Podcasts
Environmental, Social and Governance (ESG) podcast
In this podcast we are joined by David Smith, Head of ESG in Asia. David discusses Aberdeen Standard Investments' philosophy on ESG and describes how ESG is integrated into the investment process. He also shares what engagement with companies on ESG looks like in practice.
Recorded on 3 December 2020.
Transcript
Podcasts from Aberdeen Standard Investment Trusts - invest in good company
Host: Hello, and welcome to the latest in the Aberdeen Standard Investment Trusts podcast series. With me today is David Smith, Head of ESG in Asia. We'll be talking about the ESG process at Aberdeen Standard Investments. David, I wonder if we could start with a big picture view of ESG. What is it? Why is it important?
David: Hi, well, thanks for having me. ESG refers to the analysis of environmental and social and governance factors. And really, that's an understanding of the way the company is managed. So that's the governance part. And also the impact that the company is having on the environment and on society at large. As long term investors, we think that understanding these factors help us make a better judgement around the quality of the company. So rather than looking at a narrow information set, just the financial numbers and how much money we think the company is going to make next year, for example, looking at a broader spectrum of information around these E and S and G factors, helps us fully understand the way the company is positioned for long term sustainable growth.
Host: Okay, and then there are different interpretations of ESG. And it can sometimes end up being a bit of an alphabet soup, you know, SRI and ESG and these kind of things. How do people's views tend to differ? And what's the ASI philosophy on this?
David: Absolutely, you’re right. And it can be, can be a bit of an alphabet soup, as you say. There's a there's a variety or spectrum of views as to approaching this, this issue. And we've seen some people have looked at screening and removing certain sectors, which is an approach that might see someone exclude a certain company or a certain country, right up to the other end of the spectrum, which is around the integration of these factors in the investment process and the way you look at companies to better understand the company. And for us, as we look to manage our portfolios, we've looked to integrate ESG as part of that investment process. So our philosophy sees us do a lot of research before we buy companies, look to understand the way they interact with their supply chain, the way they impact the environment, how much are they polluting the sea or the earth or the air? How are they working with employees, for example, and how are senior management incentivized, and how are the board of directors put together. The other difference in approach is that we've seen one approach have a large group of ESG analysts in a HQ of a fund manager, for example, that work loosely with fund managers and contribute indirectly to the investment process. We've chosen an alternate approach whereby we have ESG analysts such as myself, integrated within the investment team within the region that we're looking at, to allow us to be closer to companies, closer to markets, closer to the countries and closer to the issues that we're looking at, and to be able to work more closely with fund managers, as we meet and understand the companies that we’re looking to invest in.
Host: Okay. And then, I mean, certain areas, such as strong governance have presumably always been part of the investment process, and the way that people select companies. But how is the ESG process kind of involved in recent years in terms of both the areas that you look at and also the kind of disclosure you're getting from companies?
David: Yeah, that's a great question. So ESG has always been part of our due diligence process when we're looking at companies. But I think it's fair to say that we have iterated and strengthened the process on ESG over the last, let's say, three, five years or potentially longer. And that's not really been around a change in the process. It's just been a strengthening of the way that we've looked at it. It's been a deeper integration of these factors as part of our process. It's been around putting additional resources within regions within different fund management teams across Aberdeen Standard Investments. We now have dedicated ESG analysts in every region for equities for Aberdeen Standard Investments. I think the information we're getting from corporates is also evolving. So within Asia if you were to go back, well, I've been with the firm for almost a decade now. If you go back over that period of time, at the beginning we saw reasonable disclosure in some of the developed Asian markets. But really, the E and S component of ESG was somewhat nascent in terms of the disclosures and reporting that companies were making. And we've seen the strong focus on ESG reporting from corporates around this region, driven by strong interest from fund managers such as ourselves, and also from broader societal interest really pushed that reporting forward. Now, there's still a big spectrum of quality of reporting. And the challenge in Asia is that it is a market that is characterised by high levels of information asymmetry across the region as to ESG quality. So to an extent, to put it simply, it's very difficult to know how good companies are in terms of ESG by reading the annual report. There are some companies that do really, really well at managing their environmental impact and have really, really good supply chain management, for example. But they’re simply not reporting well on that - they're not telling their story good enough. And I suppose the bigger risk is the companies that report this really, really well and have really nice, glossy annual reports, but are perhaps not managing those risks or minimising their impact as much as we would like them too. So one part of our work as owners of companies and being situated in this region, is to work with the companies that we own in our various portfolios constructively, to encourage them to disclose more, but also to work with them to look at comparable companies across the region from their sector and say well, look, this is an example of the kind of disclosures you could be making. This is the kind of reporting you could be looking to. And also, here's the benefit of making those disclosures and improving your reporting quality, because we think that investors around the world are increasingly looking at ESG factors. And so by having better disclosure, and more fulsome reporting, we think those companies would be more visible to global investors looking at this region. So you see reporting improved, it's still a broad spectrum, but we're spending a lot of time working with companies to help them better tell their story.
Host: And obviously, there's a lot going on internally, do you make any use of external providers or external research?
David: Yeah, absolutely. So I think this goes back to my earlier comments around the high levels of information asymmetry around ESG. So if you are a third party ESG research firm - so some are looking from the outside in - it's sometimes quite difficult to be able to make a judgement as to the ESG quality of a company if you're looking simply at an annual report or other similar disclosures, and they can be fairly sparse. And that may result in a fairly low score for a company, which in some cases, or in many cases, could be quite undeserving, whereas we spend a lot of time with companies, understanding companies and doing our research. So we've developed our own ESG score for companies, whereby we draw on our own experience and our own research to assess the ESG quality of a company. And there can sometimes be big disparities between the way we view our company and the way external researchers view a company because we have a better understanding of the company through our research process. And again, part of the work we do with companies is to improve disclosure to bring the perspective of third party providers up to the level at which we see companies.
Host: I wonder if you could both talk about how ESG is integrated into the investment processes at ASI?
David: Well, the understandings we have of ESG as part of the investment process, take their inspiration largely from the work we do on different sectors. So we look at sectors in some detail, we will sketch out our understanding of where a sector is going over the next, let's say, three to five years, what are the attractions of a sector, what are the drivers of value in that sector? And what are the risks in that sector to achieving that value? And part of that is, is these fundamental trends we see in a sector and part of that is ESG. If you look at the real estate sector that would obviously have different ESG risks and opportunities from for example, utilities, which would be different again, from information technology. And then the people who are doing the research on the companies themselves, so what we would call a stock owner or the stock analyst, integrates those perspectives from the way we look at a sector into the questions that we ask a company. So if you meet a company in the real estate sector, then it's very easy to see, for the analysts that we've got in the region, what are the big ESG risks and opportunities in that sector? And therefore, what are the key issues for that company? And what should we be looking out for in terms of the way they're managing their ESG. So for every research note we do on a company, we're asking questions around ESG, we're trying to understand the ESG quality of the company, and the way they're positioned for long term sustainable growth. So it’s fully integrated into the investment process in as much as it’s the stock analysts themselves who are doing this research rather than a separate team in a separate region, or relying on third party research providers to tell us how to think about ESG.
Host: Okay, and you mentioned that you’re involved with the engagement with companies. Could you just talk a little bit about what that looks like in practice?
David: Sure, there are probably two components of engagement that I'll talk about, we usually divide engagement into either protecting the value of our clients assets, or enhancing the value of our client assets. If you look at protecting the value of client assets, then those tend to be engagements where we are trying to ensure that the companies that we bought, which we think are high quality companies, continue to be high quality companies, and our engagements where we're continuing to get more information around the way the company manages its ESG risks. So these engagements could be around better understanding the way the company manages, for example, its risks, if you look at semiconductor manufacturing, and one of the companies we own across a number of funds is TSMC, a semiconductor manufacturing company in Taiwan, obviously, semiconductor manufacturing is a very water intensive process. And we think that the ability to manage water stress and water risk is a competitive advantage in terms of your ability to operate over the long term. So that discussion is ongoing and helps us better understand and better protect the value of our clients’ investments. The other part of engagement is around enhancing the value of investments. And that's where we work constructively with companies around structures or processes, or around capital allocation, to better understand why decisions are being made. And also to provide constructive feedback as to ways we think that processes or structures or cap allocation could be improved for the benefit of minority shareholders. Now, that's not to say that, that we know everything about running a business, but it's about asking provocative questions around capital allocation, around return hurdles, around why companies continue to invest in in x business or y business, and also drawing on our expertise around this region example where we've got around 50 fund managers on the equities team to say, well, look, we're seeing this trend in this sector in another country, is that something that you're seeing in your sector, or by saying we're seeing this trend or this development at this part of the supply chain - is that something that's affecting you? And how do you think you can manage that? Or even drawing on the work we do globally. So we may own a competitor to an Asian company, in an American fund or European fund, for example, and be able to say, Well, we've seen this happen in the US or in the UK, for example. Is that something that we're seeing in your market? And is that something that you seem to be well positioned to take advantage of? So we can see those two types of engagement, both protect and enhance engagement, and obviously these should be of interest to fund managers and stock analysts, because these have the potential to impact the fundamental value of the companies that we're looking at. So obviously, this is something you do collaboratively with the people that cover the stocks in our portfolios.
Host: Okay, and David, just finally, from you. I mean, what do you think is unique about the approach that you've helped build at ASI?
David: I think what's unique is the degree of integration ESG has into the investment process, both in terms of the process itself, and the individuals who are embedded within the equities team around the world. So as we've mentioned, there are three of us in Singapore who work with the 50 or so fund managers across the region. I think what's unique is the degree of integration we have into discussions and understandings of companies around the region. So it's not easy to discuss ESG from a knowledgeable perspective and an experienced perspective, understanding a company's unique position in an industry, position in a value chain, what are the key drivers of value, and competitive pressures that that company may be facing? It may be easy to send the odd letter to a company to say, we think you should do X or Y better, otherwise we're going to sell you, as in, it's a lot more difficult to fully understand the way that the company makes money, what the risks are around that company, what the competitive pressures are that that company is feeling, how industries are going to evolve, and how positioned that company is for these changes to the industry. So it's a lot more hard work than having a separate ESG function. But we think ultimately, it gives us a richer insight. I think the other unique facet of what we do is just the length of time we've been doing it. So this isn’t something that we've been doing just over the last couple of years. We've been doing this for the last couple of decades, and we've been able to build on the experience we've gleaned looking at ESG for the last two, three decades to iterate forward to where we are now in terms of our industry understanding. So a few things have been unique. But I think I would certainly point to the degree of integration we've got both in terms of the people and the way that it's looked at in terms of investment process.
Host: Great. Okay. Thank you, David for those insights today. And thank you to our listeners for tuning in. And please do look out for future episodes.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up, and investors may get back less than the amount invested. Past performance is not a guide to future returns. Return projections are estimates and provide no guarantee of future results.
A global income podcast
In this podcast we are joined by Bruce Stout, manager of Murray International Trust, Yoojeong Oh, manager of Aberdeen Asian Income Fund and Iain Pyle, manager of Shires Income. They discuss how they have managed their respective income mandates in 2020, as well as the prospects for income seekers in 2020.
Recorded on 3 December 2020.
Transcript
Podcasts from Aberdeen Standard Investment Trusts - invest in good company
Interviewer: Hello, and welcome to the latest in the Aberdeen Standard Investment Trust podcast series. On today's income panel, we have fund managers Bruce Stout, Yoojeong Oh and Iain Pyle to talk about how they've managed their income mandate this year, and the prospects for 2021. Welcome, everyone. Now, Bruce, we'll start with you. It's been a tough year for income seekers. I wondered if you could give us a global view on the dividend picture, which areas have been resilient and which have been weaker.
Bruce: Yeah, tough is one word to describe it. It is probably the hardest year, I think we've ever seen in terms of income in global financial markets. We were just having a look back and dividend recessions are actually not that common in history, there's probably been about half a dozen in the last hundred years. But when they're concentrated all around the world, like they have been in the last 12 months, they are very deep and very painful. What we saw in terms of resilience, I guess, was sectors such as telecommunications continued to be okay. Consumer staples on the whole were good and tech companies that pay dividends, the ones that we're interested in, things like Taiwan Semi, and Samsung and GlobalWafers have continued to pay good dividends. As did healthcare and I suppose one of the surprise areas of strength for dividends was in commodities, particularly things like copper and iron ore, and also lithium. But where dividends were weak, they were very weak. And we saw draconian cuts in banks, in energy companies, insurance. And the more sort of consumer discretionary industries such as airports, travel and tourism. The final thing I would probably say about the past year for dividends is it's really been an attack on all fronts, because we've had companies that have been leveraged, and they've had no cash and had to cut. Thankfully, we don't have exposure to those types of businesses. But we've also had some companies where they've had strong balance sheets and good cash, but they’ve still cut because of the uncertainty. And then the more difficult areas have been areas where regulators have demanded cuts in things like banks and insurance, which make up about 25% of global dividends in the past so that was tough. And politicians have weighed into the argument as well, demanding cuts in some partially state owned companies. So an absolute tsunami for dividends over the past 12 months in a tough environment to negotiate.
Interviewer: And what are you seeing now from companies as there's more visibility on earnings? Are you starting to see some dividends restored? And is that focused on certain sectors?
Bruce: Yes, it's quite interesting. I mean, we don't blame any companies for suspending or cancelling dividends last year because there was so much uncertainty, it was very difficult for them to get trading statements, it was very difficult to see what was happening. And of course, they wanted to maintain liquidity. And, and that was just the nature of the environment that we were in. But there's a bit more confidence coming back to some visibility and transparency in recovery, particularly in Asia and emerging areas that don't have the overhang perhaps that the developed world has. And we’ve seen a couple of specials actually recently, one in Indo Cement in Indonesia and Sociedad Quimica Y Minera in Chile, and we've had one or two companies that are talking about restoring the dividends in the first half of next year. So hopefully it will be a more positive outlook the next year when we start to see recovery take hold.
Interviewer: Okay and finally, do you have any views on the outlook for 2021? Any themes you have picked up for that?
