The Chairman of Aberdeen Asian Income, Peter Arthur, says its performance was disappointing over the year that ended on 31 December 2015. The net asset value per Ordinary Shares (“NAV”) fell by 9.9%, trailing the 3.9% decline in the MSCI All Country Asia Pacific ex-Japan Index. The share price fell by 16.8% on a total return basis to 159.0p over the same period. The share price traded at a discount to NAV of 6.8% at the end of 2015, compared with a premium to NAV of 1.0% the year before and the discount has widened further in 2016. Four quarterly dividends were declared over 2015. The first three were paid at the rate of 2.0p totalling 6.0p which, when added to the fourth dividend of 2.5p, represented an overall increase of 6.25% for the year to stand at 8.5p. It is the Board’s intention to declare four quarterly dividends during the current year totalling at least 8.5p per share. In the event of there being insufficient earnings during the year in order to pay a fully covered dividend, then the shortfall will be made up either from revenue reserves or capital profits.
The Chairman says significant exposure to Southeast Asia hampered returns over the year. By region, Southeast Asia was the hardest hit, with most markets registering double-digit declines, made worse by adverse currency movements. In trade-reliant Thailand, persistently poor export numbers weighed on sentiment. Singapore, a traditionally defensive market, was also pressured by the challenging external environment, while its housing sector continued to be under pressure from ongoing property curbs and rising borrowing costs. Malaysia and Indonesia suffered from the commodity plunge. Domestic issues also contributed to roiling their markets: debt woes at Malaysian state investment vehicle 1MDB added to uncertainty, while confidence over reforms waned in Indonesia.
The manager’s report says a key area of underperformance was the portfolio’s overweight exposure to Singapore. The market lagged the region and faced sustained selling pressure because its open and trade-reliant economy seemed susceptible to the problems in both China and the commodities sector. Also hurting performance was the local market benchmark’s sizable exposure to financials, which included the banking and property sectors. Notably, the local property market has been in a rut for some time, hamstrung by market-cooling measures. Nevertheless, they continue to like Singapore despite the prevailing headwinds because of its diversity of good quality companies with businesses that have linkages to the rest of the region. They say, overall, their holdings there still have the wherewithal to maintain their dividend payout ratios, while the sharp decline in their share prices has only made their valuations and yield appear compelling.
At the stock level, exposure to the Singapore lenders, Oversea-Chinese Banking Corporation, United Overseas Bank and DBS Group also detracted from relative returns. They were largely affected by the poor sentiment arising from China’s unexpected yuan devaluation, but their fundamentals have stayed largely intact. The management of these banks have maintained their asset quality and they remain well capitalised. They are comfortable with holding them over the longer term. Another Singapore holding that detracted was conglomerate Keppel Corporation. Although its rig-building business has come under pressure because of fears that a major Brazilian client may default amid the oil price rout, its other businesses have stayed resilient, especially its property arm.
In the resources sector, BHP Billiton and Rio Tinto continued to face soft commodity prices, which seem unlikely to see a turnaround in the near term. It is worth noting that both BHP and Rio are the lowest cost producers in the sector and their cashflows remain good. They have also been resolute in their strategy of maintaining record output to flush out less efficient players. Already, several companies have been hit by the fallout and more business failures are expected as financing becomes costlier and tighter amid waning profitability. They feel that Rio’s asset base and balance sheet strength should enable it to take advantage of the opportunities arising from sector consolidation. In comparison, BHP was compelled to absorb an impairment charge for its exposure to US shale oil and understandably, its management has grown more cautious.
Another notable detractor was Standard Chartered, which is committed to a comprehensive overhaul. In the past 12 months, it has rejuvenated its board and replaced senior management with fresh faces, led by CEO Bill Winters. In addition, it has imposed a new discipline on its lending activities and has implemented significant changes that should put the bank in good stead.
In comparison, holdings that contributed to relative outperformance were the US dollar corporate bonds that included Yanlord Land, Green Dragon Gas, and DFCC Bank, as Asian credit markets remained well bid. Other fixed income instruments that added to performance were Indonesia’s Bank OCBC NISP and India’s ICICI Bank, which are denominated in their respective currencies.
Also benefiting the portfolio were our Hong Kong holdings, textile producer Texwinca and shoe manufacturer Kingmaker Footwear. Texwinca’s recent results exceeded expectations while its retail operations have become profitable again. The company is streamlining its assets and recently sold a property in Shanghai. The move boosted its cash buffer by another HK$250 million and raised hopes of a special dividend. Separately, Kingmaker, one of the world’s leading contract manufacturers of leisure and sports shoes, counts Asics, Clarks and New Balance among its clients. Its most recent results were underpinned by a recovery in orders and pricing which, in turn, lifted profit margins. Its decision to shift part of its production to Vietnam some time ago seems prescient now as it stands to benefit from the nation’s membership in the recently signed Trans Pacific Partnership. Both companies have strong cash generation and net-cash balance sheets that enable them to continue paying out decent dividends.
Another stand out during the period was Singapore-listed Venture Corporation. The electronics contract manufacturer’s results were boosted by the strength of the US dollar, together with sales growth in its medical, as well as test and measurement segments. It has remained relatively resilient despite a sell-off among its Taiwanese rivals, helped in part by its strategic move into more niche businesses with higher profitability and less intense competition, such as 3D printing. Venture’s stable margins and solid balance sheet have allowed it to maintain a good dividend yield.
AAIF : Aberdeen Asian Income held back by South East Asian exposure