UK - Lion puts trust in Dragon to deliver

As China enters the year of the Dragon, Mark Williams is gearing up to launch Liontrust Asian Income, shrugging off warnings of an asset bubble, but largely avoiding Indian stocks.

When I take the train to work, I’m confronted at St Pancras station with a huge billboard promoting Schroder Asian Income. When I cycle in, I pass under a bridge with an even bigger banner telling me to buy Henderson Far East Income. And after a brilliant year for Liontrust in 2011, what is it launching for 2012? An Asian Income fund.

The surprise for me is just how high the income you receive on these funds is. Schroder’s standard Asian Income pays about 4.3%, while its maximiser version targets 7%. Mark Williams, who will manage the Liontrust Asian Income fund when it is launched in late March, is targeting about 4.5%. Given the latest evidence from America’s Federal Open Market Committee that Federal Reserve interest rates are likely to stay flat until at least 2014 - some openly airing the possibility of rates at almost zero until 2016 - the desire for income is going to become ever more urgent.

Can Williams do it? Although a recent joiner at Liontrust, he has a performance record stretching back through Occam (acquired by Liontrust last August) and Foreign & Colonial (F&C). But the most recent figures for his recently rebranded Liontrust Asia fund make less than pleasurable reading - down 25% in 2011 compared with a 17% fall in the index. Nor was 2010 any better: the fund managed an 8% gain compared with the index rise of 20%.

But Williams remains confident that he’ll find his way again. “I’ve run money in Asia since 2000, when I managed a fund launched by F&C,” he says. “I outperformed every year until 2010 and 2011, which I found very difficult. Overall, including 2010 and 2011, I still outperformed by 50%.”

So what went wrong recently? Asia’s problem was Europe, says Williams. He had positioned his portfolio for a looser monetary environment in China and better than expected growth in America helping to pump up demand. Both calls were right. Except Europe spoiled the party.

“The trends I was looking for were overridden by the trends coming out of Europe. I was expecting an acceleration in the US economy and a loosening in China, along with something of a resolution to the situation in Europe. But Asia is probably the region most tied in to the global macro situation, so the impact from Europe was serious.”

During the Chinese year of the Rabbit (we’ve just moved into the year of the Dragon), markets turned and ran. Across the bulk of Asia, markets languished in the shadow of the eurozone crisis, falling 15% compared with 8% for the MSCI world index. Economies may have decoupled, with China and India able to grow at 7-8% when Europe, America and Japan are flat, but markets remain curiously synchronised.

The downturn in Chinese stocks has prompted fears of an asset bubble, with over-investment in property and excessive lending by banks. But Williams is unperturbed.

“I don’t see a widespread property bubble,” he says. “Deposit ratios at the banks remain healthy, and although there will be [office or apartment] blocks that remain empty perhaps for years, much of the current spending on property and infrastructure is good for the country. There is still a massive urbanisation process going on. And you have to remember that China cleaned out its banking system as long ago as the middle part of the last decade.”

He doesn’t expect China to continue to expand at breakneck 8-10% a year, and sees a time when GDP growth subsides to about 5%. But that shouldn’t make us wary about investing. “Manufacturing will inevitably lose some of its edge. China will turn into more of a domestic consumption story,” he says.

But unlike Anthony Bolton’s so far ill-fated venture into the Chinese consumer sector, Williams has not stuffed his portfolio with consumer stocks. “I still baulk at the valuations,” he says. He likes healthcare, but laments the number of listed opportunities in which to invest. “I still like the mid-cap space in China, although not in export plays but stocks that will benefit from the infrastructure boom. I expect low-end manufacturers to have a torrid time,” he warns.

He has sold out of 361 De­grees, a Chinese sportswear firm, on news of a slowdown in sales, and invested in Comba Telecom, which he expects to benefit from capital spending.

In total, nearly 35% of Liontrust Asia is in China and Hong Kong, with South Korea (21%) and Taiwan (17%) next. Samsung is the single largest holding at 5% of the fund, with Taiwan Semiconductor at 4.2% and China Mobile at 3%.

India barely features in the fund, evidence of Williams’ concern about valuations. “You can find some decent stocks, but they are nearly always too expensive. You can argue that Indian companies are better managed, but then you only have to look at the number of corruption cases last year. And you have to worry about structural inflation in India.”

Any suggestion of a bit of a bubble in fund managers pushing Asian Income is brushed aside. There are still only a handful of funds in the Oeic sector (plus a few more in investment trusts), so it’s hardly the same as British equity income, he protests. He reckons that a projected 4.5% income level from his new fund is sustainable for the long term.

India and Korea are pretty hopeless for income seekers, yielding 1.5% and 0.5% respectively, but Taiwan yields 5%, Hong Kong manages 4% while Malaysia and Thailand yield 3-3.5%. Williams also likes Indonesia on both the domestic and export front. Building a portfolio that pays 4.5% won’t be too challenging, he insists. He cites data from Daiwa which shows that if between 1994 and 2012 you invested in the top 20% high yielders in Asia, ploughing back the dividends, you would have outperformed the market significantly. It’s a story we’ve long heard in British equity income, but it seems it rings true in Asia as well.

“I still believe that Asia will outperform over the next decade,” says Williams. “And don’t forget, it’s already had its financial crisis.”

Patrick Collinson

WebFund

Business & Investment Opportunities

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