Bruce: Yeah, I mean, apart from the general recovery in an environment where people might start to get back to normal, I think there are two aspects here that are very, very important for the future of dividends going forward. One is corporate balance sheets, and that the companies are strong enough to invest and to return more cash to shareholders, and there's absolutely no doubt on a global basis that leads us to Asia, because the debt to equity, in general in those areas is much, much lower than a place like the United States, for example, where companies have been aggressively borrowing in a low interest rate environment for the last five years. And debt to equity on the S&P 500 is up about 70%. So the affordability’s not there in the US and the will’s not there as well. But the other thing that's also very important is the shape of the yield curves in various countries going forward from here, because, again, in a place like Asia where a 10 year bond might be 4 or 5% in India and Indonesia, then an equity yield of 4 or 5% is perfectly normal. And those are the sort of levels that are very attractive. But in the developed world where 10 year bond yields are practically zero, then it will be very interesting in the next five years, to see at what level companies restore dividends, do they go back to the traditional 4 or 5%? Or will they be lower? And that's a question we can't answer at the moment. But it will be very important for the future level of dividends going forward.
Interviewer: Okay, great. Thank you, Bruce. Yoojeong, what's been the picture on dividends in Asia?
Yoojeong: Yeah, so I can just pick up on some of the points that Bruce has just made. As one of the fastest growing areas of the world, Asia really entered the crisis with a lower base as far as dividend yields were concerned. And so dividend cuts within the region have been more modest relative to more developed regions. And of course, Asia has sold down too in March and April. And we've also seen lockdowns and travel restrictions here as well, which hurt the tourism related businesses in particular. However, the recovery in markets since then has been very strong, earnings growth, and hence dividend growth, for the region is driven by consumption. And that hasn't gone away. So favourable demographics, and the rising middle income story remains very much intact.
Interviewer: And what steps have you been taking to kind of navigate this environment, sort of steer the portfolio to the winners and avoid those that are cutting?
Yoojeong: When the pandemic hit, I didn't think there was much time to try and reposition the portfolio. But fortunately, less than 5% of the Asian Income Fund was invested at the time in companies who ended up suspending their dividend. And these were, as Bruce mentioned, those that were mandated by the regulator rather than a result of financial distress. Turnover in the fund remained low during the year. So we're still looking below 20%. And the reason we were able to avoid the bulk of dividend cancellation is due to our investment process, which focuses on good quality companies that have strong business franchises, and cash flow generation along with robust balance sheets. We spend quite a fair bit of time looking at ESG factors as well, and how resilient these frameworks are, which often tie into prudence and that culture of respecting total returns for minority shareholders as well. So dividend growth on an absolute basis is lower this year, as expected given the disruption seen to earnings growth over the summer months in particular, but actually, earnings recovery in Asia has been quick. The Asian Income Fund has enjoyed some dividend increases this year as well, as well as special dividends and cash returns from the companies that we invest in.
Interviewer: Okay, and where are you finding those sources of resilient income? I mean, are they across multiple sectors? Or do they tend to be in certain areas?
Yoojeong: Yeah, so we're looking for resilient income and income growth. And again, as Bruce touched upon at the beginning, Asia is really home to the global leaders in technology, and that's been a huge beneficiary of the working from home trade that we've seen this year. So whilst we don't invest in the internet stocks that don't pay dividends, we've banked some pretty strong share price gains from the semiconductor manufacturers TSMC in Taiwan, and Samsung Electronics in Korea to sit on cash balance sheets and they pay good dividends. And they’re looking at a strong cyclical recovery as we head into 2021 as well. So these two stocks are our largest positions within the fund. But we also invest selectively in the supply chain as well, where we see dominant market share and dividend growth. So an example there would be the mid cap company GlobalWafers in Taiwan, who make the silicon wafers that are the raw material for both Samsung Electronics and TSMC. And, as mentioned earlier there, consumption remains well supported in Asia. And we've benefited from dividend growth this year from a more diverse range of sectors than just technology. So we've seen special dividends from convenience store operators in Hong Kong, to e-commerce companies in Taiwan. And we've been invested very broadly across petrol station REITs in Australia, to equipment suppliers for COVID testing kits in Singapore. So there's been a lot of positive dividend news over the year as well from a wide range of sectors. And we're able to collect income from this broad range of sectors and markets, which has been particularly important during these volatile times such as the one we’ve all lived through this year.
Interviewer: Great. Okay. Thank you, Yoojeong. Coming to you Iain, now the UK has definitely been one of the toughest areas this year. I wonder if you could talk a bit about how you've navigated this environment?
Iain: Yeah, of course. So with the UK being a fairly income focused market compared to Asia, I think it's felt dividend cuts this year, more than many other places. And I think dividends for the for the market are down about 45%, which is obviously a pretty significant cut. In terms of how we've navigated it in Shires, I think we came into the cuts in a reasonably good position, the weighting towards higher quality companies, and a strong position in preference shares where dividends have been absolutely rock solid has definitely been helpful. And it means we've had less exposure to the sectors that Bruce mentioned where you've seen the bulk of the cuts, but clearly along with any income portfolio in the UK, they haven't been immune from dividend cuts this year. And in terms of managing through those, we've tried to bucket the dividend cutters in three sectors. So first of all, you've got the ones where balance sheet is okay, cash generation still okay, but there's a regulatory requirement to suspend dividends. And that's primarily the banks in the UK, so in our portfolio, things like Standard Chartered and Close Brothers. And in both those cases, actually, cash generation has remained strong, capital positions remain in a pretty good place. And we're confident that when dividend bans are lifted, hopefully early next year, we'll see dividends resume. So it's fairly easy to sit and hold on to those first kind of companies. The second bucket is the companies where you've got a really sharp, short and hopefully temporary shortfall in cash generation, and they can be things that are consumer facing, something like Howden Joinery selling kitchens in the UK is a good example, where no one is buying a kitchen in the second quarter of this year. There's no cash generation, the right decision is to suspend dividends, but when the market normalises we'd expect cash generation to come back, the balance sheet is in a good situation and dividends will resume and in fact, Howdens is one which has resumed paying dividends already. And again, where we like the companies where they're high quality names, we're going to hold on to those positions and be a bit patient. And the third bucket is a difficult one – it’s where actually, even when the world normalises next year hopefully, there will be some structural change and where balance sheets have deteriorated to such an extent that we don't see income coming back from those companies within an investable timeframe. And we had very few of those in the portfolio but Cineworld is probably an example where that industry may well structurally change. And from an income perspective, it's time to move on. So we've managed, we've managed through it that way. But I think the nice thing is that income within Shires has been down substantially less than the market. So we've come into it in a good position and that has paid dividends.
Interviewer: Alright. And you’ve seen some of the biggest UK dividend payers cut. Is there a sense that the pandemic could reshape the dividend landscape in the UK, moving away from some of those old economy companies that have dominated in previous years?
Iain: I think there is certainly going to be a little bit of a shuffling of the pack. If you think about the big income constituents of the index historically, then actually a lot of those names have been very resilient. So, utilities, health care, tobacco, telecoms and even the miners actually have all been very resilient through this year. The two areas where we've seen dividend cuts have been the banks and the oil companies. And the banks, I think is, a temporary thing, it will come back probably at a slightly lower level than it was pre crisis. The oil companies is a more of a structural thing, I think that they transition through an energy change over the next few decades. And if you look at the top dividend payers this time last year, then the top five, or the top three, were HSBC, Royal Dutch Shell and BP and they have now all slipped out of the top five. So that's obviously quite a big shift in the makeup of income within the UK market.
Interviewer: Okay, and a question to everyone now, about the extent to which you've had to draw on reserves to shore up dividend payments to shareholders this year, and the impact that's had on reserves going forward. Bruce, could I put that to you first?
Bruce: Yeah, so obviously, the very attractive aspect of the investment trust as a business is that the trust has reserves in order to cover this and Murray International has a lot of reserves, I can't give you the exact number for the simple reason that I don't know it yet. The year end is the end of December. But the board have already committed to maintaining the dividend, you know, through this difficult year. And over the last 5 years, or 10 years, or whatever we've constantly been adding to the services and in fact have added 30 million in the last 10 years. So that’s what the reserves are there for - they’re there for a rainy day. And this has been an absolute downpour this year. So hopefully, you know, next year, we'll get back into a more stable situation. And we'll just use whatever reserves we have to use this year to through it.
Interviewer: Okay, and Yoojoeng, same question to you.
Yoojeong: Yep, very similar for Asian Income. We started 2020 with close to two thirds of dividends covered by reserves, so a very healthy safety buffer that we’ve built up over the years. For the past 12 years, the Asian Income Fund has grown the dividend per share paid to shareholders. And we would also very much like to maintain this trend, even during this downpour that Bruce alludes to. So this will mean we will dip into reserves for the first time this year, but it will still only be very modest, given some of the dividend trends I spoke about earlier. And the majority of the reserves will remain untouched for future rainy days.
Interviewer:
Great. And finally you Iain?
Iain: Yeah, very much the same again for Shires - we came into this year with around one year of dividends covered by reserves. And this year, clearly, we're going to have to draw down on that slightly. But actually, it'll be at a pretty low level and going forwards I think we – we’ve got an outlook which will hopefully allow us to build back towards coverage within the next few years. So the drawing should be relatively modest.
Interviewer:
Great. And then just finally, Iain, I'll come to you first on this. If you had sort of one or two things that an income seekers should really bear in mind for the year ahead, what would they be?
Iain: I think, have a little bit of patience on income. As Bruce alluded to earlier, a lot of companies are going to come out of this year with a balance sheet slightly more stretched. And we're probably going to go into a restocking cycle, which is going to have a draw on cash through next year. And therefore it might take a little bit of time for companies to restart dividends and to get dividends back up to prior levels. So we'll need to be patient. That doesn't mean those aren't very good investments and will still generate a good level of income. But we're not going to snap back to 2019 level straight away. And also, I think be aware of a bit of a change of mix of how we earn income going forwards, in that the sources of income will be different as we've already discussed. And we'll probably see a shift away from high levels of ordinary dividends to more something more flexible going forwards because companies will not want to put themselves in a position where they need to cut anytime in the near term. So those things we need to think about as investors but hopefully with dividends, we're going to be in a period where we can see some decent dividend growth over the next few years and that's actually when income as a style performs better.
Interviewer: Okay, great. Yoojeong, would you add anything to that?
Yoojeong: Yeah, so there's a lot of macro stories coming out that people are focusing on. We're talking about vaccines, we're talking about all this - all these stimulus measures globally unwinding and also the risk of inflation as we talk about trade frictions, particularly impacting regions of Asia, with supply chains having to reorganise as a result of that, so these are all things that markets are worried about. And we are worried about too, as well. But in the context of that, in the context of the macro noise, I think what we have consistently done over the past 10 plus years is really stick to what we do. And that's to continue to invest in good quality companies that are generating strong cash flows, who can support good dividend yield, as well as dividend growth. And that will hopefully enable us to continue delivering a good total return package to shareholders in Asian Income.
Interviewer: Great, thank you. And a final word from you, Bruce, if I could on that.
Bruce: Yeah, I guess – one thing that we've learned over the years is that when you have concentrated sources of income, you’re always very vulnerable. So it's something that at Murray International we've tried to avoid for a long time and, and the world has changed to the point where there are many more companies and markets that have embraced total return to shareholder and do pay higher and growing dividends, perhaps the US is the one anomaly there. So we will continue to focus on diversification because diversification is key in terms of countries and sectors, and different types of businesses, so that you have a spread of income sources throughout the portfolio. And it's not just dependent on one sector or one industry where if something happens, then you get into difficulty. So diversification for us continues to be key. Not by yield, but by good balance sheets so our dividends can grow.
Interviewer: Great. Okay. Thank you everyone for those insights today and to our listeners for tuning in. You can find out more about the Aberdeen trusts at www.invtrusts.co.uk and please do look out for future podcasts.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only, and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments of products mentioned herein, and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up, and investors may get back less than the amount invested. Past performance is not a guide to future returns. Return projections are estimates and provide no guarantee of future results.
Aberdeen New Thai Investment Trust: update from the manager
In this podcast, Aberdeen New Thai Investment Trust manager Orsen Karnburisudthi provides an update on Thailand's recovery from the pandemic and discusses recent political developments in the country. He also explores the impact on dividends in Thailand this year and discusses the outlook for 2021.
Recorded on 25 November 2020.
Transcript
Podcasts from Aberdeen Standard Investment Trusts - invest in good company
Interviewer: Welcome to the latest in our Aberdeen Standard Investment Trusts podcast series. With me today is the manager of the Aberdeen New Thai Investment Trust, Orsen Karnburisudthi. We'll be talking about how Thailand is recovering from the pandemic and whether recent political developments are likely to have any impact on the company. Welcome Orsen. Now, economic data appears to be improving in the region, are you generally confident that the recovery is building momentum?
Orsen: Yes, if you look at Thailand, the GDP growth has recovered from the second quarter, the second quarter GDP decreased 12% year on year, the third quarter is still down compared with the third quarter last year, but down less with 6.4%. This is better than expectations of 8 to 9%. And if you look at GDP growth for the full year, the growth would be about minus 6%, which is much better than estimates earlier in the year at the peak of the Covid pandemic in March and April. Much of this will come from government spending. These have been strong, both normal spending by the government as well as capital investments. In the third quarter both of these have been positive. The biggest uncertainty remains Covid-19. Thailand, fortunately, is doing better than many countries, including neighbours.
Interviewer: And are there still some sectors set to recover?. I mean, how about the region’s all important tourism sector, for example.
Orsen: I'll start with the sector overall. And then touch on tourism. The private sector has recovered from the second quarter, understandably. The third quarter is still down year on year, the fourth quarter as well. And not back to the baseline of 2019. So it's still quarter on quarter momentum, but it could still take a few quarters to come back to levels of last year. International tourism is a large variable. We're expecting foreign tourists of just under 7 million this year. But take into account that 6 million is before the lockdown earlier this year. So just really not much tourist arrivals this year. The figure next year, the estimate is about 5 million international tourist arrivals, the latest estimate, and this is assuming a vaccine would be available in the third quarter of next year. So that's the one large variable for 2020. In the meantime, where we have seen, areas of improvement - government has been subsidising spending for consumers that ranges from cash handouts, to co-payment schemes, and even domestic travel schemes where the government subsidises up to 40% of a hotel room and dining. So this encourages domestic tourism. Besides these subsidies, if you're looking forward to global trade, exports look promising with the result of the US elections with Mr. Biden winning but this will take time to be reflected for global recovery in trade.
Interviewer: Okay, and I mean, there has been some political upsets recently with some kind of high profile protests against the king. Are these sort of isolated incidents, or can you see them having any economic impact?
