Company Announcements

INTERIM MANAGEMENT REPORT

CHAIRMAN'S STATEMENT

Introduction

Your Company has delivered a solid start to the financial year, posting a positive NAV total return of 7.4% for the six months to 28 February 2021.  We have declared two interim dividends during the period, delivering a 1.8% increase on the same period for the prior year.  This is not an insignificant increase against the backdrop for dividends over the period.  At 28 February 2021, the ordinary shares yielded a very attractive 7.3%. 

The Company funded the dividends for the year ended 31 August 2020 entirely from revenue and added a small amount to the revenue reserve, which remains in excess of £17m.  This leaves the Company well placed to maintain its dividend track record.

As they had done in 2020, markets continued to focus on growth and momentum rather than cash flows and dividends, which impacted the capital performance.  However, valuation is once again starting to matter and this bodes well for the portfolio - your Fund Managers have always cared about the price they pay for an asset, as well as the underlying fundamentals of the companies in which they invest your money.  This discipline has stood the Company in good stead over the long term.  

Performance

The NAV total return performance for the six months to 28 February 2021 was 7.4% and the share price total return was 6.8%, reflecting a small contraction in the premium to NAV. This compares with returns from the FTSE All World Asia Pacific ex-Japan Index of 17.5% and MSCI AC Asia Pacific ex Japan High Dividend Yield Index of 12.8% for the same period. The strength of high valuation and low yield technology names was responsible for the underperformance against the broad index while the recent rally in banks and unsustainable recovery plays impacted the returns relative to the high yield index.

Dividends

The first and second interim dividends for the year ending 31 August 2021 in the amount of 5.80p per ordinary share each were paid or became payable during the period.  This is a 1.8% increase on the dividends paid for the same period last year and well above the annual consumer price inflation figure of 0.7% at the end of February 2021.

Share issuance

In contrast to much of the AIC Asia Pacific Equity Income sector, the Company continued to trade at a premium and we issued a total of 2.8m shares in the six months to 28 February 2021.  This raised £9.1m for further investment.  In the period since the end of the half-year, we issued a further 2.3m shares.

As ever, all shares were issued at a premium to the net asset value.

Outlook

The near term outlook for the global economy will largely depend on the coronavirus vaccine roll out and its efficacy. In 2020 the global economy contracted by 3.3%¹ although now the International Monetary Fund ('IMF') is forecasting a strong recovery with growth of 6.0%¹ this year. There will be significant variations between countries and regions and economic forecasts are subject to further revisions, but current evidence suggest they will be on the upside.

From the perspective of your Company, the outlook remains positive for two primary reasons. Firstly, the IMF is forecasting growth of 8.6%¹ this year for Emerging and Developing Asia following a decline of 1.0%¹ in 2020 and growth in China this year of 8.4%¹ following a very creditable performance of 2.3%¹ growth in 2020.  The second reason is that after a decade of underperformance relative to growth stocks, a sharp global cyclical recovery should benefit value shares at the expense of growth shares, perhaps reversing the trend.  A return to value as opposed to growth, where valuations are very extended, will enhance the value of our portfolio which, by necessity, is heavily weighted towards value to achieve our income mandate. Despite all the uncertainties, we were able to raise the total dividend for the year ended 31 August 2020 by 2.7% without utilising the revenue reserve, but investor preferences for growth impacted our NAV performance. As an equity income portfolio our primary focus must be income generation, but, if after ten years of underperformance of value relative to growth, value becomes more attractive to investors, our NAV performance will benefit.

Despite Covid-19 induced poor global growth in 2020, the economic drivers in Asia remain predominately in place. The negative economic impact has been largely confined to India, Indonesia and the Philippines. North Asia, in particular, suffered less damage and recovered more quickly. While the US has a new president, who will adopt very different policies to President Trump, trade tensions with China will almost certainly remain. However, so far, attempts to slow globalisation do not seemed to have worked. According to the NikkeiAsia news agency in November 2020² the port of Los Angeles saw the busiest month in its history with goods valued at US$52 billion coming across the Pacific, mostly from China. As well, intraregional trade in Asia remains very robust with China-ASEAN trade levels now exceeding trade with both the US and the European Union ('EU'). Opportunities in the Asian region will remain compelling to western business and, despite political pressures, will not be ignored.

