The Guinness Asian Equity Income Fund is designed to provide investors with exposure to high quality dividend-paying companies in the Asia Pacific region. The Fund aims to provide long-term capital appreciation and a source of income that has the potential to grow over time.
The Asian region is made up of a mix of advanced, high-income economies and newly industrialised countries that are home to 54% of the world’s population. Industrialisation brings with it increased wealth, improved standards of living and a vast consumer market that attracts both domestic and international brands.
China‘s 19 million passenger car market makes it a magnet for US, European and Japanese carmakers. Its manufacturing capabilities are unmatched in cost and scale, from clothes to electronics to ships. They make China the world’s largest trader of goods valued at over $4 trillion. South Korean and Taiwanese companies dominate the production of computer chips and personal electronic devices. India has 900 million mobile phone subscribers but only 110-120 million have a smartphone. This is the next big smartphone market. But high growth and rapid development is often accompanied by volatility and risk.
We focus on profitable companies (in cash terms) that have generated persistently high return on capital over the last eight years, demonstrating stability and resilience. Historically, companies in our universe have gone on to deliver significant dividend growth. We believe strong cash generation and its distribution as dividends also provide a degree of downside protection against volatility in local markets.
We maintain a high conviction portfolio of around 30-40 equally-weighted positions with a minimum market capitalisation of $500 million, with low turnover and no benchmark-driven constraints on sector and regional weightings.
Update | Dec '17
Webcast | Oct '17
Insight | Dec '17
Press | Nov '17 | FE Trustnet
Press | Oct '17 | Investment Week
Why invest in the Guinness Asian Equity Income Fund?
The Fund is designed to provide investors with exposure to Asian equities through a high conviction, low turnover portfolio of consistently profitable dividend-paying companies.
- Focus on consistent high return on capital
- Consistent high return on capital is a good indication of a company’s durability, and its ability to pay healthy dividends. The Fund invests in companies that are unusually consistent in generating returns on capital above their cost of capital.
- Growth and income
- Our approach to dividend investing is to focus on companies that can sustainably grow their dividend into the future, rather than simply looking for companies with a high dividend yield.
- High conviction
- The Fund typically invests in 36 companies, with each company having an equal weighting. This provides a good balance between the benefits of diversification while also allowing each company to add meaningfully to performance. We don’t have a long tail of small positions and by definition we can never just ‘hug’ the benchmark index.
- Fundamentally driven
- We focus on ‘bottom-up’ stock selection rather than trying to make decisions based on an expected outlook for the region’s economy. We like to invest in good companies that have, in the short term, fallen out of favour, but that have previously shown an ability to weather most economic environments over time.
- Low turnover
- We prefer to invest over the long term. We also recognise the increased costs of trading in and out of companies unnecessarily. Typically we will hold a company in the portfolio for between three and five years.
- Repeatable and independent
- Edmund Harriss and analyst Mark Hammonds have managed the Fund since launch. They have developed an investment process that is clear, robust, transparent, and scalable. Their approach filters out much of the noise and hype that surrounds companies to focus on the true signals that drive company valuations. By performing their own company research and analysis, using their own proprietary modelling systems, the managers try to avoid some of the behavioural biases associated with being unduly influenced by market sentiment.
The Fund is designed to give investors exposure to one of the world’s fastest growing regions, which will have a significant influence over our economic future. However, with change and opportunity comes risk. We seek to manage this by investing in companies that:
- have a proven record of generating returns in excess of the cost of capital;
- can successfully reinvest those returns in order to grow their business; and,
- are committed to paying dividends to shareholders that can grow over time.
The case for Asian equities
Asia’s developed and emerging economies
The Asia Pacific region includes both developed and emerging economies, and is home to 54% of the world’s population (4.1 billion people). Its population is still younger than the developed world, and is getting richer. While western economies struggle to sustain economic growth, it is Asia’s dynamism, expanding population and increasing wealth that will shape our economic future. If you believe successful investing is about recognising patterns of change to identify value and opportunities for wealth creation, then Asia is the place to look.
Asia has diversified
Asia is different from ‘Emerging Markets’. Asia is diversified, whereas other emerging markets rely on production of resources or a larger neighbour (or regional trading block). The region has mobilised its resources for the production not only of raw materials but also the full range of manufactured goods (from cheap clothing to top-of-the-range electronics), and is plugged into the global manufacturing network. In 2010, 57% of Asia’s labour force (almost three in every ten workers in the world and nearly one billion people) was employed in industry or services, with the remainder working in agriculture. This was up from 510 million people or 40% of the labour force in 1990. It is this ongoing shift to “decent work” which generates wealth, fuels rising wages and provides a vibrant Asian market for goods and services. The rise of the Asian consumer, growing more numerous with more money to spend year by year, is the economic force driving change.
“Rather than rely on production of resources like other emerging markets do, Asia has mobilised its resources for the production of the full range of manufactured goods, and is plugged into the global manufacturing network.”
Asian economics and politics have matured
Having learned from its own 1998 experience, the region did well through the recent financial crisis. Governments, companies and the financial sector were not over-extended, while companies curbed their expansionary instincts and focused on cash flow generation and profit, leading to a step change improvement in companies return on investment.
