Asian Growth and Income Options

The recent ASEAN summit signifies a closer intra-region economic links in Asia. Apparently, the China factor will continue to be an important driver for the region's economic growth. The ....

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The recent ASEAN summit signifies a closer intra-region economic links in Asia. Apparently, the China factor will continue to be an important driver for the region's economic growth. The endorsement of a 5-year plan to remove tax and tariff barriers across borders gradually and the proposal to set up free-trade zones are also some welcome measures for the region's stable growth.

On the other hand, the dollar's weakness raised unanimous concern about imported inflation to Asia. Specific to the investment market, an inflationary environment could dent the performance of bond investments, as pressure on central banks to raise interest rates would increase. Meanwhile, the equity markets lack fuel to extend their strong run this year, triggering investors' greater caution in their stock picks compared to two, three years ago. In search of stable performers, stocks that offer high dividends now become investors' darlings. Just in the second half of 2004, there have already been three new funds that focus on Asian high dividend stocks introduced to the local market.

It is important to note that a stock's allure does not merely come from its high dividend yield. To elaborate, there are some situations leading a company to pay out high dividends. The first instance is when the company runs out of lucrative investments, it returns the earnings to shareholders through dividends. In this case, the company's earnings growth is likely to slow down ahead, which will cause its stock price to slide. Whether the dividend received could cover the share price losses is something to consider. The second scenario occurs when a company pays higher dividends as its earnings increase, but the dividend growth is expected and has already been reflected in the stock's price. So, the higher dividends serve primarily as a cushion to potential share-price loss, instead of a stock price propellant (i.e. capital gain). Last but not least, if a company pays higher dividends due to an improvement in its earnings ability, there is a higher likelihood for it to keep earnings stable or better in future. An upward re-rating of the stock might ensue, opening up capital appreciation potential together with attractive income return.

The Fidelity Asia Pacific Growth and Income Fund to be launched on December 16 is a portfolio that emphasizes on balancing capital and income growth. Fund manager KC Lee has been analyzing Asian stocks since 1982 and managed Asia (ex-Japan) equity portfolios for more than 16 years. 17 analysts will support him for stock research. Having been through some major ups and downs of the Asian stock markets, Lee realized that the stock market usually blazes on some new concepts, but ends up in sorrows or even badly burnt. On the contrary, quality stocks that pay stable and attractive dividends generally stand out in market downturns, while delivering reliable long-term returns.

Lee's investment experience will be integrated in his stock selection criteria for this fund. He will emphasize on a company's stable growth in free cashflow (FCF), or the cash left after deducting all the company expenses and capital expenditures. At the same time, the company to be chosen must also be generous in paying dividends to shareholders or willing to enhance shareholders' value through stock buybacks, and the manager takes a five-year horizon to judge the stability and generosity of its dividend policy. To capture both income and capital growth, this portfolio will blend high dividend stocks which prices are stable or likely to appreciate, rather than comprising purely of stocks with the highest dividend payout ratio. Lee intends to raise stakes in stocks with capital appreciation potential to at least half of the portfolio, when the stock market shows strength to rally; otherwise, he will turn to stocks with stable prices to temper downside risks. Also for risk control purpose, he will spread assets across different countries in the region, although he is not particularly keen on markets that exhibit high volatility (e.g. China and India) or those that are less accustomed to give out higher dividends (e.g. Singapore).

Interestingly, this fund does not concentrate in those sectors that traditionally offer high dividends, despite its target for a conventional steady performance pattern. Lee is going to wager less than 10% in the utilities sector after taking into consideration some company specific risks; for example, the profit guarantee enjoyed by the two power companies in Hong Kong to be diminished in 2008 could hurt their earnings from local market. While many energy and materials companies recorded unprecedented earnings in the past two years, he is concerned about the cyclical nature of these industries toting up the fund's volatility. Nonetheless, he prefers energy shares to materials shares, as China demand is a less dominating factor for the earnings of energy companies. Contrary to general view, Lee likes telecom operators with steady cashflows, as well as banks and insurance companies that are eager to boost revenues through wealth management products and services.

Above all, Lee will keep in mind all the withholding taxes and fund expenses involved, picking shares that could deliver attractive net yields. Investors interested in stable Asian investments could take a look at this new option run by seasoned management.



Table 1. A Comparison of Different Type
  Total Returns (%)   Nuts & Bolts
Fund 3 Months YTD 1-Year 3-Year 2003 Subscription Fee(%) Management Fee(%) Launch Date
Value Partners High-Dividend Stocks 8.06% 8.71% 13.16% NA 79.73% 5.00 0.75 2002-09-02
Principal Asia Pacific High Dividend Equity 18.12% 25.29% 33.16% NA 43.04% 5.00 1.00 2002-12
First State GUF - Asian Equity Plus - I 15.24% 22.92% 32.03% NA NA 5.00 1.50 2003-07-14
Schroder ISF - Asian Equity Yield - A-ACC Trailing returns not applicable for fund with history shorter than 6 months 5.00 1.50 2004-06-11
HSBC GIF Asia Pacific ex-Japan Eq High Dividend - AD Trailing returns not applicable for fund with history shorter than 6 months 5.25 1.50 2004-11-08
*Data through November 29, 2004. Returns in USD.

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