Fund Research Analyst
Traditionally, many investors in search of income have looked to the UK or US markets, where the dividend culture and focus on shareholder return are more established. Investors don’t typically associate Asia with attractive dividends. Instead, many view the region from a growth perspective given the demographics and structural dynamics of local economies. Additionally, there is the misconception that corporate governance and the interests of minority shareholders are less important to Asian and emerging market (EM) companies relative to those in developed markets. However, this is far from the case today.
According to the Financial Times, dividends from the Asia Pacific region increased by c.13% in the 12 months to the end of May 2018, totalling close to £216 billion. With dividend growth estimated at just 5.5% for the rest of the world, Asia looks extremely attractive on a relative basis, offering high yields and strong dividend growth, as well as diversification benefits. As ageing Asian populations join the developed market hunt for yield, the likelihood of a more embedded dividend culture should make the region even more compelling.
We see this as a significant opportunity and believe the Matthews Asia Pacific ex Japan Dividend fund is one of the best strategies through which to gain access. Matthews Asia is an Asian equity specialist based in San Francisco with $27.4 billion in assets under management as at the end of 2018. Their investment propositions provide a broad range of strategies for investors to gain exposure to some of the world’s fastest-growing regions. The funds managed by Matthews are unique in their own right, but they all share the same bottom-up, fundamental investment philosophy which focuses on long-term returns.
The Matthews Asia Pacific ex Japan Dividend fund follows a total return approach, building a balanced portfolio of both stable dividend payers and more cyclical dividend growers. This helps to maintain a high yield and attractive capital growth potential, while minimising volatility and providing downside protection. It has a meaningful exposure to companies in ASEAN countries which are expected to benefit from improvements in the underlying local economy and changes in dividend culture. The fund has an all cap exposure, where at least 50% in small and mid-caps is typical.
We believe that we are at a very attractive entry point for Asia and emerging markets following last year’s sell-off, predominantly during the second half of the year. Relative to developed markets, valuations across these markets look cheap, particularly in the Matthews Asia fund’s opportunity set. Both small and mid-caps in Asia are trading at a discount to small and mid-caps in Japan, the US and the ‘rest of the world’, whilst still providing an attractive yield.
Mid-caps in Asia provide a yield of 3.1% and trade at a price to earnings ratio (PE) of 11.8x, while mid-caps in the US trade at 19.1x PE and yield 1.7%. Aside from an abundance of opportunities in their opportunity set, relative to developed markets and large cap stocks, the fund has an attractive track record, and we continue to have a lot of conviction in both the fund house and the portfolio manager.