Fundamental change to government and society is most often propelled by economic forces. Asia’s experience is no different. Increased individual wealth and economic participation has been followed by increased political engagement as people demand a voice in shaping their and their children’s future. A demand for government accountability has meant more intensely contested elections, usually now won with a commitment to long-term economic planning and reform. Stock market regulation, accounting and disclosure have improved as financial systems respond to market needs.
There is a long-term investment opportunity in Asia. But opportunity and risk go hand-in-hand; the key for investors is finding proven companies and constructing the right portfolio to manage that trade-off.
Edmund has managed Asian Funds since 1994 both from London and from Hong Kong.
Edmund worked for ten years from 1993 for Guinness Flight, which became Investec after the merger in 1998. After joining the Far East Investment Desk in 1994, he served as a member of the investment team managing the China & Hong Kong Fund (now the Guinness Atkinson China & Hong Kong Fund, for US investors). He moved to Hong Kong and became the Fund’s lead manager in 1998.
In addition, Edmund has managed the Guinness Atkinson Asia Focus Fund (for US investors) since 2003, and the Guinness Atkinson Asia Pacific Dividend Fund (for US investors) since its inception in 2006.
Edmund graduated from Christ Church, University of Oxford, with a Master’s degree in Management Studies and has a Bachelor’s degree in History from the University of York. He is also an Associate of the Society of Investment Professionals.
Edmund is manager of the Guinness Best of China Fund, and lead manager of the Guinness Asian Equity Income Fund.
Mark Hammonds, CFA
Mark joined Guinness Asset Management in 2012 and is co-manager of the Guinness Asian Equity Income Fund.
Prior to joining Guinness, Mark worked at Ernst & Young, where he qualified as a Chartered Accountant. Mark graduated from Corpus Christi College, University of Cambridge, in 2007 with a First Class degree in Management Studies. He is a CFA Charterholder.
How do we run the Fund?
“We don’t chase yield, we want capital and dividend growth.”
Although the Fund is designed to invest in dividend-paying companies, our starting point in selecting our investment universe is to identify companies with consistently high return on capital. Specifically we look at companies that have a return on capital greater than 8% (in real terms) in each of the previous eight years.
Our analysis shows that companies with persistently high return on capital are highly likely to continue to do so in the future – meaning they will continue to create shareholder value.
|Why 8% and why eight years?|
|8% return on capital…||8% is well above the average real cost of capital of 6%. This means companies who achieve this level are truly creating value for their shareholders.|
|…every year…||Consistency each year excludes highly cyclical companies or those with high but declining or volatile earnings.|
|…for eight years||Eight years of high returns gives us confidence that those returns should persist into the future.|
“There is a long-term investment opportunity in Asia. But opportunity and risk go hand-in-hand. The key in Asia is finding proven companies and constructing the right portfolio to manage that trade-off.”
On average, only about 7% of Asian listed companies achieve our threshold. We then exclude those less than $500 million in size or with a debt to equity ratio greater than 1. This gives us a pool of around 300 companies from which to build our portfolio.
What about yield?
Companies that earn a consistent high return on capital often distribute a proportion of cash they create in the form of a dividend. In the Fund, however, we focus in particular on those companies that can sustainably grow their dividend into the future.
From this pool we then select candidates for extended research on the basis of value and sentiment. In depth proprietary modelling of a company’s cash flow, capital budgeting and potential for dividend growth is combined with a subjective analysis of its business model to identify candidates for inclusion in the final portfolio.
By selecting companies from a broad range of industries, countries, and market capitalisation we aim to create a well-diversified portfolio which can provide a reasonable dividend yield and growing income stream at an attractive valuation relative to Asian equity markets.
It is often easier to find companies to buy that look cheap than it is to identify those companies you own which should be sold. We consider sell discipline as important as selecting companies for purchase and continuously monitor the companies we hold in the Fund. The six core reasons we may sell a company are outlined below.
- The company fails to continue to meet our return on capital criteria
- The valuation becomes too rich
- The balance sheet becomes stretched
- The dividend outlook or management policy to dividends changes unfavourably
- The original investment thesis no longer holds, or a new idea is more compelling
- Yield contribution to the portfolio is insufficient
How do we construct the portfolio?
The Guinness Asian Equity Income Fund is a concentrated portfolio of around 36 equally weighted stocks. This provides a number of useful attributes:
- It reduces stock-specific risk, as we will not be overweight in a small number of favourite companies.
- We will not have a long tail of small holdings in the portfolio, which can be a distraction and a potential drag on performance.
- It instills a strong sell discipline as we must typically sell a position in order to make way for a new one; and we must constantly assess the companies we own in the portfolio in comparison to the rest of the universe available to us.
