Henderson Far East Income’s (HFEL) lead fund manager, Mike Kerley, welcomes the resumption of earnings growth in the region after five years of stagnation. He says that attractive opportunities still abound in his favoured areas of cash-generative companies offering high dividend growth potential or high yields, with the recent rise in P/E ratios across the region only partially addressing the longstanding undervaluation versus the rest of the world. The portfolio currently has a cyclical tilt, with more in financials and consumer stocks and less in utilities and telecoms, yet HFEL still pays a high yield (currently 5.4%), fully covered by income. The fund has tended to trade at a small premium to NAV and issues shares to meet demand. The recent introduction of a tiered management fee above £400m will reduce total expenses for investors as HFEL grows.
HFEL’s managers construct a portfolio of 40-60 stocks, broadly balanced between those on high starting yields and those with better dividend growth potential. Ideas may come from company meetings, industry research or quantitative screens. All potential investments are analysed using a variety of metrics; the aim is to identify well-managed, cash-generative companies whose share prices do not reflect the underlying business value. The managers currently favour domestically orientated companies that can benefit from Asian consumers’ increasing purchasing power.
Stock markets worldwide have powered ahead in 2017, with Asian markets having provided some of the best returns after lagging the US, in particular, in recent years. This has led to forward P/E valuations above the five-year average, although pockets of value may still be found. At some point, market participants may begin to focus more on the potential risks than the promised rewards; at such a time, cashgenerative companies that can reward shareholders through dividends could provide a relative haven.
At 12 January 2018, HFEL’s shares traded at a 2.2% premium to cum-income NAV. This is above the long-term average premium (a range of 0.3-1.4% over one, three, five and 10 years). HFEL’s board consistently issues new shares to meet investor demand, with growth in the number of shares in issue averaging c 3-5% a year. The strong demand is underpinned by HFEL’s very high yield, which at 5.4% (based on FY17 total dividends) is well above that of even income-focused peers.