Orsen: The short answer is immediately it's limited to economic recoveries and momentum continues. But more in the protesters the protest, rather, it's more across many issues, these including the monarchy - touching upon the monarchy as well. Most protesters are students, first time voters. And these protests have actually commenced before Covid-19 – it actually started earlier this year. A couple factors include angst, disenfranchisement, a popular party that they like was disbanded, not liking the government, the way the Constitution is written, the way the Senate is selected, and just having a Prime Minister since 2014. Quite a long time, along with the economic slowdown and the inequality that ensues. But on the fortunate side, the protests have been non-violent. It's been stretched out for several months already. I think the peaceful protests will continue. And it's the issue on how the institutions will be performed going forward. It will be stretched out because there has been quite a lot of reforms in those social, economic and political fronts.
Interviewer: And while this has been going on, what's been happening in the Thai stock market? Has there been any kind of notable winners and losers, what's been the overall performance?
Orsen: The market is still down year to date, like many other stock markets. There’s been different winners and losers over the course of 2020. If you start with the initial plunge with Covid, most stocks sell as well as energy. There was a recovery in May, June, July. The market was sideways August, September, October, a huge drop - a weakness - in October followed by the November rally of risk on attitude with prospects of a vaccine. So earlier in the year, low oil prices helped manufacturers that import including logistics companies and distributors, the lifting of lockdown helped retailers and the latest prospects of a vaccine, travelling tourism and competitors, for example, airports, hotels, hospitals, shopping malls. On the whole, the larger companies in each sector benefited more than overall, particularly those that are listed on the stock market.
Interviewer: And how do relative valuations look today, both regionally and compared to kind of international peers?
Orsen: If you look at the market earnings growth at the depth of the crisis, earnings estimates are down 18 to 20%. That's earnings for this year. This has improved to 11, 12% just by way of a better than expected recoveries since the second quarter, to rebound to 2019 level would take a bit longer. EPS is still down this year. So we're looking towards the end of 2021. Where earnings should pull back to the levels of 2019. And we're seeing 2022 growth of about 10%. If you look at PE ratings, the market is trading on 17 times 2021 and 16 times 2022. It is slightly elevated, I think historically, a level of 14 to 15 times would be more attractive. It's just the fact that there isn't much earning support at the moment. And expectations are running slightly ahead. Just given the developments of Covid-19.
Interviewer: Okay, and looking at the New Thai portfolio now, have you made any recent changes? Are there any sort of notable themes running through the Trust today?
Orsen: Yes, for the past three to six months, we have increased weight in several sectors. The first is services. We are underweight the sector but we have decreased this underweight so this would include services such as transport, for example, Airports of Thailand, and also increasing more weights in retailers, those that are benefiting from the recovery in spending. We have also increased weights in tech – technology, not only electronics companies, the assemblers, the exporters, but also the mobile telephony companies, the operators in Thailand. We are slightly underweight technology now and the underweight has decreased over the quarters. We have decreased weights in property and construction. For the most part, this is property developers, we don't hold property developers anymore, focusing more on asset owners with recurring rental income. We have also trimmed materials company particularly after the run up in the second quarter for example, cement companies. We have also decreased weights in financials, particularly insurance, several banks especially the large banks and some non bank financials. Within energy and resources, we also refreshed the sectors adding new utilities names. It's a mix of power utilities and water with some exposure to infrastructure investment. So these are the main changes: increased weights in services and technology, decreased weights in property, construction and some financials and just refreshing of names within energy and resources.
Interviewer: And what sort of feedback are you getting from companies that you're speaking to at the moment? Are they generally kind of optimistic or pessimistic looking into 2021?
Orsen: The drop in third quarter sales is less than initially expected. It's still down year on year, the third quarter, but the trajectory is better than expected. Again, a reflection of macro, you can see this in same store sales growth of retailers which is less negative year on year, asset quality from banks, meaning low, lower than expected, NPL formation, recovery in consumer durable sales like automobiles. Measurement is cautiously optimistic - the largest corporates with the best financial resources are improving their market shares. Again the concern overall is just that non listed, smaller companies are benefiting less or being less optimistic, suffering more from the implications of the overall economy.
Interviewer: And now the Trust currently has a yield of over 5% - how have dividends from Thai companies held up?
Orsen: Typically companies pay as a percentage of profits. And most would have a declared minimum payout ratio. This hasn't changed. At the margin, you've seen interim dividends for this year to be down slightly just by way of lower profits. Some companies do keep an absolute level stable. So even if profits are down, some companies do increase their payout ratios just to maintain the absolute level of dividends. What we're seeing this year is average dividend yields of the companies that we invest to be around 4%. I think that will be maintained if not improved upon. The upside for dividends from the Trust would be capital gains, or any gains, especially the market run up and the Trust also has reserves upon which dividends can be drawn.
Interviewer: Okay, what is the Trust’s current position on gearing, do you still have debt in the Trust?
Orsen: Gearing levels have ranged from 10 to 15%. It is currently towards the mid to high end of that range. The absolute debt level for the Trust is unchanged since the fourth quarter of 2019, it’s just as the percentage change with market movements. So if the market fell, for example, towards the end of March and the end of October, the gearing would increase just by way of the NAV of the Trust coming down. But nevertheless, we do intend to keep gearing within this range and with the absolute debt unchanged for the Trust.
Interviewer: And finally, there are more promising signs as we move into 2021. You know, the vaccine, better treatments, this kind of thing. I wonder if you could just give us a flavour of your thinking on the outlook?
Orsen: GDP will continue to be down year and year for the next one to two quarters just by comparison. It's better on a quarter and quarter basis. But if you look at the nine months, I mentioned third quarter earlier, of minus 6.49 – nine months is minus 6.7. So not bad and for a four year expectation of minus 6.28 so still a couple more quarters of weak year on year numbers and positive quarter on quarter numbers. The runway for 2021 would be a 3.5 to 4.5% growth, GDP growth. The momentum not only for stocks and for earnings will come from the improving macro and additional upside, just from tourism and travel, which I think is not yet totally factored into expectations.
Interviewer: Great, okay. Thank you Orsen for those insights today. And thank you to our listeners for tuning in. You can find out more about the trust at www.newthai-trust.co.uk. And please do look out for future updates.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer investment recommendation or solicitation to deal in any of the investments of products mentioned herein does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen standard investments. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns, return projections or estimates and provide no guarantee of future results.
Aberdeen New India Investment Trust: update from the manager
In this podcast, Aberdeen New India Investment Trust manager James Thom provides an update on the signs of recovery he is seeing in India. He also discusses the impact on Indian stock markets, the positioning of the Trust and the outlook for 2021.
Recorded on 24 November 2020.
Transcript
Podcasts from Aberdeen Standard Investment Trusts - invest in good company
Interviewer: Hello, and welcome to the latest in the Aberdeen Standard Investment Trusts Podcast series. Today we're talking to James Thom, co-manager on the Aberdeen New India Investment Trust about how India is emerging from the pandemic. Welcome, James. I wonder if we could start with an update on India's economy - are there signs of a recovery?
James: Yes, there are signs now, which is quite encouraging because India has been amongst the hardest hit of the Asian countries. And we saw when the virus first hit, a pretty draconian lockdown, which had a very severe impact on the Indian economy. We saw a contraction in GDP growth of more than 20% in the quarter ending June. So it was pretty grim for some time there. But lockdowns have now been eased and removed. Economic activity is coming back. And I think there had been some speculation around whether this was just kind of pent up demand through the kind of lockdown period, and whether it could be sustained. But we're now into several months of sustained strong growth across industries, in fact. So it looks, it looks pretty encouraging at this point with a meaningful rebound.
James: And during this period, the Indian government's been quite keen to keep spending under control and retain its credit rating. Has that held back the recovery at all?
Interviewer: To some extent, I think that that is the case, though India, arguably to their credit has been quite disciplined in trying to stick to the budget deficit targets, which are in kind of a negative territory. And that has constrained their fiscal response certainly relative to many other countries in the region. But I think the bigger impact really on the economy was the lockdown that I just referred to. And clearly, that's now been lifted and the economy is coming back quite nicely. And although India has been somewhat constrained in a fiscal standpoint, there's been quite a bit of support from a monetary standpoint with a succession of rate cuts that have been put in place. And we have seen further fiscal support come through in recent months, and a raft of other kind of support measures to support the financial system in particular, things like loan moratoriums, and general kind of liquidity being pumped in. So overall, I think yes, it's not been quite the size and scale of response to be seen from other governments, but it's been sufficient.
Interviewer: And what's happened to stock markets during this period? I mean, have you seen the same sort of dramatic fall and then recovery that you've seen in other major stock markets?
James: Yes, we have. It really has been dramatic and the markets been surprisingly strong, it is now back into positive territory year to date, it's up about 7 or 8% and hitting fresh highs again, and that marks that kind of really quite staggering kind of trough to peak return of you know, almost 70% I think from the lows in late March in local currency terms. Having said that, I think India has still lagged the broader Asia region. So if you look at regional Asia Pacific ex Japan index, it has performed even better with some of the North Asian markets like China and Taiwan, Korea, outperforming India. And really that has just been, I think, a reflection of two things, one, just having got a firmer grip on the virus pandemic earlier and therefore, they've been able to emerge from that sooner than India. And we've seen very strong performance in the sort of technology and internet sector in these markets. And that's just not really a part of the market in India at this point.
Interviewer: And have you seen that same polarisation in Indian stock markets where the winners have won very big and the losers have really been sold off very heavily. So while there's been a kind of recovery in aggregate it's actually quite bifurcated as is typical in many of the other markets?
James: Yes. So I think there has been a big kind of dispersion of returns across sectors. It is a bit different to other markets, as I say, I think, you know, in northern Asia, China in particular, or even you know, if you look further afield to the US, it's been the tech companies, the internet stocks, like, you know, Tencent and Amazon, Tencent and Alibaba in China or Amazon, Facebook, Google in the US, those have really been sort of beneficiaries almost in the pandemic and other kind of tech semiconductor type companies. India doesn't really have those types of companies. So it hasn't had that same sort of very strong returns coming from the tech sector, although it does have a very strong and large IT services sector. And that has been a standout performer with these companies also I think being beneficiaries of as the pandemic as their clients push for more digital services and a move to the Cloud. And otherwise, it's been somewhat similar. We've seen the healthcare sector perform very well as you would expect, and seen elsewhere in the world. Consumer staples, have generally done their job and being quite defensive. And then at the other end of the spectrum, the harder hit sectors have been things like financials, banks, real estate, consumer discretionary. And that's been a very similar picture in India, although now with the news on the vaccine and the normalisation in the economy, we're seeing those sectors now bouncing back quite nicely.
Interviewer: Against that backdrop, what does the portfolio look like today, are there kind of themes you can pick up on that are kind of running through it?
James: Well, it remains a high conviction focused portfolio of high quality stocks that continue to select from the bottom up based on our own first-hand research. And we really continue to look to the long term compounders of companies with strong market positions and clear, sustainable competitive advantage, I think we've had put a big focus or emphasis on balance sheet strengths through this period. It's always a sort of core part of our stock selection criteria. But I think all the more important through a period of economic turmoil like we've just been through. So the balance sheets in the companies that we hold in the portfolio are rock solid and cash flows have taken a knock but are generally pretty robust. And I think we've kind of weeded out intentionally anything where we had question marks or doubts, from a sort of quality perspective. Having said that, it remains a well diversified portfolio. We have big positions, still in the IT services sector, which as I’ve said have been a beneficiary of the pandemic this year. And we've complemented that with a couple of newer holdings. And although as I said, the internet sector is not a big sector in the Indian stock market, at least not yet, there are a few listed companies there and we've added a couple that we like and that I think are high quality players on that scene, so those have gone in. We have a big position spread in the financial sector, favouring the leading private sector banks, and those have held up much better than their public sector rivals and they continue to take share and we've more recently complimented those holdings with a couple of stocks in the life insurance sector, which remains a sort of structural long term growth story. And then I think the consumer sector and material sectors which encompasses both cement companies and paint companies play on affordable housing and urbanisation, you know, those are large positions, too. So overall, I think the portfolio remains a concentrated, active portfolio, but well aligned to some strong multi-year structural growth trends and themes.
Interviewer: Okay, are there any favoured holdings that you could highlight just as a sort of example of your process in action?
James: Yes, I mean, maybe if I just focus on HDFC - Housing Development Finance Corp given that’s the largest holding in the portfolio currently at around 10% of the fund. You know, to my mind, that is the kind of perfect example of a long term compounder high quality stock that we've held for a very long time and has served us very well. It's a financial conglomerate and its core business is in low cost mortgages. But it also has a stake in a bank, a life insurance company and an asset management business which are kind of market leading businesses in their own right. And really what they've done over the decades is work out how to lend in a sort of risk adjusted way to the middle to low income segments in India, and have developed the right systems and processes. And on the back of that, they have a very capable and experienced management team who have been able to deliver very consistent growth, but also returns and asset quality over the years, and that, over time being reflected in very strong share price performance. And I think, you know, although, you know, this is a business you've held for a long time, I think that the growth potential for this business remains very compelling, as I say, as India continues to see further urbanisation and demand for housing and therefore mortgages and other financial services products. So hence why it remains our core position.
Interviewer: Okay, I wonder if we could skip about a bit here and look at Modi. Now, he's been in power now for six years and he's put in place a reform programme. I wonder what you think of that, and how it's sort of developing the Indian economy, whether it's been a success? Is it ongoing? And you know, the prospects in future?
James: Well, I think Modi remains an extremely popular leader in India, despite the struggles with the virus and pandemic, that we’ve talked about already. And despite some reform efforts that have not, frankly not been all that successful, he seems to sort of, say the Big Bang type reform. And sometimes those are quite effective. And they've been, I think, positive for Indians, and for the economy. But not always. I think the example that stands out where it was a bit of a miss, was demonetisation efforts of reform, which really wasn't effective and caused a huge amount of disruption in the economy. Having said that, I think some of his reform efforts have been, have been very encouraging and welcome. So he's implemented and used for the bankruptcy court code. And I think that's fundamental for the efficient working of the Indian corporate environment and to banks being able to work through and restructure loans to this banking system that remains kind of heavily burdened by bad debts. I think that's a big positive. And GST the goods and services tax, I think, is another fantastic achievements - one that taken, you know - had been the focus of successive governments over the decades, but finally, Modi managed to push it through, and there is your question more to come. And we are seeing and have seen in recent months and weeks, two big new reforms in the area of labour and agriculture - it remains to be seen how effectively those get implemented. And that, as with many things in India, is key. But certainly from a headline perspective, these look like very encouraging reforms too and there's a big focus on attracting foreign direct investment into targeted sectors as well. So I think there's more to come. And, you know, whilst there have been hits and misses, on balance, I think the hits outweigh the misses.
