Investors in Asia are flocking to income-oriented products, Standard Chartered Bank and Principal Global Investors told Fund Selector Asia in separate interviews.
Therefore, this week we take a look at two dividend-yielding strategies from BlackRock and Matthews Asia that invest predominantly into Asia-Pacific equities.
The BlackRock Global Funds Asia-Pacific Equity Income seeks to invest at least 70% of its corpus in Asia ex-Japan equities. The Matthews Asia Dividend Fund also seeks to deploy at least 80% of the corpus in Asia-Pacific equities, but inclusive of Japan.
Luke Ng, vice president at FE, shares his views on the comparative analysis of the two funds.
Performance Review
The performance benchmarks for both funds differ in accordance with their investment universe. The BlackRock fund uses MSCI AC Asia-Pacific ex-Japan, whereas Matthews follows MSCI AC Asia-Pacific.
BGF rose 47.96% versus 37.65% of Matthews over the past three years as of September 2014, Ng said.
The Matthews fund performed better in the near term, especially in 2013, driven by the rally in Japanese equities this year.
The Matthews fund registered a 12.26% return in 2013 compared with BlackRock's 10.21%.
According to Ng, the BlackRock fund tends to benefit more from an equity rally, as the fund is more oriented to cyclical stocks.
“Due to its defensive stance, Matthews should weather well during a falling market.”
“Overall, the BlackRock fund should perform more like the equity market in general, while Matthews should be more like a typical equity income fund in the region.”
Matthews also benefits from the nearly 25% weighting of Japanese equities, which have been outperforming. The MSCI Japan Index is up 80% in the past two years, FE data shows.
The Matthews fund also has lower volatility than the BlackRock fund. Historically, the volatility of BGF is even higher than its respective benchmark. Due to lower volatility, Matthews performed better on a risk-adjusted return basis over the period.
Investment strategy review
According to Ng, BlackRock pursues a more dynamic strategy to rotate between high dividend and cyclical stocks depending on their valuations.
“BGF often takes contrarian bets in the turning points of a market cycle. The fund manager attempts to add value for investors via both dividend income and capital growth. At the moment, the fund is biased towards cyclical sectors including financials and consumer discretionary, as the valuation are cheaper.”
As of 31 August, the top three sector allocations of the BGF fund were financials with a 40.4% weighting compared to the 38.4% weighting of the fund's benchmark index; information technology (17.5% compared to 16%), and consumer discretionary companies (9.2% vs 7.9%).
Matthews Asia takes a more traditional approach by staying with companies that have a clear dividend policy and commit to grow their dividends in the future, Ng said. The fund is often biased towards defensive sectors, especially consumer staples.
As of August-end, the Matthews Asia fund had overweight positions in both consumer staples (22.7% compared to the 6.4% weighting of the fund's benchmark index) and consumer discretionary sector. (18.7% vs 12.8%).
“Matthews naturally has a bias towards Japanese equities relative to BlackRock. While Matthews is currently underweighting Japanese equities against its benchmark (38.4%), the weighting remains as high as 24%,” Ng said.
The BlackRock fund has a 1.8% allocation to Japanese equities.
Portfolio Managers
Andrew Swan and Oisin Crawley manage the BlackRock fund. Swan is managing director and head of Asian equities. He is responsible for managing several regional equity portfolios, setting regional equity investment strategy and developing BlackRock's Asian investment platform and capabilities.
The Matthews Asia fund is managed by Yu Zhang, Robert Horrocks and Vivek Tanneeru. Zhang has been managing Matthews’s Asia dividend and China dividend strategies since 2011 and 2012, respectively. Horrocks is chief investment officer at Matthews. He manages the firm’s Asian growth and income and Asia dividend strategies.
Fees
The management fee of the BlackRock Global Fund is 1.50% and the total expense ratio is 1.84%. Both are close to the market average. For the Matthews fund, the management fee is 0.75% and total expense ratio is 1.06% for investor class and 0.93% for institutional class.
The Verdict
Ng said investors need to choose the fund according to their risk profile.
“Investors with a more aggressive stance may prefer the BlackRock fund as the fund manager prepares to take action to ride through both rising and falling markets. On the other hand, investors may prefer the Matthews fund if they would like to stay defensive and look for a consistent income stream from the fund.”