- We are truly index independent. All companies held are weighted equally without regard to their weighting in the benchmark index, leading the portfolio to have a high active share.
|Fund||Asian Equity Income Fund||Basis||Total return, in GBP|
|Index||MSCI AC Pacific ex Japan Index||Date (period end)||30.11.2017|
|Sector||IA Asia Pacific ex Japan||Fund Launch||19.12.2013|
Please remember that past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise as a result of market and currency movement, and you may not get back the amount originally invested.
|Cumulative performance (GBP, %)|
|X class (OCF: 1.24%)||Year-to-date||1 year||3 years||5 years||From launch (19/12/2013)|
|Annualised performance (GBP, %)|
|X class (OCF: 1.24%)||1 year||3 years||5 years||10 years||From launch (19/12/2013)|
|Calendar year performance (GBP, %)|
|X class (OCF: 1.24%)||2012||2013||2014||2015||2016|
|Discrete year performance to date (GBP, %)|
|X class (OCF: 1.24%)||Nov-13||Nov-14||Nov-15||Nov-16||Nov-17|
Latest Guinness Asian Equity Income Fund Report
Edmund Harriss looks at what is driving the recent market retreat
Some thoughts on equally-weighted portfolios
Matthew Page explores the reasons behind running a concentrated, equally-weighted portfolio.
Edmund Harriss discusses the meaning behind the MSCI’s decision to upgrade Chinese A shares
Edmund Harriss explains how a drive to reduce smog in China could also help to tackle one of the country’s main economic challenges: excess industrial capacity and associated debt.
Implications for Asian investing of the UK leaving the EU Edmund Harriss discusses the consequence of the UK’s decision to leave the EU.
2015 performance & portfolio review
Edmund Harriss discusses how the portfolio has performed in 2015.
How Asia avoided a commodity crisis
Edmund Harriss discusses Asia’s industry and services-led growth and mobilisation of its work force, which have enabled the region – unlike other emerging markets – to avoid the worst of the commodity price slump.
Matthew Page investigates the “science” of economic modelling
To meet or not to meet
Matthew Page discusses the merits of meeting company management
Why dividends matter
Ian Mortimer and Matthew Page investigate the importance of dividends in the pursuit of returns
Guinness’ Harriss: The overlooked yet lucrative market for income investors
Edmund Harriss, who heads up the five FE Crown-rated Guinness Asian Equity Income fund, tells FE Trustnet why the best income opportunities reside in China despite widespread debt-related fears.
China Special: Why S&P has missed the mark with China downgrade
China’s credit rating was recently downgraded by Standard & Poor’s (S&P) from AA- to A+ because of worries over the rapid growth of the country’s debt.
Mark Hammonds to co-manage the Guinness Asian Equity Income Fund
Tom Eckett of Investment week comments on the recent promotion of Mark Hammonds
Can this tiny Fund rival Newton Asian Income?
Investment Week’s Natalie Kenway alights on Guinness Asian Equity Income in the aftermath of manager change at one of the sector’s giants.
The tiny Asia fund that’s outperforming its massive rivals
FE Trustnet’s Lauren Mason says the one-year-old Guinness Asian Equity Income fund has enough conviction to stand up to giant, well-established competitors like Newton Asian Income.
|Edmund Harriss (19/12/2013)
Mark Hammonds (19/12/2013)
|Benchmark||MSCI AC Pacific ex-Japan Index|
|IA sector||IA Asia Pacific ex Japan|
|Redemption fee||2% within 30 days of purchase|
|Underlying currency||US Dollar|
|Valuation||2300 Dublin time|
|Deal cut off time||1500 Dublin time|
|Administrator||Link Fund Administrators (Ireland) Ltd|
|Custodian||JP Morgan Bank (Ireland) plc|
|UK Reporting Fund status||Yes|
|0.99% OCF||0.74% OCF For charities||1.24% OCF||1.99% OCF|
|Currency||GBP, EUR, USD||GBP||GBP, EUR, USD||GBP, EUR, USD|
|Accumulation or Distribution||Acc||Dist||Dist||Acc||Dist||Acc|
|Name||Y Acc||Y Dist||Z Dist||X Acc||X Dist||C Acc|
|OCF* (Total ongoing charges p.a.)||0.99%||0.99%||0.74%||1.24%||1.24%||1.99%|
|Minimum direct investment||£/€/$ 10,000||£/€/$ 10,000||£/€/$ 100,000,000||£/€/$ 10,000||£/€/$ 10,000||£/€/$ 10,000|
|Minimum platform investment||Guinness Asset Management minimums do not apply. Platforms apply their own minimum investment levels.|
|GBP IE00BGHQDV44||GBP IE00BGHQDP83
|GBP BGHQDV4||GBP BGHQDP8
|Bloomberg ticker||GBP GAEIYGA ID
EUR GAEIYEA ID
USD GAEIYUA ID
|GBP GAEIYGD ID
EUR GAEIYED ID
USD GAEIYUD ID
|GBP GAEIZSD ID||GBP GAEIXSA ID
EUR GAEIXEA ID
USD GAEIXUA ID
|GBP GAEIXSD ID
EUR GAEIXED ID
USD GAEIXUD ID
|GBP GAEICGA ID
EUR GAEICEA ID
USD GAEICUA ID
|Country registrations||UK. Others to follow – contact Guinness Asset Management for more information.|
Notes*OCF = Ongoing Charges Figure, which includes the annual management charge.
- United Kingdom
- Singapore (professional only)