Interviewer: And so it could it could be a catalyst for stronger economic performance going forward as well?
James: Yes, potentially, as I say, execution is key. So if you take new policy around attracting foreign direct investment, as an example for his making India campaign that was launched was kind of much fanfare a few years back in his first term, but didn't really deliver in terms of, you know, new investment and flows into India. It's been revamped and rethought through and relaunched and is now far more targeted and supported with key kind of incentive schemes, and there is you know, some evidence of early success as India is attracting a huge amount actually of investment into the smartphone manufacturing supply chain with a large number, for example of Apple's suppliers, moving to India and setting up plants to manufacture parts. And the idea is that they will now roll this out into other sectors as well. So, if successful and I say, execution is key, then yes, I think it could provide a meaningful boost to the economic prospects of the country.
Interviewer: And how does valuations look today? I mean, India has historically traded at something of a premium to other kind of Asian markets. Is that still true? Or have you found that the pandemic has actually adjusted that a little?
James: It's still true. India's never been cheap. And even with the pandemic, and although India has lagged the broader Asia region as I said, it continues to trade at a premium. And that reflects the sort of longer term growth potential of a market which is structurally, you know, set to grow, given the size of the population and economy at a kind of relatively nascent stage of its development. So I think India will always trade at a premium. Valuations this year are a little hard to decipher, not just in India, but you know, right across markets, and given the kind of disruption to earnings, so I think we've tended to look at earnings on a sort of two year four basis or earnings multiples on a two year four basis, or on a sort of price to book ratio instead, which has been less disrupted than earnings. And there, I think you see, yes, India is still trading at a premium, but it's not looking too out of whack with historical levels. And inevitably, you have to really drill into the detail. And there are some very expensive stocks in India. But I think there is still some pockets of value as well. And I would point to a stock like HDFC. Where I think the valuation there is an example, in a financial sector which has been beaten down over the course of the year, I think they're, you know, there is still value there.
Interviewer: Great. And I wonder if we could just finish off by talking a little bit about the outlook for 2021?
James: Well, I'm more optimistic now, in my outlook than I have been for quite some time. India has been through a pretty rough two or three years, in fact, so if we rewind to 2019, it was kind of in the midst of something of a financial crisis, really, with bad debt in the financial system. And this was kind of weighing on lending and the availability of credit and therefore growth more broadly. And it felt like it was just about emerging from that. And then, of course, the pandemic hit, and that and the lockdown and the very severe impact that had on the economy. And now finally it feels like the country’s emerging from that. And whilst there's been a lot of caution and concern, understandably, when talking to companies now, there is a very clear sense that the tone is changing. Management teams are finally becoming a bit more optimistic. And as I say, there was speculation that a lot of the kind of demand that we were seeing post lockdown was just pent up demand. But that seems now to be sustained. And whilst there's a risk, of course, that we'll see a second wave of the virus in India and we certainly shouldn't kind of rule that out. Barring that, I feel quite encouraged that growth is coming back and can be sustained and that will make for quite an encouraging 2021.
Interviewer: Great, okay, thank you James for those insights today and thank you to our listeners for tuning in. You can find out more about the trust at www.aberdeen-newindia.co.uk and please do look out for future updates.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer investment recommendation or solicitation to deal in any of the investments of products mentioned herein does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen standard investments. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns, return projections or estimates and provide no guarantee of future results.
A global outlook podcast
In this podcast we are joined by Aberdeen Standard Investments economist Luke Bartholomew as well as Ben Ritchie, co-manager of Dunedin Income Growth Investment Trust, Bruce Stout, manager of Murray International Trust, and James Thom, manager of Aberdeen New Dawn Investment Trust.
Luke gives his thoughts on the extraordinary twelve months we've just witnessed, while our respective investment managers engage in some crystal ball gazing on what we might expect in 2021.
Recorded on 23 November 2020.
Transcript
Podcasts from Aberdeen Standard Investment Trusts - invest in good company.
Interviewer: Hello. Welcome to the latest in the Aberdeen Standard Investment Trusts podcast series that we have for our panel today, our economist Luke Bartholomew will be giving his thoughts on the extraordinary 12 months we've just witnessed, while fund managers, Ben Ritchie, Bruce Stout and James Thom will be doing some crystal ball gazing on what we can expect in 2021. Welcome everybody. And now, Luke, turning to you first, nobody needs reminding that it's been a very unusual year. And I wonder if you can talk us through some of the highlights and low lights?
Luke: Sure. I think you're right, that it's been what to say at the very least unusual year. It's one of those years where all the cliches that we use often in this industry, extraordinary historical unprecedented for one. Absolutely true and on the nose. And in that context, I don't think it is too difficult to think of some lowlights; the absolutely astonishing collapse in economic activity that we saw in the first half of the year 25% or so contraction. In the UK, for example, one has to go back hundreds of years of economic history to find something comparable. And of course, you know, that economic costs really significantly understates the true welfare costs ,not just the public health consequences, and the tragic loss of life, but also the shutting down of opportunities for so many people. The fact that people weren't able to go out and live their normal lives, the huge increase in unemployment that we saw in the US less so in the UK, and the rest of Europe as different policies were put in place. But yeah, I think the economic costs were just absolutely astronomical. And really, as I say, I mean, truly are cliche inducing. So I mean, I think there are some positives, and if not positive, then at least things to give one some hope. First of all, how well policymakers came together in late March, early April, when it looked like not only were we facing a public health crisis, but also perhaps the financial market crisis, monetary and fiscal policymakers were able to largely avert that. And on the whole they have put in place policies that have supported cash flow and income through this extraordinary business. Now, no doubt there will be some long term consequences from that, but they have certainly diminished some of the short term costs that we might have faced. And then the most obvious highlight, I suppose, is the good news that we've had on the vaccine evidence, that if enough capital and human engineering, it is deployed in one direction, and we are capable of quite extraordinary things. And it looks like as we speak today, that there is light at the end of the tunnel as it comes to the vaccine. And I think perhaps that does speak positively, for our ability to solve user problems as well.
Interviewer: And with potential normality ahead, do you still think that the pandemic will permanently change some aspects of the global economy?
Luke: Yes, I are expecting the economy to end up being permanently smaller than it otherwise would have been. So there is some permanent loss of economic activity. And I don't think that's too difficult to understand in terms of the psychological scarring, which leads to reduced savings, reduced investment in various bits of sort of stranded capital that have come out from this crisis that are no longer quite as economically viable as though as they once were, the fact that a whole bunch of investment streams are probably not going to go ahead over the last year in a way that they otherwise would have done weighing on future growth. The scarring to the labor market that we might see from the periods of unemployment and inactivity. But beyond that, I think it's also possible to see other structural changes as well. It's hard to believe that we would have gone through this, and it won't have changes in some fundamental ways. The most obvious, I guess, is working from home, I suspect we'll be doing a fair bit more of that in the future. Perhaps our travel patterns will change, perhaps where we live and why we live in those places. Those will also change as well, particularly if we do end up working from home much more. And I guess the great imponderable from all of this is to what extent the capacity that we’ve shown to make great sacrifices when necessary , to have extraordinary innovation for the state to mobilise resources, whether that speaks to our capacity to deal with problems, like climate change, and what it might mean about how we go about tackling that in the future.
Interviewer: Yeah, and what about a final verdict on the health of the global economy today? Are you reasonably optimistic looking into 2021?
Luke: So I think right now, the way we frame it is, second wave versus the vaccine for the short term outlook is once again, looking pretty dark. I think the UK and Europe are only now only going to avoid a technical recession of two quarters of negative growth, it looks like key for this year is going to be a quite large contraction. And then next year, we're only expecting a very modest growth. But after that, I think for the second half of next year, we could find ourselves growing quite robustly. One of the things that we learned this summer is that when lockdown restrictions are lifted, in the short term, you get a pretty large boost from growth. And as lockdown measures get wound down in the second half of next year, the vaccine allows us to return to some kind of quote, unquote, normality, that is a period where we could see quite rapid growth and potentially a return to something like the old normal, but I suppose one final cautionary thought to end on is let's remember what that normal is that we're going back to it was already a world of pretty disappointing, sluggish growth, a world of quite low inflation with central bankers and other policymakers struggling to get the targets consistent inflation, and a world of very, very low interest rates. And to the extent to which we are going back to, quote unquote, normal. I think that is the normal we are going back to.
Interviewer: Okay, that's great. Thank you, Luke. If we could turn to you now, Bruce, and ask the same question. How optimistic Are you looking out over the next 12 months?
Bruce: Well it's always difficult to predict, isn't it? and optimism is not something I think that familiar to the average Scottish psyche. So I'll try and be realistic rather than optimistic with what we've got in front of us. And, I mean, undoubtedly, this has been an extraordinary period. I can't remember one in living memory, who has life and livelihoods and health and wealth, were all threatened at the same time. I suspects as we've heard before, that, for many nations and individuals, life will be a bit awkward, and we have changed, I guess. And for investors, that means an unfamiliar landscape, I suppose relative to the past, which may ultimately unfold. However, I think, as always, it be very presumptuous to extrapolate the events and investment teams of this year, because it was so unusual, as some sort of new normal because for many the new normal, is less about choice, just simply a reality. So I think as the world returns to something like it was before, then, I suppose we are quite optimistic, because we've seen such a gulf between a narrow number of stocks and themes that have performed this year, and particularly in e-commerce and technology. But on the other side of that, people totally ignoring things like oil and gas and commodities, and transport, tourism, etc. As if we're never going to need those again, really all sorts of cyclical assets and you can add to that Emerging markets and Asia as well. So there's a huge still a huge valuation gap between a small number of businesses that have done well and a large number of good quality companies that have lagged, and that valuation gap looks quite interesting for next year.
Interviewer: And so while the pandemic has reshaped the prospect for individual industries, you think that might have been overdone, a bit, that actually it is not it's not going to be as profound a change as markets have, have presumed?
Bruce: Yes I mean, we've gone and been very, very active this year. And looking at all the businesses that we own. When I see all the businesses, it's a concentrated portfolio, Murray International is only 50 companies, but we wanted to look at them, again, with a sort of fresh pair of eyes in light of what's been happening to see if things have really changed, because, I mean, there's a lot of talk about spare capacity out there. But a lot of the spare capacity may be obsolete capacity. Now, we don't know in which case, and some companies that do have good production services may be in a very advantageous position to raise prices and rebuild the balance sheets to ensure for, for some businesses like long haul travel, and the impact that it has on jet engines, or high street retailing, maybe the whole cash versus cashless society has changed. But for a lot of other businesses, they will go back to some semblance of normality, because they add essential services and commodities for people in their lives. So it's towards those types of growth companies that we're looking at the moment because I think that's where the best opportunities are, particularly we see in Asia and emerging markets, because if there's one thing that that looks as if it's going to evolve from this, there's going to be a legacy of huge public sector debt, particularly in the developed world. And that has to be paid off over a long period of time, which will have implications for taxation on both the individual level and the corporate level, and just a general constraint on growth. Whereas, particularly in Asia, in the developing world, we don't have the same fiscal imbalances, there's much more flexibility to still have fiscal policy. And there will be such a legacy as far as we can see. So that is a change, but it's a positive change for those areas.
Interviewer: And you mentioned a couple there, but I wonder if you could just talk a bit about the key themes running through the portfolio as we move next year?
Bruce: There are one or two key themes. I think the issue that that we've had this year is a real concentration of markets, particularly in technology and e-commerce. And, as markets have got narrower and narrower, there has been less focus on diversification and that that is one of the themes of Murray International we have over 25 different countries and about 60 different businesses. So it is a very diversified International Trust, that gives us a broad exposure for capital growth and for income growth. But also, the other main theme is that we are mainly focused on Asia and the Emerging Markets world with over 50% of the portfolio in Asia and the Emerging Markets world because that's where we feel going forward the best relative growth opportunities are. So the next five to 10 years at least, plus also remember that there will be a big legacy from the pandemic this year in terms of huge public sector debt that's been racked up in the developed world. And it has to be paid for, I guess, in higher taxes, both for individuals and for corporations at some point. So there is a drag for growth prospects in the developed world that just isn't there in Asia and emerging markets to the same extent. So that tailwind should be beneficial as well, as we go forward.
Interviewer: Great. Okay. Thank you, Bruce. And, James, coming to you, though, as Bruce mentioned, that Asia appear to have emerged stronger from the pandemic. I wonder if you could give your verdict on Asia's response and the economic recovery, you've seen since?
James: Yes, I'd largely agree with Bruce, although it does feel a little premature, perhaps delivering a verdict at this stage, because it's still, you know, we're still very much in the midst of the pandemic, and, and working our way through it. But having said that, I think, absolutely, Asia has done in general a commendable job, I think in the way in which they responded to the pandemic and managed their way through it. So much so now that we have several countries out here that will post positive GDP growth this year. So despite the very large hit to GDP in the first quarter, and first half of the year, given the their ability to contain the virus, we're now seeing economic activity recover quite quickly. And in particular, in China, the big economy here, but also Taiwan, Vietnam, I think are all due to deliver positive growth this year, which is quite a stark contrast to much of the rest of the world, and I think is a testament to the really very rapid and focused response that these countries had to containing the pandemic, locking down the borders, implementing an effective track and trace capability and obviously supporting economies with the stimulus when needed. So I think, overall, it is looking certainly relative to the rest of the world, pretty encouraging. Here, obviously, there remains the risk of second or even third wave. And we are continuing to see that and it's by no means a panacea. There are several countries here that are still battling through that that's the first wave, India stands out in particular, as a country that has seen very significant numbers of cases. But even there, fortunately, we're now seeing case numbers peak, and hopefully, it will continue to trend down those play that kind of second wave risk does remain.
Interviewer: Okay, and how are you positioning the Aberdeen New Dawn Investment Trust for the year ahead?