China remains an important trade partner for the EU resulting in the recently signed Comprehensive Investment Agreement. EU overall trade with Asia currently stands at US$1.6 trillion annually exceeding trade with the US.

Current events and forecasts in our region give us every reason to have confidence that the Company will continue to meet its income mandate and be attractive to investors seeking regular income and international diversification.

John Russell

Chairman

22   April 2021

1  IMF World Economic Outlook, April 2021

2  https://asia.nikkei.com/Spotlight/The-Big-Story/The-next-wave-of-globalization-Asia-in-the-cockpit

Fund Managers' Report

Overview

In the Fund Managers' report at the end of the financial year in August 2020, we wrote about the uncertainty surrounding the Covid-19 pandemic and the material impact it was having on the world's health and wealth. Six months on and the virus is still with us, although the successful development of effective vaccines is providing a light at the end of the tunnel. The impact on economic activity has been material with many of the world's major economies likely to take a number of years to recover to pre Covid-19 levels.

Asia Pacific has fared better than most with North Asia, in particular, weathering the storm relatively successfully to the extent that Taiwan and China actually managed positive Gross Domestic Product ('GDP') growth in 2020. This was due to early and draconian lockdown measures, which contained the coronavirus, while the recovery in manufacturing, and especially demand for work from home technology, boosted industrial production and insulated these economies from the worst of the pandemic slowdown. The progress of containing the coronavirus has been less successful in southern Asia and India, where lockdown measures imposed by central government tended to be less vehemently followed at the provincial level, delaying the pace of recovery. Tourism dependent economies, such as Thailand, were particularly hard hit with GDP falling 6.1%³ in 2020.

The performance of individual markets broadly reflected the success in dealing with the pandemic. The best performing markets were Korea and Taiwan, which both rose by more than 30%⁴ in sterling terms over the period, surprisingly followed by India which burst into life following a better than expected budget in early February 2021. The Chinese market lagged its North Asian peers, dragged down by the highly weighted internet sector which faced headwinds as the regulator investigated some of the prominent platforms for monopolistic practices. Malaysia, Indonesia and the Philippines, although positive, lagged the average return due to lingering coronavirus concerns and a lack of market exposure to cyclically sensitive sectors. At the sector level, technology and materials led the way followed by financials, with banks rallying strongly in the last three months. Defensive sectors continued to underperform led by telecommunications, utilities and health care.

Aside from Covid-19, the most significant news over the period was the US Presidential election where Joe Biden succeeded Donald Trump to become the 46^th US president.  Although we are still in the early days of the new president's term it is refreshing to have an incumbent who is predictable rather than the 'scatter gun' approach adopted by his predecessor. The method may be different, but the impact on the region, and China in particular, is the same with the US continuing its policy of containment through tariffs and sanctions while taking a more multilateral rather than unilateral approach to negotiation. It is safe to say that the relationship between China and the US will remain fraught for many years to come which will have implications for investment in the region as a whole as countries may be forced to choose sides in the ongoing dispute.

Despite the uncertainty, the support provided by fiscal and monetary policy has provided a positive back-drop for asset prices with many equity markets reaching all-time highs over the period. Excess liquidity and the desire to look through the valley to the recovery beyond has prompted a change in market leadership as cyclically sensitive sectors start to claw back some of the underperformance from structural growth. The last three months in particular have seen financials, materials and industrials start to outperform internet related technology stocks and consumer sectors as investors start to question the valuation of 'darling' stocks when they are only growing marginally faster than the out of favour value sectors which are more operationally leveraged to recovery.

The optimism is supported by the expected strong rebound in corporate earnings. Asia Pacific ex Japan is forecast to have 28%⁴ earnings growth in 2021, driven by some of the sectors hard hit in 2020, but also by the materials sector which is benefiting from ever increasing commodity prices. These levels of growth make the current price to earnings valuation more palatable despite the fact that these are trading some way above their long-term averages. On a relative basis, the case is more attractive with the valuation of the MSCI Asia Pacific ex Japan Index relative to the MSCI World Index trading below its long-term average.

