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Performance of Martin Currie Asia Unconstrained “adrift” of its investment objective

Performance of Martin Currie Asia Unconstrained “adrift” of its investment objective – the NAV on a total return basis of Martin Currie Asia Unconstrained (MCP) increased by 6.3% while the share price rose 9.8% for the year to 31 March 2018. On a capital return basis, the NAV recorded an increase of 2.5%. The share price rose by 5.4% excluding income received.  The investment objective of the company is to match Asian nominal GDP growth, and the regional MSCI Asia ex Japan Index, which both increased by over 12% in sterling terms over the past 12 months.

Performance

The investment strategy of the company was developed by Martin Currie( the company’s investment manager) is unusual relative to its peers and is said by the chairman to be “inimitable” or “matchless”.  It is designed to capture capital growth commensurate with nominal economic growth in Asia. This strategy was put in place in August 2014 and appears to have got off to a flying start. However, from for the past three years to 31 March 2018 and particularly over the past 12 months, returns have been behind the objective. It is thanks to the early period from the point that the strategy was adopted that since August 2014, the performance has been in line with the rise of nominal Asian GDP.

In the report, the chairman of the company explains that this is due to a number of factors:

  • Sterling’s weakness against the US dollar – the performance of sterling has created something of a headwind to performance.
  • Stock selection -market breadth in Asia has been abnormally narrow with a large number of stocks in the universe being ignored, irrespective of merit. Instead, spectacular returns have been concentrated in a few tech, internet and energy names.
  • The distortion of fund flows into passively managed strategies and ETFs.

By investing in companies with positive free cash flow growth and strong balance sheets, the returns are typically less volatile than the market.

Dividend policy

Since July 2017 the company has been able to make payments out of capital. The level of capital payment was set at 2% of the company’s year-end ex-income NAV.  The final total dividend for the year increased by 2.6% to 16.70p  from 16.28p in 2017. The distribution represents a 4.35% yield on the year-end closing share price at 31 March 2018.

Discount

The board hoped that by changing the dividend policy it should help to reduce and stabilise the level of discount. This may have happened, as the discount has narrowed from 14.6% to 12.3% over the year to 31 March 2018. The average discount for the AIC peer group has widened over that period.

Outlook from the chairman, Harry Wells

“2018 began with rising expectations, driven by synchronised global economic recovery hopes, strong upward momentum in corporate earnings revisions and euphoric readings on sentiment indicators. The IMF still expects global growth of 3.9% in 2018. Although fundamental data across the G10 economies remains strong, some recent data indicators have shown softening trends. The S&P 500 reached a record high of 2,872.87 on 26 January 2018 (up 7.5% from year-end 2017), but higher US wage growth reported in early February then saw world equity markets correct sharply on fears of resurging inflation and the prospect of a steepening interest rate trajectory. Trade war anxiety has heightened since March as America announced tariffs on Chinese steel and aluminium imports. The subsequent retaliation by China raised further concerns over protectionism. In fact, the proposed tariff increases affect only a small proportion of China exports. President Trump appears to be targeting China’s digital economy and his bark may be worse than his bite, given his reported policy reversal to rejoin the Trans Pacific Trade Partnership. The President has a point in attempting to halt the infringement of intellectual copyright and there is some logic in trying to redress the trade balance. Still, the Americans may end up shooting themselves in the foot by picking fights with trade partners, as tariffs push up input and product prices, affecting both corporate margins and the consumer.

 Fortunately, the US is not the only source of global demand. Inter-Asian trade is growing and consumption is rising on a secular trend, reflecting a rise in disposable income. For example, Chinese per capita incomes are on track to double between 2012 and 2020. Asian corporate earnings are now forecast to grow by approximately 13% this year. Regional equities still look attractive on the basis of reasonable valuations, after factoring in these growth expectations. However, a significant increase in US bond yields, as a corollary of the perception of increased inflation, could be a wrecking ball. The more the US Federal Reserve raises rates and shrinks its balance sheet, it is apparently planning a near 25% reduction over the next two years, the more asset prices are potentially at risk. Offshore US-dollar denominated debt has ballooned during quantitative easing, so increased interest rates and a strengthening US dollar would pressure emerging markets, including weaker Asian corporate credits. However, if the Fed miscalculates, they may be forced to perform a volte face to support markets.

 Geopolitically, it is encouraging to see that relations with North Korea appear to be improving, with diplomacy replacing bellicose rhetoric and missile tests. Still, China continues to extend its sphere of influence around the region including the South China Sea and its relations with Taiwan have soured recently. The impasse over the Iran nuclear deal has serious implications for Middle Eastern stability and the oil price. Regardless of these concerns, volatility should generally present our investment manager with opportunities to buy equities cheaply, in cases where they hold strong conviction for future growth prospects. I anticipate that these opportunities may have a strong bias towards domestic consumption within the Asian region.”

MCP : Performance of Martin Currie Asia Unconstrained “adrift” of its investment objective

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