James: Well, the focus as ever remains on quality companies. So whilst growth is recovering, it is still pretty turbulent and an uncertain environment out there. So it feels prudent still to be invested in market leading companies with strong balance sheets and experienced management teams. So that's very much the focus overall. Having said that, we continue to think about the structural kind of growth themes and stories out here. And despite all the doom and gloom, I think there remain many of these kind of structural growth trends here in in Asia as Bruce was alluding to. So you have continued rising wealth levels and urbanisation and all of that is thriving demands, basic products and services, as it has for decades already. And I think that will continue but there are a lot of other kind of newer, faster moving trends, where Asia is playing a kind of key role. So the tech sector is one and we've got in Aberdeen New Dawn a substantial waiting. They're both in the kind of hardware side of the sector. So semiconductors, for example, where we're seeing multiple new drivers emerging for demand there, whether it's continued demand for high powered computing, data centres, cloud services, 5G, artificial intelligence, I mean, it really is a whole range of new drivers there. So I think that remains an attractive long term story. We're continuing to see substantial innovation in the internet sector. And with many of the Asian companies leading the way there, I think there's plenty going on there and COVID, as it has for much of the rest of the world has been a catalyst for that sector. We continue to see that transition from offline to online. But then I think also, you know, in the green economy, there's plenty going on here in Asia, whether it's the shift to electric vehicles, or to renewable energy. And many of the countries here are coming up with quite ambitious targets. So I think that's providing interesting investment opportunities for a slightly longer term investment horizon.
Interviewer: And what extent would you say that the pandemic has fundamentally reshaped the outlook for Asian companies? Or do you believe like Bruce that this has gone too far, at times that people have been assuming a new normal? And perhaps it's not going to be that different after all?
James: Yes, it's so difficult really to have a clear view, at this point in time, in my personal opinion on working from home, my feeling is that we shouldn't yet be writing the obituary of office space and commercial real estate just yet. And I suspect tourism and travel will eventually rebound, though, admittedly, it may not get back to pre-COVID levels. But I think, that aside, certainly there are changes happening, as a consequence of this we have talked about the internet companies already and that has been a catalyst to moving consumption online. I think that that's very real and is permanent. We've got a number of IT services companies in that part of the world, and they're seeing their corporate clients, increasing their efforts to digitise processes and shift things to the cloud. And companies themselves, I think, are increasingly doing this, you know, we see it across the region, in an effort to, I guess, they've been forced to go to digital ways of working, but have found in many cases, that's a relatively effective way of working and cost efficient, were working. So it's been quite big cost reductions happening as a consequence of this. So I think there are, you know, a number of changes that, arguably could be positive for Asian companies. And we'll have to see how permanent those proved to be. But I think many of them will be structural.
Interviewer: Great. Okay. Thank you, James. Ben, let's turn to you now The Dunedin Income Growth Investment Trust invests across both the UK and Europe, perhaps Europe, can you see a better year ahead the stock markets in the region? And if so, you know, any particular hotspots, either regionally or sectorally?
Ben: Given everything that's happened in 2020, looking at the pan European index it is actually not too bad to be down mid single digit percentage. I think, given everything that's happened is a reasonable results. The UK has been a little bit weaker than that, overall. But I think given the ginormous economic impact that we saw earlier in the year from COVID, I think to have ended up with that outcome is reasonably okay. I think looking into next year, as Luke was sort of painting the picture, really, there's a combination of sort of near term economic weakness, which is likely to feed into some pressure on companies. But then you've got a combination of expected rebound, as we move into the second half of the year, perhaps into the second quarter. And then you've got the the rollout of of the vaccines, which I guess should support further growth. And I think that's the sort of environment where we would probably expect that investors will look through the near term weakness and look out to perhaps the more optimistic picture for economic growth, and certainly when you look at what consensus is expecting from an earnings perspective, then, you are probably looking for somewhere between 35 and 45% earnings growth next year, you know, that's probably likely to be supportive for the outlook for equities as well. Although, when you think about this year, we saw that 38% decline in Europe, and a bit more in the UK. And markets have not taken that too terribly overall. So we'll have to see that imbalance. But I think certainly, next year, looks like it might be a little bit better. But I think following on from what Bruce was saying, it's always hard to say how these things will develop really at the market level.
Interviewer: And I mean, the region has had valuations on it’s side. Is that still the case, are the valuations still pretty competitive compared with its global peers?
Ben: Yeah, I mean, I think they are. But I would always caution against reading too much into that. I mean, I think, you know, Europe as a market has been cheap for most of the last 20 years. So I'm not sure that's the new thing. And it's also generally been a bit of a disappointing place for investors at a global level, you know, the UK has been on a fairly significant discount to most other markets since Brexit, and again, that hasn't necessarily helped its performance. So I think it'll really comes back down to what we think companies can deliver, in terms of earnings and cash growth. And also the starting prices which we're paying for those businesses, so we still see plenty of opportunities at the company level across Europe and the UK. But we wouldn't be making a big play of the fact that the overall markets and necessarily cheaper than other ones in the world, because I also think when you actually look at details, there is some reasonable reasons why the UK might be cheaper, they have nothing to do with Brexit, but have a lot to do with big chunks of the index being in sectors, which traditionally always have relatively low valuation like banks or oil companies or mining, when you look at them on a PE basis. So you know, I think, optimistic at the company level, but we would be cautious a little bit on using valuation as the primary reason to be enthusiastic about those markets.
Interviewer: Okay, and how are you positioning the Dunedin Income Growth Trust for the year ahead?
Ben: So see, one of the things we've really focused on over the last couple of years is not putting all of our eggs in one particular outcome basket. So to go back to 2019, one of the things that we did there, as we approached the deadlines around Brexit deals, was not really having any great insight into how that would play out was just to make sure that we were quite balanced in terms of our positioning, to make sure that we had good domestic UK exposure, which is prosper in the case of a deal, but also have some good overseas companies, which continue to generate good returns, if we were to see a reasonable outcome. And I think we've tried to take that kind of approach where if we don't know, then why take in a big bets, either way. And I think that's much the same, really, as we look out into 2021. And we look at that, for the last few weeks, we've had the US presidential elections, we've had the development of vaccines, through both of those quite big events we managed to keep relative pace with what's been going on in the market, despite having proven to be pretty resilient for most of this year. So we see that as a sort of some degree of a good outturn in terms of positioning. And I think if we look into the year ahead, we want to be both resilient in tough market conditions, if we do see sentiment turned down for whatever reason, or the economy, not deliver what people expect. But equally, you know, we want to be able to participate in any available growth opportunities that might be there. So, you know, perhaps the segment where we might lag the most would be if we really do see the very, very distressed companies in the market perform incredibly strongly in 2021, that probably won't be particularly helpful for us. But otherwise, I think we feel pretty good about our outlook. And we put an interesting portfolio with a range of different companies operating in different economies, different geographies, different economic drivers. And I think that overall leaves us feeling quite confident that we're well positioned with a good bunch of companies, you know, almost regardless of what comes out of some sort of macro-economic or strategic political perspective.
Interviewer: Great. Okay. Thank you, Ben. And thank you everyone for those insights today. And thank you to our listeners for tuning in. And let's hope for a less eventful 2021. You can find out more about the full range of Aberdeen Standard Investment Trusts www.invtrusts.co.uk and please do look out for future podcasts.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer investment recommendation or solicitation to deal in any of the investments of products mentioned herein does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen standard investments. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns, return projections or estimates and provide no guarantee of future results.
An update from manager Fran Radano
In this podcast we are joined by Fran Radano in Philadelphia, manager of the North American Income Trust. Here he talks us through the recent presidential election and whether it's made a difference to stock markets.
Recorded on 20th November 2020.
Transcript
Podcasts from Aberdeen Standard Investment Trusts - invest in good company.
Interviewer: Hello and welcome to the latest in the Aberdeen Standard Investment Trusts podcast series. With me today is Fran Radano, Manager of The North American Income Trust. Today we'll be talking about the election and whether it's made a difference to stock markets. Welcome, Fran.
Fran: Thank you.
Interviewer: Now, the election has obviously garnered a few headlines. And after some to-ing and fro-ing, we appear to have a winner. How have markets reacted to Joe Biden's victory and how has that affected the portfolio?
Fran: So first things first, Trump technically hasn't conceded yet. But obviously, for all intents and purposes, we're assuming a Biden presidency, and we're expecting a Republican Senate, which won’t be decided until early January, and a very narrowly held democratic House. I think the effect here of what that looks like will offer probably what we think might be the best combination of sort of pragmatism at the top, and sort of the benefits of a divided government, where the full democratic platform of higher taxes and large spending programmes on certain initiatives will probably be pulled back, if not pulled back entirely. And conversely, some of the Republican platform initiatives are also off the table. So I think you see a pretty good backdrop here. And obviously, it's pandemic dependent, but we do have a vaccine now with good efficacy. So if we look through that, you know, we feel sort of cautiously optimistic.
Interviewer: And have you made any changes to the portfolio in expectation of a Biden win or any other outcome to the election?
Fran: No significant changes, you know, sort of, per usual, but obviously, we're cognisant, you know, if you look at an industry like banking where under a democratic sweep, there could have been higher taxation and more regulation, and to be sure, the regulation is still on the table, taxation, probably less so. Something like that could impact their business in an already difficult time. So we did reduce some regional bank exposure, you know, not massively but thoughtfully. You know, conversely, in a sector like healthcare, you know, we maintained our overweight position, with the belief that the underlying businesses have predictable cash flows. They have demand visibility, and we just believe the single digit multiples of our two core positions, which are Abbvie and Bristol Myers, are draconian at current levels.
Interviewer: And 2020 has obviously been an extremely challenging year, to put it mildly. I wonder if you can give a brief overview of the performance of the portfolio and also any reshaping you've done in the light of the pandemic?
Fran: Yeah, well, as you as you know, 2020 has been you know, it's been a bit of a whipsaw. You know, we saw it at the very start of the year, strong GDP reading. And literally all-time records in both consumer net worth and low unemployment. And wage growth was also strong. So we had a great backdrop coming in, probably something we hadn’t seen in quite some time. And as we know, this fairly abruptly changed as the markets pulled off in February. And the US economy, you know, came to a screeching halt, almost literally by mid-March. Currently, the backup of the second and now third wave during the truly unprecedented presidential election has made it especially difficult for dividend focused managers as dividend yielding stocks were shunned despite very few dividend cuts here in the US. When we look at it, maybe it was the perceived risk of increased taxation on dividends under a Biden sweep, or simply the focus of investors on all things technology related. As far as the portfolio changes, we've made nothing - you know, reshaping is a good word. I think we’ve reshaped some things in the margin. I think what we've done on the whole is that we were able to pick up some very high quality names, that are growers that also pay progressive dividends that had been on our watch list for quite some time, but had high valuations. And in the spring, when we saw stocks sold off indiscriminately, we were able to buy some of those.
Interviewer: Okay, and now we have a potential vaccine, although there's still a couple of stages left to go. The markets have been quite excited about that. Has that changed market leadership at all? Has it changed the sort of balance of valuation for the US market?
Fran: It seems like some days it has and some days it hasn't. I think, you know, as long term investors we do see a light at the end of the tunnel, given the vaccine, you know, test readings from two different providers. But, I think the way we look at it, as long term investors is, we still like our healthcare space, we think the risk total is largely priced in. We also own two defence companies, Lockheed Martin and L3 Harris trading at mid-teens multiples, which seem to be pricing in an outcome that we simply don't foresee. And finally, on the banking side, we own four domestic banks of different shapes and sizes, and we just believe the valuations there do not align with the cash generation or the balance sheet strength. And oddly enough, the bond market of all people would agree with us on these banks, but the equities still have lagged.
Interviewer: And the aim of the Trust is to pay above average dividend income and generate long term capital growth. As you mentioned earlier, it's been a tough year for income. Can you give an update on the portfolio income and the levels of revenue reserves?
Fran: Yeah, so the typical stock in the fund, you know, yield, say 3.5, maybe 3.75%, it grows its dividend at a high single digit clip. Year to date, dividend growth is a bit lower because some companies have just sort of kept their dividends flat. So right now we're looking at dividend growth, and they say 4 to 5% range. And of our 40 stocks in the fund, we've only had 2 dividend reductions. One was a small 14% cut, and the other was a company, Blackstone, who actually pays a variable dividend. And they just announced their final dividend of the year and actually year over year it’s essentially flat now. So you know, the other 38 companies in the fund have paid either a flat dividend or progressive dividend. So that puts us in a pretty good place on the revenue front. Revenue reserves are calculated annually. And, you know, we entered the year with roughly 10 months of revenue reserves. We believe when we close the books on this year in January, that will put the board in a very good position to once again pay a progressive dividend and actually increase reserves even further. We feel very good about our performance on this front in an otherwise, you know, very difficult year.
Interviewer: Yeah, I mean, do you think the worst is over on the dividend front? Or can you still see companies continuing cuts?
Fran: No, I think we feel pretty good about it. I think, you know, what makes the US market a little bit different is there's two ways to return cash to shareholders. There’s share repurchase and there's dividend. You know, for a typical company in the North American Income Trust, majority of that return of money to shareholders is through dividends, but often our companies buy back stock enough to keep the share count flat, or even shrink the share count, you know, 50 basis points, or percent. And what we've seen is, our companies sort of turn off the share repurchase spigot and continue to pay out dividends. So we actually feel pretty good about that. If we look sort of beyond our universe, we actually see some companies actually reinstating their dividend. So I think the visibility is there, and obviously, the vaccine and the promise there, you know, lends some credence to that. So, otherwise we feel very good about dividends and revenues and the ability to pay a progressive dividend.
Interviewer: And just finally a bit of crystal ball gazing if we can. I mean, how are you as 2021 approaches? How are you feeling about the future? Are you reasonably optimistic that companies can bounce back or even thrive after the crisis?
Fran: So it was interesting in the States here, I think, the crisis, what we saw here with many of the large well capitalised companies is that they were actually able to sort of sustain their business and sustain their business model, and many of them have grown share. Unfortunately, it was these small, private, less well capitalised companies that you see on Main Street - they've not only lost share, but they are still feeling a lot of pain. And given the political theatre, you know, in not renewing fiscal stimulus bills, it's continuing. So I think it is a little bit of a bifurcation on that front. I think the biggest learning going forward with corporates and companies in the Trust is a lot of them realise, you know, they can actually manage their business with far fewer expenses than they thought were needed. I would expect more automation, I would expect more use of technology. And the business travel component that people have talked about, I think that will be reduced on a semi-permanent basis or, you know, for quite some time. And then, importantly, I think on a personal level, life in a post vaccine world for many who have been sheltered has the potential for people to embrace life, like they have never before, you know, which will be a fascinating time. I think that that will sort of stimulate the economy and make at least the back half of 2021 a very interesting time when we look back in the history books.
