Kate Lin: Welcome to Morningstar. Globally, with fixed-income yields looking more promising, the income outlook for global multi-asset funds is on the upswing. Interest rate hikes are the main cause, but what else are fund managers investing in Asian assets thinking about to try to meet the rising expectations for income from investors? Sam Hui, our Manager Research Analyst, is with us today to discuss some strategies these fund managers are using to stay ahead.
Hi, Sam. What are the net impacts of interest rate changes and stock and bond corrections from last year, especially in China, on Asian multi-asset income funds?
Sam Hui: Hi, Kate. Thanks for the question. We have observed aggressive rate hikes triggering asset prices to fall across bonds and stocks globally. Asia was not immune from that, and the downfall of China's property sector, as well as the COVID lockdown and geopolitical tension also posed challenges. Against this backdrop, Asian multi-asset funds posted one of their worst years in 2022, recording double-digit losses. The picture for China multi-asset funds was slightly worse, given their constraint in geographic positioning, and they have to allocate the bulk of their assets in China, despite the challenges facing the country. That said, the investment prospect of Asia and China multi-asset income fund has turned brighter, as they now enjoy a more attractive opportunity set, given improved yields.
Lin: Can you tell us how they have coped with the new environment, and what are some changes to their portfolios?
Hui: In our paper, we have looked at Asian and China multi-asset income funds offered by Schroders and JP Morgan, which are some of the largest funds in the Asian market. They have all increased allocations to bonds versus stocks, as the teams believe bonds are increasingly attractive in terms of risk-reward following the interest rate reset. This has resulted in more balanced stock-bond splits for portfolios.
Within bonds, the managers have trimmed exposure to China property and explored opportunities in other sectors and outside China. They prefer higher-quality issuers given the gloomy macro backdrop. Specifically, for the Asia portfolio, we have seen some structural refinements to them. Following the significant underperformance of value stock against growth stock in 2020, both Asia funds from Schroders and JP Morgan introduced a quality growth-tilted equity sub-sleeve to complement the existing dividend-tilted and value-focused equity-sleeve. This should help mitigate future stylistic headwinds and strike a better balance between income and total return. To sum up, the Asia and China multi-asset income fund portfolios we see today are more balanced and diversified than a few years ago.
Lin: Some global strategies are giving out yields as high as 9%, which is quite impressive. What about Asian allocation funds? Are they offering similarly appealing yields? And more importantly, are they sustainable?
Hui: There are a couple of Asian multi-asset income funds offering 8% to 9%, but we emphasize that such level is extreme for both global and Asia. Investors should be mindful that there is no free lunch for yield. Higher yield tends to come with greater risk, and if that is not sufficiently backed by income generated from underlying assets, the distribution may not be durable. It is important, therefore, to assess the level of payout together with the level of income and source of income.
For example, Schroder China Asset Income invests its equity sleeve into quality growth companies which tend to have a lower dividend yield, and it is reasonable for them to have a lower payout of around 3% while having some capital appreciation potential. On the other hand, JPMorgan China Income invests its equities sleeve live into dividend and value-focused stocks. Therefore, they are able to support a higher payout yield of roughly 4.5%. Turning to Asia, Schroder Asian Asset Income yields around 6%, whilst JPM Asia Pacific Income yields around 4.5%. While both funds have their equities sleeves focused on dividend stocks, they favor different sectors. You can learn more in our recently published paper. Overall, investors should look through the payout amount and also consider the level of risk and total return when they select funds for their investment objectives.
Lin: Thank you so much for your time, Sam. As Sam mentioned, for detailed findings, check out our latest research report. For Morningstar, I'm Kate Lin.
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