selloff across global markets. We took gearing up to just above 10% and actually, bringing it back down to 7% was a late last year story, just because rates were getting higher. It was getting more uncertain in terms of where Asia would go. Actually, as a structural advantage of a closed-end fund, I would say having gearing at all times is a benefit to the portfolio and it gently enhances the income that we can deliver, as well as the NAV that we deliver.

I think growth-wise, if you’re looking at a market that’s got about 10%, 12% earnings growth potential for the coming year as well, then that certainly provides a nice attractive offset for the current cost of borrowing which is higher than what we were paying in 2022, but is certainly not unbeatable by equity returns.

What discount are shares bought back at?

Gavin Lumsden:

Got another question here, ‘The shares are currently trading around 11% discount below net asset value’, according to one viewer. I thought the figure was 13%, but anyway, the question is, ‘What is the average discount at which shares are bought back at?’

Yoojeong Oh:

We have been buying back shares this year and that’s been part of the board strategy to manage the discount. As much as the viewers are concerned about where the discount level is, I’m also concerned as a share holder in this fund as well. It’s been something the board have wanted to correct. If you look at our dividends that we’ve paid, then we have actually offered a very nice dividend increase. At the end of 2023 we paid a 17.5% year-on-year increase in covered dividend. We’ve also been very active in buybacks to try and narrow that discount as well. I think fund performance, as you’ve seen over the long-term, as well as the very short-term, is also attractive relative to the index. So all the efforts are being made, I would say the priority in terms of board discussions as well. I hope that that’s something that works out for everybody.

Gavin Lumsden:

I note that your focus is on higher yielding stocks, but not necessarily high yielding stocks. I wonder, given that you’re not doing a barbell approach, you’re looking for stocks that are providing yield and growth. How do you ensure that the growth is there and it’s not a return of capital that you’re giving back to investors?

Yoojeong Oh:

That’s why we really focus on companies that can deliver dividend growth as well. It’s not enough just to be high yielding because often stocks that yield outrageously abnormally high yields. That can be a function of what’s happened to their share price rather than an increase in dividends. We are not looking for just special situations. We’re not looking for purely 10%-plus yield stocks. We really want good quality companies that are paying that sustainable dividend. Who can grow their dividends over time because their business is growing. Their free cashflow generation is growing. Their earnings are growing and that’s helping them to grow their dividend.

That’s really been the key reason why we’ve been able to grow our own dividend per share to shareholders over the past 15 years. That’s really a key focus for us. I just refer back to TSMC because if you think of that, then that is quite a low yielding stock. It yields lower than the index average as well. For us, we look at it as a source of revenue increase every year, given that they are increasing their dividend. They actually increased their dividend a couple of weeks ago for this year. We really want that combination of ability to grow dividend and we appreciate that it’s not just a function of yield because there can be companies where share price has done very well and the yield can look low.

As there can be companies where yields look very high, but actually, it’s because their share price has not been very good and they’re actually cutting their dividend, but you’re getting a 10% yield because they’ve not done very well. It’s really knowing the difference between what you’re investing in and again, I think that comes back to having all these analysts that can feed us all this information about who are the dividend growers and who they think will be the dividend growers for the coming year as well.

What impact has South Korea had?

Gavin Lumsden:

Can we go back to politics briefly? Last week in South Korea, we saw the President fail to impose martial law. It’s not a big country for the trust, around 4% weighting, but is that having any impact on your investments?

Yoojeong Oh:

The only two companies that we own in Korea are memory chip manufacturers. These are very much global exporters so, they’re not so beholden to the domestic policies of what’s going on in Korea. Interestingly, I was in Korea when this was going on. I was there for research to meet with our holdings and the day I left, I left in the morning and martial law was imposed that night. I’d already left, but some of my friends were still there and before martial law is normally triggered when there’ a big event. There’s a coup against the government or there’s some uprising, there’s actually laws that get triggered when martial law is imposed. Including curfews. Suddenly they weren’t allowed to go outside. The hotels imposed curfews on everybody.

Of course, as you know, it was lifted pretty soon after. It didn’t even last overnight. I think it wasn’t a great reflection of the stability of politics in a country like Korea, that wants to be migrated up from emerging market to developed market. I think it’s also not been ideal because that country has been trying to do this value up programme to boost shareholder returns for investors in the market over the past year. I just think when you have political uncertainty like this, then a lot of people tend to sit on the sidelines. So, we might see that that value up discount narrowing for the Korean corporates may take a bit longer.

Is China still a growth engine?

Gavin Lumsden:

Very alarming development, but good to see it was reversed so quickly. We’ve seen China announce a change in monetary policy this week, going towards a looser approach in future. China and Beijing’s been throwing a lot into stimulating consumer confidence and investor confidence for that matter. Do you think it can remain the engine of global economic growth?

Yoojeong Oh:

I think China has issued a lot of policies this year. Particularly after the US elections, to try and really shore up domestic spending. As you say, a lot of the stimulus has been aimed at the domestic consumer and I think that’s exactly the right thing to do. I think when sentiment is low domestically, when unemployment is high, especially in the youth population, then that’s when you start getting issues in terms of your ability to grow. I think all the stimulus measures have been directionally correct. I think we will still have to wait to see how the tariff rules playout from the US and what ultimately is imposed against a lot of these Chinese industries. That might reflect upon what China decides to do next year.

Again, I think similar to what we were talking bout in Korea, when there is this level of uncertainty at the political level, then it’s very difficult to make long-term investment decisions, other than really focusing on the quality aspects of stocks. So, looking for companies that can do well and grow earnings, regardless of what the macro situation is. That’s hopefully what we’ll continue to do within the China market. We’ll rely upon our analysts to find those good quality yield payers that will do well regardless.

Gavin Lumsden:

You’ve got to control what you can control. Yoojeong, thank you very much for your time. That’s all the time we have, but thank you for your time and giving us your answers. To our audience as well, I hope what you’ve heard has whetted your appetite for investing in Asia and considering it as a source of income as well as growth. A final piece of housekeeping, please complete the feedback survey, as we’re always keen to improve what we do. Thank you so much again for Yoojeong joining us today. Look out for more of our investment trust programmes. 

This is my last programme as, after 25 years I will soon be leaving Citywire, but I will be leaving you in the capable hands of Jeremy Gordon, who’ll be taking over as editor and we’re doing more of these programmes next year. In the meantime, good bye and happy investing.