The outlook for dividends in the region remains compelling. The consensus expects 'mid-teens' dividend growth, but from what we have seen in the results for the first three months of the year, this number may prove to be conservative especially considering that earnings growth is forecast to be much higher. Analysts in the region tend to be slower to raise dividend forecasts than earnings forecasts, but as more companies announce results and surprise with dividends either being reinstated or dividend pay-out ratios increasing, we expect these forecasts to rise. The backdrop for higher dividends is firmly in place with companies generating excess cash, having little or no debt and paying out a lower percentage of their net profits as dividends than their developed market peers.

Performance

In absolute and relative terms, the last twelve months have been a difficult period for the capital performance of the portfolio. In the last six months the NAV total return is 7.4% in sterling terms compared to 17.5% for the FTSE All World Asia Pacific ex Japan Index and 12.8% for the MSCI Asia Pacific ex Japan High Dividend Yield Index. Although the Company does not have a formal benchmark some explanation is due as to why the numbers look so different in recent times when historically the performance has broadly been between these two indices over time.

Although both value and growth styles have had their time in the sun over the last six months, dividend yield has remained one of the worst performing factors. The high growth, high valuation companies which have driven the outperformance of the broad index are, unsurprisingly, not suited to our process while the high yield index tends to have a large exposure to financials where we remain sceptical of the sustainability of growth and dividends once the initial euphoria of re-opening has subsided. It should also be noted that the Company has a higher dividend yield than the broad index, the high yield index and other income peers, so it is not a big surprise to see a degree of underperformance considering how badly yield as a style has performed.

The stocks in the portfolio are chosen based on their valuation and cash flow generation and their ability to sustain and grow dividends over time. Although there is clearly a value bias to the portfolio (high valuation companies don't pay high dividends) we wouldn't consider ourselves to be purely value managers. We look for companies with the ability to surprise through higher dividends than the market expects as a way to crystalize value. This process has stood us in good stead in the past and will again in the future, but it is fair to say that while the market is focused on themes, whether its structural growth, value, ESG, re-opening or cyclicals, fundamentals tend to be ignored.

We are encouraged, however, by the more recent moves in the portfolio since the period end. We have had strong results from some of the companies owned and these have been rewarded with supportive price action. We are optimistic that the market will continue this trend of rewarding good companies for good results.

Revenue

It may have been a difficult period for capital performance, but the revenue generation remains robust. Over the period total income increased by 6%, aided somewhat by share issuance, compared to the same period last year, with dividend income increasing by 5.1% and option income by 13.3%. These numbers are encouraging especially considering that sterling appreciated by 2.5% compared to Asian currencies over the period. Revenue per share was down slightly due to the increase in issued share capital over the period. The revenue reserve remains at just over half of a full year's distribution.

Over the period we wrote five options and generated £1.2m in premia. All the options written were put options where the income received allowed access to companies which are not high yielding as yet, but are expected to be in the future. At the end of the period, four options were outstanding.  Gearing was used sparingly over the period with a range of between 0% and just over 5% of net asset value. This had a positive, albeit marginal, impact on capital and revenue performance.

Strategy

The ideal stock for inclusion in the portfolio has a combination of growth, value and yield. With strong earnings expected this year, growth is not scarce, but finding opportunities that haven't already priced in these expectations, is more of a challenge. It is fair to say that certain areas of technology and anything to do with green energy and electric vehicles are at valuations that are difficult to justify, whereas some of the enablers of these transitions have been somewhat ignored. The commodity and materials sectors are a prime example of this and have the combination of growth, value and yield. In the portfolio we have increased our exposure to BHP Group Limited and Rio Tinto Limited, and added Fortescue Metals and OZ Minerals as we believe the lack of new supply and strong demand for metals for electric vehicles and alternative energy, as well as improving demand from traditional sources as economies recover, will keep prices buoyant.

We continue to have exposure to technology and, again, prefer the enablers rather than the frontline providers. Samsung Electronics and Taiwan Semiconductor Manufacturing have served us well, although we have been trimming the latter on valuation grounds and increased our exposure to structural growth areas where valuations are more acceptable. Over the period, we have added Chinese software companies Chinasoft International and Venustech, along with gaming company Netease.