Interviewer: Let’s hope so, that's great. Okay, thank you, Fran, for those insights and for your time today. And thank you also to our listeners for tuning in. You can find out more about the Trust at www.northamericanincome.co.uk. And please do look out for future episodes.
Important information:
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments of products mentioned herein, and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up, and investors make it back less than the amount invested. Past performance is not a guide to future returns, return projections are estimates and provide no guarantee of future results.
Aberdeen Diversified Income Growth Investment Trust: update from the manager
In this podcast we are joined by Nalaka De Silva, manager of Aberdeen Diversified Income and Growth Trust. Here he discusses the recent strategic review of the Trust and how the strategy will evolve going forward.
Recorded on Monday 16 November 2020.
Discrete performance (%)
| Year ending | 31/10/20 | 31/10/19 | 31/10/18 | 31/10/17 | 31/10/16 |
| Share Price | (8.3) | (6.9) | 6.6 | 17.6 | (18.9) |
| NAVA | (1.2) | 2.9 | 1.3 | 8.6 | (5.7) |
| LIBOR + 5.5% | 5.8 | 6.3 | 6.2 |
A Including current year revenue. Total return; NAV to NAV, net income reinvested, GBP. Share price total return is on a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value. Source: Aberdeen Asset Managers Limited, Lipper and Morningstar. Past performance is not a guide to future results.
Transcript
Podcasts from Aberdeen Standard Investment Trusts - invest in good company
Interviewer: Hello, and welcome to the latest in the Aberdeen Standard Investment Trust podcast series. With me today is Nalaka De Silva Head of Private Market solutions and manager on the Aberdeen Diversified Income and Growth trust. We're going to be talking about the recent strategic review of the trust and how the strategy will evolve going forward. Welcome Nalaka, could we start with a brief introduction to the strategy and what you're trying to achieve with it?
Nalaka: Oh, hi. Thank you very much for having me. So the Aberdeen Diversified Income and Growth, Investment Trust is really there to provide a stable income and capital appreciation through a globally diversified multi asset portfolio. And we try to do that by investing in a range of assets that are less correlated to equity markets to provide that stable income and long term growth potential.
Interviewer: The Board recently undertook a strategic review on the trust. Can you talk me through the announcement from a few weeks ago and what it sets out?
Nalaka: So as I mentioned, the strategic review is really there to do two things, one, as a portfolio that spans across public and private markets, look at how we can create a portfolio that's going to be resilient in fairly uncertain times. And as you know, we've been going through a fairly volatile time for markets, still waiting to see how the US elections pan out from a policy standpoint and whether Mr Biden takes over, the Coronavirus and vaccine and how , will this continue to evolve over time. And, as a result, a portfolio like ADIG how will it react to those types of conditions going forward? So the review itself was to do two things one, could we de-risk the portfolio in a time of volatility? And how do we position ourselves to provide that stable income and growth? That required us to do a couple of things. One is look at the long term asset allocation of the portfolio, and look at how we structure our investments going forward. And finally, how do we implement in the near term?
Interviewer: Okay, and you've recently come in as lead fund manager on trust? Can you give us some insight into your background and also on ASI’s Private Markets capability?
Nalaka: Sure, so I'm responsible for private market solutions and I work with a range of clients from insurance companies to pension funds to wealth managers in building multi asset private market portfolios. I sit on the management group of broader private markets business, which is currently about £65 billion in size, as a result of the merger between Aberdeen Asset Management & Standard Life investments our platform is one of the largest private market vehicles or businesses in Europe. We have exposure to private equity infrastructure, real estate, credit and natural resources. And there’s about 230 people on the private market sides and real estate sides, working out of 21 locations globally. It gives us a fantastic platform to be able to provide investment content and access to arrange really exciting opportunities for clients.
Interviewer: Okay, and you've mentioned about how the Strategy has evolved and that markets will form a significant part of it. Could you just discuss that in a bit more detail, you know, how you're allocating between the different areas and that sort of thing? Sure.
Nalaka: So I think it starts to talk about a bit about what we did on the asset allocation changes in terms of looking at the portfolio and how it was previously positioned. We had a lot of exposure to equities, to fixed income in emerging markets and asset backed security space and a range of opportunities in what we described as special opportunities or special ops, which included things like aviation financing, shipping, music royalties, as well as private market investments, including kind of infrastructure and private equity. And looking at the portfolio today, and where we want to take it going forward it was to try and reduce risk in the portfolio in the near term. So that's taking equity risk off the table, in terms of volatility, and perhaps looking at where the emerging market exposure was taking us longer term. So what we've done is to reduce the exposure to equities, from roughly about 17%, down to 10% of the portfolio, we've taken 31% of emerging market debt and fixed income securities down to about 25%. And we're replacing that with private equity, infrastructure, real estate and credit assets on the private market size, and where we are and leading the special opportunities roughly the same around sort of 20%. So that will give a more stable portfolio going forward because of low volatility on the public market side. And where we were trying to enhance the yield of the funds will be accessing areas within the private markets, such as private credit and infrastructure, which are very stable, and cashflow generating parts of the market, where the income streams are identifiable and resilient.
Interviewer: And how are you accessing those investments? Are you are you making direct investments or you take a portfolio approach.
Nalaka: So we're taking portfolio approach to the overall portfolio is divided up into four segments, equity, credit, alternative and private markets. And within that, we're using the depth and breadth of ASI capabilities. So we have a very strong multi asset solutions team and currently expand upon their investment program within fixed income equities and credit assets, and also the diversified alternatives group. And on the private market sides so as I mentioned before, it's a big platform, investing across private equity infrastructure, real estate, credit and natural resources. So when we look at investing, we first work out where we want to target investments which markets would segment and the process of portfolio construction that takes place. And then from an implementation standpoint, we'll work with each investment teams or deal teams to execute in any one particular marketplace. So we will take direct investments and private markets, as well as investing through funds.
Interviewer: Okay, and stable, resilient dividends have obviously been a key priorities for the trust. Can you explain a little bit about how you're going to achieve that as it while also growing the NAV?
Nalaka: Sure, so the income is really important components of the portfolio. And I think it's important to perhaps distinguish in terms of the private market holdings, where that income is going to come from, and we have touched on infrastructure before the infrastructure has been building up in the portfolio, both on the public side and on the private side for some time, and we will continue to build on the core, that's investing in essential infrastructure, that supports the regional and domestic economies, things like schools, hospitals, transportation assets, energy generation, communication assets, these type of investments that's throw off a of a yield, that's very stable, and also has some form of inflation linkage, which will be helpful over the long term, and will build around that portfolio. And so the next place that we look for yield is private credit, investing or lending to businesses, where there'd be senior loans or asset backed securities or securities that are secured on the back of physical assets, where there's a high degree of protection for investors in uncertain times. And because the yield that we get from private assets is slightly higher than we would get on public assets because of the liquidity, that can generate a higher yield in the portfolio without taking a whole lot more risk. We will also get the growth coming through longer term from investments in private equity, the development of real estate assets, we're investing in mixed use and residential property assets globally, we're invested in timber, and agriculture and farmland assets. And so the growth aspects of the portfolio will be complemented from a core satellites built on the foundation of I guess, credit and infrastructure, and then private equity, real estate and natural resources around that.
Interviewer: And presumably, investing in these types of assets, create and bring the kind of unique range of risks. Can you talk a little bit about how you're managing those risks, you know, the key you have in place to look at that?
Nalaka: We look at risks on number level? So when we talk about the public and the private aspects, we look at the liquidity risk around an asset how liquid is an asset and how quickly can we sell it at the time that we want to. For private markets, it's a bit different we look at private markets as a long term hold of assets and sometimes we take time to put money into the investment, it takes time to be drawn down. You know, if we're building an asset, the time taken to plan consents, finally constructed assets until it becomes operational or stabilised, you know, takes a few years. so what we do is we try to balance that liquidity risk across the portfolio by having a range of investments at different stages. We also look at the types of risk we're taking on in the portfolio. So if we look at infrastructure, for example, these things will be typically linked to some sort of government concession on the social infrastructure sizes, schools, hospitals, transport assets, other assets might be kind of economically focused. So we look at energy. But the types of investments that we're looking for is to find an identifiable stream of revenue, which then gets distributed back to the funds, and ultimately back out to investors. And so when we build up a profile of all of the different investment types, and we've got a range of diversified alternative income sources within ADIG, we have got the likes of shipping, but areas that are in music royalties, for example, which is rather interesting fields. We've got litigation finance, which is financing court cases, and all of these providing, a cash flow back to the fund. We've also got the more traditional types of fixed income, so investing in emerging market bonds, where these are loans to governments or corporates in developing countries around the world which pay a relatively high yield. And then we've also got some lifted securities, which are backed by physical assets, called asset backed securities. And that's invested with a range of managers from commercial mortgage backed securities all the way through to different types of instruments that pay out the yield. So as we add all of those income together, that's what will prop up our dividend reserves, which will ultimately be paid out through the progressive dividend policy by the board.
Interviewer: Great. I mean, one of the benefits of the trust is clearly that it allows investors to be invested in investments if they're unable to access themselves. And can you talk a bit about how the trust can act as a diversifying for client portfolios and, and also perhaps why that's particularly important today?
Nalaka: Absolutely, I think, typically getting into particularly private markets is difficult because, one, they're not perfectly divisible, you can't invest through shares and buy, 1% of a private company, or invest in an infrastructure projects on a global basis. So having a vehicle which allows a broader audience of investors to be able to access these types of projects, or companies or assets through fund or directly make the investment trusts a really valuable vehicle for that. So you get access to things that are just not available physically or structurally can be accessed in normal forms. And then from a diversification standpoint, the range of assets that ADIG has, is quite a unique in a way. So it covers the full span of public and private, we've got risk buckets that are designed to generate returns and different points of the cycle at different points in the market. We have equities to do that, in the near term with a bit of a tilt to smaller companies, which are generating higher growth, and a bit of the tilt to infrastructure as well. Then we've got our fixed income and credit portfolios, which is diversified across a broad basket of underlying assets, whether it be government bonds, corporate bonds, and an asset backed securities. And you've got this really interesting space of alternative risk premia, as we describe it. And what we're going to be doing there is we're going to be selling down our listed infrastructure as we take on more private infrastructure, but still take on very interesting opportunities in terms of the likes of litigation finance, the music royalties, and other income generative stream which are less correlated to the equity markets. And then this big basket of private markets that we hope to grow with the portfolio in time to, including infrastructure projects, as I mentioned, private credit and exciting investments in private companies through a diversified basket of venture capital, private equity, natural resources and real estate. And that that diversification provides stability at times when markets are volatile. So not all of those assets move in the same direction. And when the world is correlated around particular times of the market, like we saw that through COVID and in 2018 or during the trade war and tech rhetoric that was going around at that point in time, and what we expect is while we will have some volatility, we will have a much smoother ride having a high proportion into these less correlated assets.
Interviewer: Great, and then just finally, what benefits have you seen from the recent phone repurchase.
Nalaka: The bond repurchase was something that the bulls are willing looking to do to provide more flexibility at the corporate level. So by taking the bonds, which are going out to 2031, and we're actually relatively expensive in terms of interest rates at about 6.25%, when there was quite a big interest charge in the fund. So one its providing more of a buffer, or more capacity to be able to provide that stable dividend, because we're not paying that expensive rate of interest. And because if the board decides that they're going to do share buybacks, which is an important part of discount management, as an investment trust, having that leverage covenants in place made it very difficult to do that. So just provide them more flexibility in discount management control and providing the propensity for a progressive dividend.
Interviewer: Great. Okay, thank you so much for those updates. And thank you to our listeners for tuning in. More details on the trust can be found at www.aberdeendiversified.co.uk. And please do look out for future episodes.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments and products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns. Return projections are estimates and provide no guarantee of future results.
Asia Dragon Trust: Key trends - digitalisation
Transcript
Podcasts from Aberdeen Standard Investment Trusts: invest in good company.
Interviewer: Hello and welcome to the latest in our Aberdeen Standard Investment Trusts podcast series where we catch up with the Trust managers to explore how they're navigating these difficult conditions. With me today is Pruksa Iamthongthong from the Asia Dragon Trust to give her insight. Thank you for joining us today Pruksa. Now you're aiming to find areas of structural growth in the Asian economy, and obviously digitisation and the move to online has been very important during this pandemic, but can you explain why longer term e-commerce and online activity have such strong growth potential?
Pruksa: Well they have really been a force to be reckoned with during this pandemic. But if we were to look at how the growth has been and looking for a long term trajectory, I think online and e-commerce has clearly been very disruptive to traditional retail and simply because I think it’s the answer to various consumer needs, whether you think about the breadth of choices that the online world can offer at the click of your fingertips, the personalization of choices as well - as they gather more data about you, they can make recommendations according to your browsing habits. As well as the increased convenience in the increasingly fast paced world that we live in, it is convenient with deliveries coming to your doorstep. And ultimately, if all these things are done extremely well by an online provider, an e-commerce retailer, it does produce a very good customer experience. So I say why not - I think we are all converted during this Covid period. And therefore from a growth perspective, we do see a long runway for e-commerce and online activity or digitalisation across many verticals of the economy. And this applies to many parts of the world.
Interviewer: Okay, and what type of companies are you investing in to access this trend?
Pruksa: Well, we can access this trend from many ways, actually. Firstly, we can think about the ecosystem players that could be the providers of such online services. So for example, the likes of Tencent which is our core holding. Tencent as part of the business helps to digitalise the local small shops within the community. They provide Tencent Wechat pay - it has mini programmes that provide these shops with CRM or customer relationship management. And essentially, that allows small shops to convert their offline presence into an online and ultimately mostly an O to O model, which is an online to offline model. And that's how consumers today are actually accessing this service. And I think we actually see an acceleration of this happening during the Covid situation in China, where many of these offline retailers - businesses - have to be forced to go online to remain in business. So that could be one way. Another way, is in the enablers of digitalisation. And what I mean by this is it could be the investment into the building blocks of digitalisation. So, if you think about it, there is no secret that data is the key in digitalisation, and in others, and we go back to my earlier point about customer service. In order to provide that seamless customer service and experience, the ability to process data to store data, to facilitate interaction and exchange of data is extremely important. And all this needs to be powered by things like advanced semiconductor chips. And that is manufactured by the likes of TSMC. Taiwan Semiconductor, which we have in the portfolio and Samsung Electronics, both are core holdings in the Trust. We also invest in data centres in China, which will be the key infrastructure is supporting the rapid growth of cloud providers that are a key enabler in this area as well. And the third way could be a bit more traditional, it may be a traditional consumer goods company. One example that we can think of is a company in India. It’s an old company called Hindustan Unilever, which is the Indian subsidiary of Unilever. It is a household name that is well known for their consumer goods. But perhaps what is less known is how they have played a central role in the digitalization of e-commerce activity in India, which we know is - penetration of [modern trade] is actually very low. So a lot of trade in India happens on what you call a general trade and the small neighbourhood shops call Kirana which is - you can think of it as a little hole in the wall. It is very much a central part of that. So what this company does is they help to digitalize the Kiranas. They provide the app interface called Mykirana that allows these offline small Kiranas to go online again. And if you are a consumer in India, you open the app up, you can actually search for the Kirana that is closest to you and order online – again, it will be delivered to you at your doorstep. So something very, very handy during the Covid situation India as you can imagine.
