The case for Newton Asian Income

These days, investors are increasingly recognising the importance of dividend payments as an incremental part of a portfolio's total return. Likewise, many UK income investors have recognised the importance of being able to diversify away from their home market without having to sacrifice yield. This has made the Newton Asian Income Fund a compelling choice for a wide variety of investors.

Recent Newton research suggests that Asia has one of the world's highest payout ratios. Despite the backdrop of slowing economic growth and the continuing financial crisis in western markets, estimates suggest that around 40% of Asian companies' 2008 earnings were paid out to shareholders in the form of dividends. This underlines the cultural change that Asian companies have undergone in the years since the Asian financial crisis of the late 1990s and the commitment that so many modern Asian enterprises now have to the concept of shareholder value. As well as attractive yield levels, Asia also boasts some of the least expensive markets and fastest growing economies worldwide.

The Newton Asian Income Fund is a blend of two approaches, mixing a strict yield discipline with the global thematic investment approach employed by the same team that manages the Newton Oriental Fund. The Newton Asian Income Fund aims to deliver both income and long-term capital growth by investing in high yielding equities from across the region. The Fund comprises a concentrated portfolio of typically between 40-50 stocks, invested in all the major markets of the region, including China, Singapore, Hong Kong, Thailand, Malaysia, the Philippines, South Korea, Taiwan, Australia and New Zealand.

The manager selects stocks in order to target high dividend yields and strong prospects for dividend growth, with no restrictions on company size or sector. Although focused on a high growth region, the Fund is a genuine equity income fund and aims to produce a dividend yield 35% above that of the regional FTSE All World Asia ex Japan Index.

The Fund's approach leads to companies that are thematically attractive, have sound fundamentals and which offer a substantial yield. As a result, the portfolio contains a concentration of stocks with high free cashflow yields, higher returns on equity, higher levels of potential dividend growth and lower P/Es than those of the broader market.

Like Newton's other equity income funds, the Newton Asian Income Fund's investment approach is underpinned by a strict buy/sell discipline. All new holdings must have a prospective yield greater than the benchmark, the FTSE All World Asia Pacific ex Japan Index. This narrows the number of companies within the Fund's investment universe from over 1,500 to around 600. The manager sells any holding where the prospective yield falls below a 15% discount to the index.

The focus on dividends means the Fund is more defensive by nature compared to its peer group. This was demonstrated in 2008. During what was a very difficult and testing period for Asian equities, the Fund comfortably outperformed its benchmark index and fund peer group by almost 8%¹.

Newton's investment approach is global thematic. Teams of strategists and senior fund managers evaluate trends across the globe to identify those which will drive future returns. For example, Newton has identified increasing consumer demand as an outcome of the rising growth of the developing economies of Asia.

Once a theme is identified, research is prioritised to focus on those stocks that will benefit from it. Newton has a team of analysts that work by industry to find the most attractive stocks globally. The results of this analysis are published via a series of research recommended lists (RRLs), with stocks weighted according to the strength of analysts' convictions. The process ensures a high degree of commonality across the house, and that the very best ideas are widely used. Each investment team constructs a model portfolio based on the recommendations from the RRLs.

The Asian equity team draws on the best ideas from the research group and regularly visits the region, meeting approximately 35-40 companies each time, in addition to its weekly company meetings held in London.

A principal Newton theme which continues to support Asian equities is that of 'population dynamics' (and urban population growth in particular). The region's urban population is currently growing by over 30 million people per year due to continued mass migration from rural areas. This creates many opportunities for investment. One such area is the dramatically increasing demand that rising levels of car ownership in the region have created. Consequently, the Fund's investment into stocks such as Hopewell Highway, a Hong Kong listed toll-road company with operations in China, stemmed from Newton's theme of 'population dynamics'.

Very much linked to the theme of 'population dynamics' is the increasing importance of domestic consumer demand within the region. As it urbanises, productivity and wages are rising fast. With income per capita growing rapidly and domestic consumption in Asia accounting for a greater proportion of economic growth, the region is also becoming less dependent on exports. The portfolio holding Advanced Info Service, a Thai-based mobile phone operator, is just one of a number of local stocks to have prospered on the back of such domestic consumer demand.

The greater emphasis being placed on capital management by Asian companies is another important theme for the Fund. Company balance sheets within the region have seen a vast improvement compared with the late 1990s. This has, of course, allowed them more room to increase the level of dividends on offer.

Along with healthy balance sheets at the corporate level, many Asian countries are now enjoying current account surpluses. In addition, foreign exchange reserves have increased sharply within the region. Adding to the attractiveness of Asian equities for foreign investors, Newton expects further currency appreciation within Asia, reflecting the region's strong underlying economic fundamentals.

Newton has a longstanding track record in equity income investing; in the UK, its flagship fund, the Newton Higher Income Fund, is currently rated 'A' by Standard & Poor's. Newton's Asian capability is no less compelling. The Newton Oriental Fund is currently rated 'AA' by Standard & Poor's, while the Newton Asian Income Fund also has a Standard & Poor's 'AA' rating.