abrdn Asian Income Fund takes an unconstrained view of Asian equities by investing in high-quality equities without being tied to any specific benchmark.
Of course, the trust benchmarks its performance to a broad index, the Morningstar IT Asia Pacific Equity Income Index. However, performance comparison is where the managers limit references to broader indices. It does not play a significant part in asset allocation.
The investment approach seeks out high-quality companies with reliable yields while ensuring each investment is made at a sensible valuation. Inherently, this strategy provides investors with a higher yield and less volatility than other Asian or emerging markets funds.
Although the trust is focused on Asia, the strategy must not be confused with an emerging market mandate. The trust invests in developed Asia Pacific markets, including Australia, New Zealand, and Singapore, while providing exposure to Taiwan and South Korea.
The abrdn Asian Income Fund is largely equally weighted towards cyclical and sensitive sectors, with 43.67% in cyclical and 51.74% in sensitive sectors, including energy, communications and technology.
This approach to sector allocation exposes the trust to underlying growth in Asian markets, which tend to move more quickly than developed markets in reaction to changes in underlying growth, but limits volatility by focusing on established names with a lower risk profile.
For example, the portfolio is underweight the risky and low-yielding Chinese equities prominent in the MSCI AC Asia Pacific ex Japan Index.
In an underwhelming year for Asian equities dogged by Chinese concerns in 2023, the trust’s NAV grew 2.5% compared to a 1.6% return for the index. The dividend grew by 11.75% to 11.75p from 10p over this period.
The top ten holdings include high-quality Asia-Pacific names such as Taiwan Semiconductor Manufacturing, Samsung Electronics, Power Grid Corp Of India, and, interestingly, miner BHP Group.
Focusing on high-quality companies has allowed the trust to increase dividend payouts consistently over the past year to yield 5.5%. Given the strong track record of dividend hikes, one would expect the trust to live up to its income mandate and continue to increase shareholder return in the years to come.
Capital growth
The trust’s capital appreciation attraction has two core pillars. First, the trust trades at an 11% discount to NAV, which presents opportunities for this discount to narrow over time. Additionally, and arguably most importantly, Asian equities are substantially undervalued compared to developed market equities, particularly the US.
A higher interest rate environment naturally pulled capital into the relative safety of US and European assets at the detriment to emerging markets. Should history be a reliable indicator, one would expect capital to flow back into emerging markets as developed market interest rates fall.
When these flows are coupled with arbdn Asian Income Fund’s unconstrained approach to high-quality, reliable income plays, the result will likley be both capital appreciation and measured income.
