Invesco Asia posts strong results thanks to early portfolio repositioning – Invesco Asia (IAT) has posted its full year results for the year ended 30 April 2021, during which time its share price was up by 58.5% while its NAV was up 56.4%. This is significantly ahead of the trust’s benchmark index, MSCI AC Asia ex Japan, which was up 34.8%.
The average discount over the year was 10.7%, ending at 8.2% as at 30 April while total dividends for the year were 15.10p, representing a yield of 3.9% and up by a huge 115.7% on the previous year’s total dividends of just 7p.
During the year under review, manager Ian Hargreaves, repositioned the portfolio early for recovery, which the board says proved to be the key factor in the subsequent success. Chairman, Neil Rogan, said: “Given it is exceptional to beat an index benchmark by so much in one year, the team is now reassessing every holding to decide whether the valuation case still offers upside. Some holdings will be multi-year winners, some will not. Ian discusses the outlook in more detail in his report”.
Manager’s report:
Performance
Markets have made a strong recovery from their March 2020 lows boosted by significant stimulus measures in developed markets and the reopening of economies across the world as Covid-19 lockdowns were lifted. More recently, there has been optimism surrounding the rollout of vaccination programmes and an ongoing economic recovery, although a new wave of Covid-19 cases in some Asian countries has seen markets pull back from record highs.
Against this backdrop the portfolio has significantly and consistently outperformed its benchmark index. This has been attributable to strong stock selection across a range of different sectors. Portfolio turnover has been higher than usual, which is as we would expect given market volatility and the opportunities that this has presented us with. Staying true to our investment process, means we have been actively taking profits from outperformers, as share prices move closer to our estimate of fair value. In turn, we have been taking advantage of the divergence in performance and valuation between different countries and sectors, with opportunities to add to selected cyclical businesses that have had scope for earnings to recover quickly as conditions normalise. We have been able to find what we consider to be deep discounts to fair value in these areas, with conviction levels supported by the strong balance sheets that some of these companies have.
Attribution
The technology sector has continued to be a great source of positive performance, with semiconductor stocks enjoying a very strong year amidst a flurry of headlines about the global shortage of chips for manufacturers of everything from cars to mobile phones. Taiwanese memory chip designer MediaTek was the biggest single contributor to relative performance thanks to robust demand for its higher margin 5G chip and excitement over its new high-end, next generation microprocessor that helps process AI (artificial intelligence) tasks faster, using less power.
More recently, tech hardware companies such as ASUSTeK Computer and Delta Electronics have been key drivers. Delta Electronics has benefitted from its exposure to major industry trends (5G, automation, cloud and electric vehicles) that should support a recovery in margins and deliver more sustainable growth over the medium-term, while ASUSTeK Computer has seen strong demand for PCs and notebooks given the working/studying from home trend.
Chinese internet companies have contributed positively, particularly JD.com and NetEase as e-commerce and online gaming companies saw little disruption to their businesses and may have even benefitted from the stay-at-home trend. Both companies also enjoyed successful secondary listings in Hong Kong. Meanwhile, Chinese consumer-related companies have added value, as baijiu distiller Jiangsu Yanghe and fitted furniture manufacturer Suofeiya Home Collection (both A-shares) benefitted from a strong recovery in demand as lockdowns were lifted.
Dividends
The full year dividend of 15.10p, a 115.7% rise over the previous fiscal year, contrasts with the 21.3% decline in income generated by our Asian holdings this fiscal year. This reflects our commitment to the dividend enhancement policy announced in August last year, as well as our belief that the dividend cuts seen across Asian companies in a pandemic year are of a temporary nature. Although the dividend cuts were less severe in Asia compared to the UK and Europe, Asian banks were not immune to the forced curtailment on banking dividends by regulators. This was a global reaction to the pandemic and the uncertainty. Although many companies in Asia have solid balance sheets, some adopted a cautious approach by cutting dividends. With the recovery in economy activity and solid earnings across many sectors we would expect dividend payments to recover as well.
Outlook
We are less bullish than we were twelve months ago given higher market valuations, but we feel there are grounds for cautious optimism, with opportunities to take advantage of valuation discrepancies that exist between markets and sectors, which we feel are unjustifiable.
These are challenging times, but Asia remains a region with solid economic and corporate fundamentals. We continue to be impressed by the greater capital discipline being displayed by companies across the region, with increasingly strong balance sheets and improving free cash flow generation. The challenge has been how to better allocate that capital. Asian managements are gradually yielding to pressure from minority shareholders to pay better dividends. This is an important fundamental development at a time when dividend returns will likely form a larger component of equity returns.
IAT : Invesco Asia posts strong results thanks to early portfolio repositioning