Interviewer: Thank you so much Pruksa for your insights today, and thank you to our listeners for tuning in. For more information on the Trust, please do check our website, www.asiadragontrust.co.uk and do look out for future podcasts.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments and products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns. Return projections are estimates and provide no guarantee of future results.
A short update on Japan
In this podcast we are joined by Ben Morris, Senior Investment Specialist at Aberdeen Standard Investments. Here he provides a short update on Japan: an update on markets and why Japan still remains an important asset class, a look at how we invest in Japan and finally a brief outlook.
Recorded on Monday 26th October 2020.
For more information on Aberdeen Japan Investment Trust: www.aberdeenjapan.co.uk
Transcript
Hello, my name is Ben Morris and I'm the Senior Equity Investment Specialist at Aberdeen Standard Investments and I'm delighted to share a short update on Japan. I'd like to cover three areas. Firstly an update on the market and why Japan still remains an important asset class. Secondly, how we invest at Aberdeen Standard Investments. And thirdly, and finally, a brief outlook.
So in terms of an update on the market, we've seen Japanese equities advance in the third quarter of this year on expectations of policy continuity after Yoshihide Suga succeeded Shinzo Abe as Prime Minister. In addition to maintaining fiscal and monetary stimulus Suga pledged to speed up structural reforms, promote digitalisation in the government and society as a whole. He has also aimed to consolidate small and medium sized enterprises and regional banking sectors to help optimise their operations. Similarly, he has pledged to promote more competition among mobile phone carriers to drive down prices and sentiment has generally lifted as regional authorities including the Tokyo Metropolitan Government that downgraded their COVID-19 alert levels as a result of the receding infection rate. And in addition, there was some general optimism that the US Federal Reserve's revamped approach to handling inflation would keep interest rates low, lower for an extended period of time. So with these sort of thoughts on the market in mind, it is worth reminding ourselves of the opportunity in Japanese equities. As you know, Japan is one of the largest single country markets in the world, around 7 or 8 per cent of MSCI world. With a similar number of companies as the US, we know that coverage is poor. It's probably the most under covered developed market in the world. And this really means that there are genuine opportunities for active managers. Secondly, investing in Japan is not only about investing in Japan, there are many high quality companies that are operating across the world, that just happen to be based in Japan. A key example of this would be Makita, the power tool manufacturer or Seismic, the medical equipment manufacturer. And thirdly, ESG. Historically, governance has been poor. We have seen numerous issues in the past around the likes of poisoned pills, weak controls, inefficient capital allocation. So really this is coming from a low base and the manager is looking at these characteristics and engaging with companies certainly provides an opportunity there.
So onto the second question, why Aberdeen Standard Investments and what's our approach. Our long term quality approach really is driven by fundamental in depth bottom up research with the ESG analysis fully embedded within that and we're seeking to uncover high quality Japanese companies that we can invest into for the long term. The team, on average, meets with about 150 Japanese corporates a year. And we do certainly benefit from our large experienced investment team across Asia. And actually the wider global equity research platform that we have, that we benefit from, helps us both in terms of coverage, but also cross checking investment opportunities. And being a long term, shareholder - long term investor - certainly does help the company engagement. And as we know, that engagement aspect really is supportive to managing those potential sort of governance risks. The outcome of this approach enables the team to construct portfolios, where you know, if you think about portfolio metrics, they are typically above average on a number of areas. Firstly, profitability. Our focus on expanding on strong economic notes and premium and high profit, operating profit margins than the broader index stands the portfolios in good stead. Secondly, dividend growth, looking for rising powers of growth and those that are growing faster than the index, strength of balance sheets and having strong balance sheets, low levels of net debt to equity and in many cases net cash, hugely supportive and offers up those high quality characteristics that you might expect. And thirdly, returns - having higher return on equity than the index. So, growth from these companies that we are investing in. And from these underlying companies that we've identified and invested into, we’re able to draw out several themes from that. So things like automation, smart initiatives, structural reform opportunities and technological and pharmaceutical innovation, would be some attractive areas that we’ve seen that are finding and have found companies that we invest in. These opportunities combined with attractive valuations for Japanese equities certainly give us a reason to consider an allocation.
And then finally, on to a brief outlook. Essentially, the medium term outlook is relatively hazy. We're seeing a fresh wave of coronavirus cases throughout the world. And this could certainly stifle the start of a recovery. We have seen some promise in terms of vaccines and definitely things like the timeline and the success of these treatments are still pretty unclear. And then we add on to that the uncertainty and the tensions a break between Washington and Beijing - finalising in the context of the US presidential election in early November. Certainly there are challenges, but we do believe that the solid fundamentals of the companies that we invest in to, combined with management agility should allow the recovery of these companies to occur faster than the broader market. And we may remain absolutely committed to our bottom up investment approach. And we have an emphasis, as we've discussed, on good quality companies at attractive valuations while actively engaging with their management to ensure robust levels of corporate governance and high standards of sustainability. Our holdings retain healthy balance sheets and generate strong cash flow. And it's you know - the management experience and the knowledge that we have of our company management who've been able to successfully navigate previous crises that give us more confidence in the valuable addition they can add to the portfolios. Thank you very much for your time today. And look forward to speaking with you again soon.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up, and investors may get back less than the amount invested. Past performance is not a guide to future returns. Return projections are estimates and provide no guarantee of future results.
Asia Dragon Trust: our philosophy and approach
In this short audio update, Adrian Lim, co-manager of Asia Dragon Trust plc, joins us to explain the philosophy and approach of this investment trust to include the importance of quality, strong balance sheets and good governance standards.
Recorded on 15th October 2020.
For more information: www.asiadragontrust.co.uk.
Transcript
Podcasts from Aberdeen Standard Investment Trusts, invest in good company.
Interviewer: Hello and welcome to the latest in our Aberdeen Standard Investment Trusts podcast series, where we catch up with the Trust managers to explore how they're navigating these difficult times. With me today is Adrian Lim from the Asia Dragon Trust to give his insight. Thank you for joining us, Adrian. Now let's start by looking at the philosophy and approach of the trust – the Asia Dragon approach focuses on finding quality companies, and how are you defining quality?
Adrian: Well, quality means basically identifying companies that we think have the best attributes that position itself with the best possible chance of outperforming its peer group and its competition over the long term. This usually means that it requires a combination of good people and talent, not just managers, but throughout the company. It requires responsive and resilient business models that are effective, and the ability of the company to execute as a whole. We also look out for financial strength as well, which gives the resource that provides companies with a better chance of taking advantage of weaknesses within the competitive landscape that do come from time to time.
Interviewer: And you mentioned people there - what characteristics are you looking for in a management team?
Adrian: That's, that's quite easy to explain, but quite difficult to assess. We look for management teams that work well together as a team, that demonstrate competence within the fields that they operate or compete in, or the disciplines that they’re engages in. And, more importantly, but more difficult to measure is we like management teams that demonstrate integrity. Where they don’t just make sure that they do what's best for the company, but they make sure that the company does what's best for all shareholders equally.
Interviewer: And how are you incorporating ESG considerations into your process?
Adrian: ESG considerations are very much embedded into our search for quality. Often when we look at business models, and when we talk to management teams, and we assess them, we need to make sure that these management teams and their business models are sensitive to effectively manage the environmental, social and governance issues that are now coming to the fore in the investment community. Many of these issues we have been looking at over the last few decades of investing for the Trust. But increasingly it's coming up in discussions and we need to make sure that our management teams are aware and can communicate effectively about the things that they do to manage these issues.
Interview: Great. Okay, thank you so much Adrian for your insights today and thank you for listening. For more information on the Trust, please do check our website, www.asiadragontrust.co.uk and do look out for future podcasts.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments and products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns. Return projections are estimates and provide no guarantee of future results.
Aberdeen Standard European Logistics Income PLC: update from manager Evert Castelein
In this podcast we are joined by investment manager Evert Castelein. Here he gives a top level perspective of the logistics sector across Europe in recent months and explores some of the long-term drivers for this Trust. He also discusses the portfolio in more detail and talks us through the importance of maintaining a dialogue with tenants.
Recorded on Thursday 1st October 2020.
For more information: www.eurologisticsincome.co.uk .
Transcript
Podcasts from Aberdeen Standard Investment Trusts - invest in good company.
Interviewer: Welcome to the Aberdeen Standard Investment Trusts podcast series, where we get an update from our investment trust managers on their current positioning and the prospects for their sectors. Today we welcome Evert Castelein, Manager of the Aberdeen Standard European Logistics Income Trust, hi Evert. This has been a difficult time for commercial property generally, but in contrast it's also been a favourable time for some of the key long-term drivers on the Trust, such as online retail. Can you give me a top level perspective on the logistics sector across Europe in recent months?
Evert: Yes, of course. I think if you look at the logistics sector, in the last few years, it has been one of the strongest performing sectors in the real estate market and we expect that to remain the case going forward. If for example you look at our house view, we assume that logistics is going to outperform retail and offices, sectors that are being challenged by the working from home situation. And also the growing online consumption which is actually beneficial for logistics, as you said. So of course, logistics has not been immune to what has happened with the Covid virus as it’s an integral part of the economy. And now that there’s a recession across Europe, we clearly see that some companies are struggling, but as a sector logistics has proven to be very resilient. If we look at what’s happened this year, we noticed that the logistics supply chain was disrupted, especially in March and April when several countries went in lockdown in order to flatten the curve. And this has had a disruptive impact on supply chains that were very much focused on efficiency, ‘just in time’ deliveries, making it vulnerable. And if one of the steps is falling away in that supply chain, then goods will not be delivered on time. So that's what we saw initially. And especially companies focusing on international trade, or the automotive industry, or high street fashion and retail or restaurants - they have been, and maybe still are, struggling. But at the same time, we've also seen companies that have benefited from the situation such as groceries, the pharmaceutical industry, and ecommerce in particular. So it’s a mixed picture of how companies are experiencing the current situation. Some may struggle to survive, which could potentially lead to a small increase in vacancy levels. A good thing is that the starting point for the occupier market is really strong as there is an undersupplied situation across Europe with only 4% vacancy on aggregate. So that's extremely low. And there are a couple of structural trends supporting demand side for logistics space such as the rise of ecommerce, which I already mentioned, but also the reshoring of manufacturing activities and building up of inventory levels. If you start with the first one, ecommerce, we strongly believe that the growth of online sales is a structural trend. And yeah, more people are buying more online and in Europe, in 2019, online sales made up 10% of the total retail sales. And this is expected to increase to 15% this year, so that's quite a steep increase. And of course, as always, the best example to look at is Amazon. If you look at what they have done in the last few months, they have recruited 100,000 additional staff and they're expanding their logistics stock by 20%. So that's a big trend. But other big trends are the reshoring of manufacturing facilities - also called de-globalisation - which is a very strong trend. Many companies right now are moving their production activities from China back to Europe. And part of that maybe is related to an increase in wages or the trade war between the US and China. Another very important reason is that many companies wish to make supply chains more resilient to external shocks such as the virus outbreak and lockdown situation. So bringing production back home makes them less vulnerable, and for the same reason many companies are increasing their inventory levels. Something that was seen as weak management in the past because of extra cost, but now we realise that supply chains were maybe too efficient and focused on ‘just on time’ deliveries. And this is now changing, resulting in more demand for logistics space in Europe on aggregate. So this is what we see happening in the occupier market but if you look at the investment market, it's very clear that investors are recognising the opportunities making logistics as an asset class very hot. New fund launches are taking place, fund managers are reviewing existing strategies, for example moving away from hotels and retail and directing capital towards logistics with a strong focus on quality. So high demand will lead to competition and probably result in yield compression and higher property values. So we like to believe that ASELI (Aberdeen Standard European Logistics Income) is very well positioned to benefit from this flight to quality with the portfolio that we have.
Interviewer: Okay, that's great. Can you talk us through the portfolio is as it exists today, and in particular, your focus on the more liquid part of the market?
Evert: Yes, we have a very high quality portfolio with 14 warehouses in the portfolio across five different countries in Europe. Eight of the warehouses actually have been erected in the last few years so they are almost brand new. The majority of the capital has been invested in the Netherlands, where we have six assets right now. And this makes perfect sense to me as the Netherlands is seen as the gateway to the west European market thanks to its strategic geographical position and the largest port in Europe, which is the port of Rotterdam. And that's the starting point for large transport corridors leading towards Germany, Belgium and France to the south. So besides the Netherlands, we have also built up exposure in Germany with two warehouses in the Frankfurt Rhine-Main, two in France, two in Spain and two in Poland. It’s a very high quality portfolio. In sourcing deals, one of the key things to look at for us is liquidity. And with the Trust, we are investing in the most liquid part of the market where there's a lot of demand from both occupiers and investors. So within the segment of big boxes, we are focusing on mid-sized assets, as we think the ultra-big boxes with lot size above 1 million sq ft, for example, leased out to likes of Amazon has absolutely a role to play. But there's probably no alternative if a tenant leaves or gives you a hard time in renegotiating the terms or the maturity of the lease. So these buildings are so big and bespoke that we think it's better to invest in smaller sized assets that typically have a lot size of around 30, 40, maybe 50 thousand square metres.
