Aberdeen Asian Income Fund reports that its NAV rose by 29.9% over the course of 2016, outpacing the 27.7% rise in the MSCI All Country Asia Pacific ex-Japan Index (total return basis). The share price rose by 28.4% on a total return basis to 194.3p, while the discount widened slightly, notwithstanding significant buy-back activity, from 6.8% to 8.3% over the period. Four quarterly dividends were declared over 2016. The first three were paid at the rate of 2.0p totalling 6.0p which, when added to the fourth dividend of 2.75p, represented an overall increase of 2.9% for the year to stand at 8.75p.
The portfolio’s outperformance over the year was driven in large part by the underweight to China, which lagged the broader region. Concerns surrounding yuan weakness and stricter capital controls resurfaced in the wake of the strengthening US dollar. This weighed on financial stocks, and not holding China Life Insurance and Ping An Insurance proved beneficial. The lack of exposure to India also aided relative performance. Early optimism over the approval of the GST bill and ratification of the bankruptcy law was overshadowed by the demonetisation policy implemented in November despite it being a longer-term positive for the economy. The portfolio’s lack of exposure reflects their view that most Indian companies can generate attractive returns by investing to meet growing domestic demand, which they prioritise over paying out dividends. Elsewhere, the overweight to Thailand was positive as the market was one of the best-performing, buoyed by stimulus measures and a smooth royal transition. Thai holdings, such as Electricity Generating, Tesco Lotus Retail Growth and Hana Microelectronics, rallied in tandem.
Also boosting relative return was the good performance of their Singapore holdings. Technology services and solutions provider Venture Corp’s results continued to exceed expectations on the back of tighter cost controls and solid revenues in high value-added segments such as test and measurement, medical and life sciences. Jardine Cycle & Carriage continued to benefit from its Indonesian subsidiary Astra International, which reported a recovery in automobile sales and rallied in line with the Jakarta stock market. Meanwhile, sentiment towards the Singapore banks, United Overseas Bank, DBS Group and Oversea-Chinese Banking Corp, gradually improved. Concerns over their lending to the energy sector and exposure to China receded as the oil price rebounded and the mainland appeared to stabilise. Further impetus was provided by expectations that profits will be bolstered by higher interest rates following President Trump’s win. Although Singapore was a regional laggard over the year, their stance remains that the market offers high-quality companies at good value, and many have diversified their earnings across the higher growth economies within the region.
The rebound in commodity prices benefited several of our holdings, one of them being Indonesian coal producer Indo Tambangraya Megah. Similarly, diversified miners Rio Tinto and South32 saw their share prices rise alongside the sector rebound. All three remain low-cost producers in their respective segments, with good cash flows. Cost-cutting discipline and non-core disposals enabled Rio Tinto to raise its dividend for 2016, while South32 paid its inaugural dividend and linked its future payout policy to earnings growth. Another holding that contributed to relative return was Viva Energy REIT, which operates 425 Shell and Coles Express petrol stations across Australia. Its unique portfolio imbues it with good cash generation that will enhance its ability to pay dividends over time. They built up our exposure to the stock after repurchasing it at a more compelling valuation compared to its August IPO.
Conversely, relative performance was pared by the portfolio’s underweight to Taiwan, which was one of the best-performing markets, led by the tech rally. Their view is that the market continues to offer a relatively narrow selection of companies, with the bulk of them in lower-quality cyclical industries lacking market leadership. The exposure to Malaysia also detracted as the local market was pressured by the ongoing 1MDB controversy. At the stock level, BAT Malaysia was a key detractor as its share price was dampened by the fall in cigarette sales, exacerbated by the excise duty hike in November, and loss of market share in the premium segment. Nevertheless, the company offers an attractive yield of around 7%. Earnings have stayed resilient through economic cycles and this has supported dividends.
In Hong Kong, Texwinca faced a difficult global operating environment, with demand weakening in the US, its largest market. However, the textile manufacturer remains committed to dividend payouts, supported by robust cash flows. Swire Pacific underperformed as earnings were hampered by its aviation unit, which is undergoing a major restructuring in response to challenges within the airline industry. Nonetheless, Swire has other businesses, notably its property unit, where they continue to find value. Elsewhere, Thai media company BEC World’s share price fell on the back of lower advertising revenues, which were aggravated by the nationwide mourning that followed King Bhumibol’s passing. Marketing spending is likely to stay subdued in the near term but the stock retains its attractive yield.
Another detractor was Korea’s Samsung Electronics. The underweight position versus the index hurt performance as the share price rallied after the company announced the biggest share buyback in its history, while continuing to grow its dividends. Despite the recall and discontinuation of its Galaxy Note 7 smartphone, the company still posted better-than-expected earnings. They introduced Samsung Electronics to the portfolio over the review period, on the back of its commitment to link shareholder returns to free cash flow generation. The company has made great strides in this regard and they have been encouraged by its improving investor communication that forms the bedrock of its shareholder friendly policies. They believe the company is well placed to weather negative headlines, given its net cash balance sheet, diversified revenue streams and market leadership in precision manufacturing, which help it manage various business cycles
AAIF : Aberdeen Asian Income benefits from China underweight