We have increased our exposure to financials across the region on a selective basis. Banks have valuation support and arguably better growth prospects as economies recover, but, in some cases, dividends have been restricted by regulator intervention and will take some time to recover to pre Covid-19 levels. This is particularly true of Australia and Singapore so we continue to avoid commercial banks in these two countries. We do find opportunity elsewhere, though, and we have added banks in China, Indonesia, Hong Kong and Korea over the period.

Other notable changes include adding Thai Beverage to the portfolio. This Thai and Vietnamese brewer has been hit hard by the lack of tourism spend in Thailand, but is now at attractive valuations and is a beneficiary of continued strong growth of beer consumption in Vietnam and the eventual re-opening of international travel. Swire Pacific has been added to the portfolio as a re-opening beneficiary. This Hong Kong conglomerate has a 45% stake in Cathay Pacific as well as interests in airline services, oil services and office and retail property in Hong Kong and is trading at a record discount to the sum of its parts.

To fund these acquisitions, we have reduced exposure to telecommunications and Real Estate Investment Trusts, which are attractive from a yield perspective, but are lacking in growth and are susceptible to underperformance as inflation and interest rate expectations increase. 

The portfolio remains focused on North Asia and Australia compared to ASEAN and India with a barbell strategy of high and sustainable yield alongside dividend growth opportunities. The characteristics of the portfolio as at the end of March 2021 show a forward price to earnings ratio of 11.2x with 22.6%⁵ earnings per share growth forecast. These numbers are based on consensus estimates and are compelling compared to history.

Outlook

We remain positive on the outlook for Asian equities in the months ahead. Asian economies are recovering from Covid-19 quicker than most other regions with impressive growth forecast for the next couple of years. Although valuations on the face of it look expensive compared to history, these are distorted by bubble like excesses in some structural growth areas while some of the value and yield dominated sectors offer numerous opportunities.

Dividend yield as a style looks very interesting at current levels.  Despite incredibly low interest rates, the 20% highest yielding stocks in Asia are trading at a record discount to the market price to earnings multiple.  We believe this gap will close and expect interest to return to these areas as the need for income from aging populations in a low interest rate environment is an ongoing theme. While the strong markets have allowed some investors to fulfil their income requirements from capital gains, any volatility in returns will focus minds to the benefits of sustainable income, which should be beneficial for the stocks owned by the Company.

We remain focused on cash flow generative businesses with sustainable and growing dividends which play into the growth dynamics of the Asia Pacific region at reasonable valuations.

Mike Kerley and Sat Duhra

Fund Managers

22 April 2021

3 Thai Office of National Economic and Social Development Council

4  Factset, MSCI

5  Janus Henderson Investors

Principal Risks and Uncertainties

The principal risks and uncertainties associated with the Company's business can be divided into the following main areas:

·      Investment and strategy - adopting an inappropriate investment strategy or underperformance for an extended period leading to a wide discount and hostile shareholders;

·      Accounting, legal and regulatory - failure to maintain accurate accounting records or a breach of legal or regulatory requirements resulting in financial or reputational loss;

·      Operational - disruption to or failure of a third-party service provider leading to loss of shareholder value or reputational damage;

·      Financial - changes in market prices, currency exchange rates, interest rates or poor liquidity or counterparty management leading to a loss of shareholder value.

Further information on these risks and how they are managed is given in the annual report for the year ended 31 August 2020. In the view of the Board these principal risks and uncertainties are as applicable to the remaining six months of the financial year as they were to the six months under review.

Directors' Responsibility Statement

The directors (listed in note 13) confirm that, to the best of their knowledge:

·      the unaudited condensed set of financial statements has been prepared in accordance with IAS 34 - Interim Financial Reporting ('IAS 34') and gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Company as required by Disclosure Guidance and Transparency Rule ('DTR') 4.2.4R;

·      the interim management report includes a fair review of the information required:

-      by DTR 4.2.7R (indication of important events during the first six months of the financial year, and their impact on the unaudited condensed set of financial statements, and a description of principal risks and uncertainties for the remaining six months of the year); and

-      by DTR 4.2.8R (disclosure of related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or the performance of the Company during the period; and any changes in related party transactions described in the latest annual report that could have an impact in the first six months of the current financial year).

Legislation in Jersey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The directors remain responsible for establishing and controlling the process for doing so, and for ensuring that the financial statements are complete and unaltered in any way.

For and on behalf of the Board

John Russell

Chairman

22 April 2021