Well positioned as Trade War heats up

10/07/2019

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Mike Kerley, fund manager for Henderson Far East Income, offers his take on the current state of the US-China trade war and explains why the dispute shouldn’t worry shareholders of Henderson Far East Income. Mike also comments on how he and his team achieve such an impressive dividend yield and the latest activity within the trusts portfolio.

Transcript

Q: Hello and welcome to this latest video update for Henderson Far East Income. I'm joined by the fund manager Mike Kerley, Mike thank you very much for joining me today. Now first off trade war, we have spoken about it a lot and things have heated up a lot since the last time we spoke when things that were cooling down.

This doesn't look like it's going away and some investors might be spooked and put off by investing in Asian companies as a result. Now you look at the region every day. So what can you tell us about the impact of tariffs on Asian companies and have the recent developments over the last month or two affected your thinking around the portfolio?

A: Yeah sadly it's certainly true that the trade disputes have escalated and they've gone really from being all about tariffs and general stuff really to the relationship between the U.S. and China and it's now getting more specific. So we're talking about Huawei, we're talking about ZTE, we're talking about other Chinese corporates who operate in the US. And on the other side of that we've started seeing China talking about some of the supplies they make to America. We're talking about some of the rare earths which China is a large exporter of which goes into lots of electronics, goods, etc.

So this tit for tat on tariffs initially and then on corporates I think is probably here to stay unless we get some kind of resolution and the resolution looks difficult because Xi and Trump need a win for their own domestic popularity and it's difficult to see how both of them can come out with that and the further we go down the road the more difficult it becomes.

For us in the portfolio it's not that much of an issue really apart from sentiment and momentum and some side effects if you like because we don't have that much exposure to tech which is the main area of focus at this point in time. But clearly if it goes on and affects economies then there are stocks that we own in the portfolio which will be impacted by low growth environment.

Q: Okay now we've also had a few elections in the region over the past few months and actually a couple of surprises in there, what's your take on that?

A: Well I mean the two which really have been a bit of a surprise are India and Australia. It wasn't a big surprise that Modi got re-elected but it was a surprise that he got re-elected with a bigger majority than he did the first time round. So the markets taken that well and that should be good for the ongoing reforms which he started off in his first term. He still has the headwinds of getting these policies through a fairly divided government and an electoral system. But even so it's a positive move.

In Australia everyone expected a move from the liberal to the Labour government. That didn't happen actually the Liberals got re-elected. The market again has taken that very well mainly because the Labour government were talking about removing some of the tax benefits on dividends and on housing, which is now obviously disappeared and the markets taken that very well. So both of those elections I would say have had positive impacts and were a surprise.

Q: Now if you were looking for an investment trusts that invest primarily in equities and your primary objective was income you'd find that Henderson Far East Income has the best dividend yield across the industry. Now what can you tell us about your approach to achieving that impressive yield?

A: Well the whole idea of Henderson Far East is to get exposure to the income story which is already in Asia and potentially the income story which has yet to come. So we split the portfolio between the high yielding stocks, tend to be in the more developed parts of Asia like Australia, Hong, Kong, Singapore and then roughly 50% of the portfolio into areas where we see dividend growth. What we look for is cash flow, cash flow generation to sustain the dividends that currently are paid and for companies which are maturing over time producing more and more cash and ultimately will have the ability to pay higher dividends in the future. So we think the combination of the two can give you a nice high dividend with the potential for dividend growth which is why you go to Asia in the first place rather than UK because there is underlying growth. So when we put those two together plus we use option writing to generate some additional income we manage to deliver a yield which is currently north of 6%.

Q: Now lastly what can you tell us about your activity on the portfolio over the past three months? Have there been any interesting additions or positions exited and the gearing also remains very low. So what might tempt you to use that?

A: Yeah we haven't changed that much really from really the start of the year let alone the last three months. The emphasis is still on consumption. We expect the trade war to have an impact on exports and global trade. So we have very little exposure to that. We think if there is an offset to what's going on with trade it will probably come domestically especially in China with the ability to increase some of the measures to boost consumption. So we think consumer and domestic consumer so we want local brands not foreign brands within Asian markets.

So every opportunity we get in the last 5, 6, well 8 months or so has been to add to those areas. So that could be wine companies in Australia, it can be Macau casinos, it can be jewellery companies, sportswear, this kind of stuff. These are the kind of companies we've been adding to and we were reducing, on the whole, financials which are okay from a valuation standpoint but we're struggling with a falling interest rate environment which is what we'd like to see in the US which will probably be repeated in the region. We think that's going to be a little bit of a headwind for banks in Asia Pacific. So that's the main themes of the portfolio over the last six months or so.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

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 and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Henderson Far East Income Limited

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 and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

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Henderson Far East Income Limited is a Jersey fund, registered at Liberté, 19-23 La Motte Street, St Helier, Jersey JE2 4SY and is regulated by the Jersey Financial Services Commission

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

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