So that's one. Another focus points for the fund is on urban logistics, a part of the market that we lack in particular. Urban logistics are the last mile delivery hubs. It’s the final step in the supply chain that is needed to deliver the goods that people have ordered online to the end consumer. And the way these operators are competing with each other is on delivery times so you need to get close and at the same the urbanization trend makes cities grow bigger. So there's a lot of competition for land and land prices are going up. And that ultimately will be reflected in higher rents. So we have very high growth expectations for urban logistics where we have built up quite a bit of exposure with the portfolio. The way I look at assets to get an idea of the liquidity is always by asking myself the question, if the warehouse has a second-life, in case the tenants would leave? Am I spending capital on a very large, bespoke, not flexible building with a long lease and a strong tenant on a secondary location, hoping the tenant won’t leave? Or am I investing in an established location with a lot of dynamics and with a building that, due to modern specification, can easily be leased out to another company? And I prefer the latter. I think that's a more liquid investment. And all our assets, I think are located on established locations and have these modern specifications that are needed in today's market. And, yeah, this is what you need, I think to build a durable income stream and pay stable dividends to investors.
Interviewer: Okay, so we can look at the income side in a bit more detail. I understand that rent collection has been reasonably robust, but where you have had tenants in some distress, what sort of conversations have you been having with them?
Evert: Well, I'm very happy with the rent collection so far. Our current estimate for the full year 2020 is that we will collect 97% of annual rent this year. And in today's market, I think that's really high. It's fair to say that the second quarter was challenging as companies started to feel the impact of the lockdown situation. We have collected 85% of rents due for the second quarter. And then the third quarter that number was 96%. Discussions evolve around rent deferrals or rent-frees in combination with material lease extensions. So these were the two options on the table. The majority of the discussions on rent-frees took place in our multi-tenant buildings, where we are dealing with shorter lease durations and where we normally would have had the same discussion on prolongations within the next few years or so. So on balance, there's hardly any difference, I think between the three year cash flow projection pre-Covid and now. And for me as the fund manager, I’m based in Amsterdam, it's really important to have support from our local resources within Aberdeen Standard Investments. ASI is the second largest real estate investor in Europe. And we have local boots on the ground, asset managers that are taking care of day to day business so they are liaising with our tenants, and making sure we make the right decisions together. And it really helps if your colleague based locally speaks the local language to get the best deal together. And, yeah, the property business is really a local and people's business. And that's why scale and local presence is really important. And it's something that sets us apart as a house.
Interviewer: And the Trust has recently maintained its quarterly dividend, which gives some stability for the shareholders. But how are you feeling about the rest of the year and looking into 2021? Are you kind of optimistic, pessimistic?
Evert: I'm not going to predict the future. But all I can say is, based on what we know today, that the logistics as a sector is really hot, and that we are in a really good position with ASELI. So overall, I'm very optimistic and the quality of the portfolio is really high, we have very liquid assets that are all fully leased out, and there's no vacancy, and we've managed the impact of Covid on our tenant portfolio with a satisfying result. And also the loan portfolio, it's very important to realise that there's sufficient headroom on the financial covenants that we have agreed with banks such as LTV and ICR ratios. So risks here are limited which ultimately resulted together with a strong rent collection to keep paying out the dividends, like we've done in Q1 and Q2.
If we look at the future of the logistics sector overall, I think it's really strong thanks to structural drivers such as the growth of e-commerce, which has really given a boost to the sector. And as a Trust, we have ambition to grow as well and to diversify risk with more assets in the portfolio and also focus on our existing portfolio by adding value to these assets with our local teams, for example, by extending our buildings, or by putting solar panels on the roofs and reduce the carbon footprint. So for me as a fund manager, the focus is very much on rent collection, keeping our tenants happy, adding value through active asset management, and growing the fund with new assets with the credit facility that we have put in place, which is a facility that allows us to buy an asset first before we go back to the market for a new capital raise. And at the moment, I'm looking at quite a few interesting deals with local transaction managers, both on an on- and off-market basis.
Interviewer: Great. Okay, thank you Evert for those insights today. And thank you to our listeners for tuning in. You can find out more about the trust at www.eurologisticsincome.co.uk and please do look out for future episodes.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets.. It is provided for information purposes only and should not be considered as an offer investment recommendation or solicitation to deal in any of the investments of products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up, and investors may get back less than the amount invested. Past performance is not a guide to future returns. Return projections are estimates and provide no guarantee of future results.
An update from the co-managers of Dunedin Income Growth Investment Trust
In this podcast we are introduced to new co-manager of the Trust, Georgina Cooper. Georgina and her fellow co-manager Ben Ritchie explain how they will work together to build on the momentum of the last few years as well as looking at recent portfolio changes and discussing their thoughts about what the future might hold.
Recorded on Monday 28th September 2020
Discrete performance (%)
| Year ending | 30/09/20 | 30/09/19 | 30/09/18 | 30/09/17 | 30/09/16 |
| Share Price | (4.9) | 11.1 | 4.6 | 9.7 | 14.8 |
| NAVA | (3.8) | 8.1 | 4.2 | 9.2 | 18.2 |
| FTSE All-Share | (16.6) | 2.7 | 5.9 | 11.9 | 16.8 |
A Including current year revenue. Total return; NAV to NAV, net income reinvested, GBP. Share price total return is on a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value. Source: Aberdeen Asset Managers Limited, Lipper and Morningstar. Past performance is not a guide to future results.
For more information: www.dunedinincomegrowth.co.uk
Transcript
Interviewer: Welcome to the latest in our Aberdeen Standard Investment Trusts podcast series where we catch up with our investment trust managers to look at how Covid-19 is impacting their portfolios. Today, we welcome Ben Ritchie and Louise Kernohan, co-managers of the Dunedin Income Growth Investment Trust (DIGIT). Welcome.
Can we start by looking at the stock market landscape today? There's obviously been a meaningful rally from the very lows seen last month, but which areas have proved particularly resilient and which still look vulnerable? Ben, I'll put that to you first.
Ben Ritchie: Thanks very much Cherry. I think when we look at it overall, it's really quite a complex picture and the environment is as challenging today as it has been probably at any point in my career when we look at what's going on in terms of evolution of markets. I think the important things to remember are that whenever something terrible happens for the economy, whether it's going back to the financial crisis or whether it’s the effect of the virus today, is the future is always uncertain and we don't know what's going to happen and we have to work on the basis of the information which we have available to us. I think when we look at the portfolio today, we feel very well positioned and we think we're in companies that have, generally speaking, got pretty good prospects even if the near term is tough. Where companies are facing more pressure on earnings, they’ve generally got very strong balance sheets, good cash flows or good cash balance sheets which are supporting their businesses through this tough time. And then we've also got a reasonable percentage of the portfolio which is continuing to trade, not completely without effect, but continuing to trade relatively robustly. When we put that all together, we have had less exposure to some of the areas that have been hit pretty hard. I think that that makes us feel that we're reasonably positioned going forward and the areas that have been hit hard, funnily enough have not been that surprising really. I mean, be it areas like travel and leisure, aerospace and defense, the banking sector, which I guess is always going to end up picking up some of the credit tab for the issues that we face, and then oil and gas which has been weak on the back of the challenges there. All in all we’re relatively light in all of those areas and we’re overweight to areas where the prospects look a little rosier, and we've been positioned like that for quite a while. I think when we put that all together, it's tough but we’re cautiously optimistic really about the prospects of the portfolio from here.
Interviewer: And Louise, would you add anything to that?
Louise Kernohan: Yes, just to add, as Ben says, it's a very complex landscape and we've seen quite a wide dispersion of performances between sectors. So you'll have some sectors that have performed very robustly throughout this period so far. So key examples there would be the pharmaceutical sector, which is being held up by being defensive - people still need their medicines. And it's actually those characteristics which are the reasons why it's attractive for us to invest in with DIGIT, and we indeed have an overweight position to healthcare, so that's been a positive. You've seen some sectors where they saw a really sharp decline in March, but then we've seen a subsequent sharp recovery and that is actually perhaps not unfair. For example, the construction and house building industry, we have Countryside Properties, which is an industry where there's a structural supply demand and balance and the government will be keen for that to resume as soon as safely possible and that is possible for those industries to resume in some way, shape, or form.
So there are positives on the horizon there. And then you've seen some industries which suffered badly throughout and haven't seen a recovery where there's just more longer term structural issues at play. So as Ben said, good examples are airlines, aerospace industry, and tour operators, where the outlook is just much more opaque at the moment and challenging. And also banks and oil, which has the structural challenges where again, it's because of these reasons to start with as to why we are underweight those industries. So it's been a tough period, but thankfully for DIGIT, we have been well positioned coming into it.
Interviewer: Okay, and Ben, individual sectors aside, do you think that the measures taken by governments and central banks have largely brought the systemic threats under control?
Ben Ritchie: I think there's a couple of pieces to this really, which is I think first of all, you've got to look at the financial plumbing and it was pretty clear in the first half of March that that was starting to creak and that you were seeing a failure of trust between counterparties within the financial system, be that investment banks, retail banks, hedge funds, asset managers, insurance companies. That whole circle was starting to stop. And when that does happen, we know that the impact of that is extremely bad. But the good thing I think about that element of it is that the central banks and policy makers have had relatively recent experience of how to manage that, both in the financial crisis, and in the Eurozone crisis and they have acted very-very quickly and very-very aggressively to provide effectively cash to actors within that area to support that. So I think that sort of systemic crisis caused by collapsing of natural system, which I think certainly looked like a possibility a couple of months ago, has been taken off the table. I think that's good news. I think the bigger challenge though if we think about it in a wider context is if this is a sort of Lehman Brothers and main street type situation, how the policy makers set about addressing those challenges because that's a lot more complex. You know, you're not just dealing with a couple of hundred financial institutions, you're dealing with literally millions and millions and millions of small businesses and millions of consumers. That's quite tough. So I think from the positive side, I think that the financial system is being insulated and I suspect that policy makers and central banks can make sure that that doesn’t recur through the deployment of their cash flows. I think the bigger challenges are now coming on to how do we manage unemployment, how do we keep the real economy alive during a period of time when activity levels are going to be very, very depressed and that is just perhaps a more complex and more challenging prospect for governments and policy makers globally, particularly I would say in Europe and the U.S.
Interviewer: Louise, I know it's very early days, but I wonder if any of the feedback that you're getting from companies gives any sort of insight or clues into those longer term prospects for companies?
Louise Kernohan: Yes, I mean, when it comes to speaking to the companies and talking about trading trends, the company management really don't know much or any better than any of the rest of us really. I think all of us are feeling our way through here and it can be interesting to hear comparisons to previous downturns, for example, the financial crisis, which can be interesting. So it might be the case that demand slumped for six months, but snapped back quickly before so there's reason to think that it might do it again, but really, because this downturn is so different, being more high street footfall related than being a financial crisis, those comparisons aren't always even going to be valid. So on the trading front, there's not really a huge amount that management can give us insight on. But what there has been a lot focus on, talking to management, has been the factors that they can control. So the primary focus there has first and foremost been on the safety of staff and companies are doing the best that they can to operate the best they can under the current conditions. So with staff either working at home or working on site with strict social distancing. Another focus is on cost, so many of the companies are using the furlough scheme – that scheme is seeing substantial take-up. We’ve seen dividend cuts, and conversations moving onto liquidity. For example, how long can a company operate at this low level of activity without coming into liquidity problems? We're finding that most companies are actually doing a really good job with this. Survivability isn't an issue for the vast, vast majority of companies, and really the question has sort of moved on to now to how can companies operate in a prolonged period of social distancing. And thinking about the fact that social distancing wasn't even a concept for any of us even a few months ago and now whole businesses are having to adapt to that. How do you adapt to a world where say, your demand might be half of what it was previously because of social distancing, but your cost base might not be that flexible. So that's the sort of thing that we're talking to companies about and there's just a wide variety of answers to that. Some companies are more straightforward, others are much more complex and so really sort of taking it on a case by case basis.
Interviewer: You have made some changes to the portfolio over this period, I believe, including raising gearing to reinvest in certain areas. I wonder if you could talk a little about the changes you've made Ben?
Ben Ritchie: Yes, so we acted as markets were performing pretty aggressively during mid-March to raise some additional debt to invest. It wasn’t a huge amount, four million pounds, but it was sort of indicative of the fact that we did see some reasonable opportunities developing to put money to work. And the kind of companies we were buying were businesses which we thought still have pretty solid dividend pending prospects, but where the valuations looked more attractive. Things like SSE, Coca-Cola Hellenic, a Coca-Cola bottling company, but primarily operating in Europe, and Rio Tinto - all businesses which we felt would be solid companies which were then trading perhaps 25% to 30% cheaper than they had done. The timing as ever on that wasn’t perfect as markets continued to go down a little bit more over the course of the rest of March. But we've added again to things like Coca-Cola and SSE a second time and in recent times we've actually been looking to add to some new things as well. So we've taken advantage of a very significant decline in the share price of Intermediate Capital Group, which is an alternative asset manager to be able to build a small position there. We've done the same with Hannover Rueck taking advantage of our overseas capability to buy what we think is one of the world's best reinsurance companies at a pretty reasonable price at a time when the reinsurance markets look like they are poised for growth. We've also bought a stake effectively in the Chinese company Tencent through a Dutch listed company called Prosus, which owns a very large stake in Tencent and trades at a big discount to the value of its assets. So we've been quite active in terms of looking to add things to the portfolio during this period of time. Especially by our standards - we tend to take a fairly long term view, but there have been a few opportunities that are being thrown up by events.
Interviewer: Okay, Louise, how are you making the distinction between companies that are in temporary trouble and those where the outlook has fundamentally changed? Have you exited any positions on that basis?
Louise Kernohan: So that is really the key question for any investor right now - making that distinction between companies where this is a transient problem and where actually this is a longer term issue which fundamentally changes the value of the business. So ever since the start of this crisis, Ben and I have been fully focusing on that and thinking about the businesses. Not just about which ones will survive, I mean that is obviously key, but it's not just that, it’s about also which ones will not only survive, but which will come out in a stronger position. While none of us can predict the future, you can choose winning businesses within an industry that have structural advantages, good financial firepower, which leaves the business in the best possible position. So I mean, an example here would be Rightmove where clearly the UK housing market isn't moving at the moment. Rightmove’s customers, being the estate agents, are in an extremely challenging place, which is naturally going to affect Rightmove and it's easy to paint a bad near term scenario for them because their competitors are offering free services to their customers trying to steal what little business there is out there. But what’s important for Rightmove in terms of thinking about has the outlook fundamentally changed longer term? Well, the reality is that Rightmove’s network remains far, far superior to any of its peers. So, they can try and charge cheaper, but at the end of the day Rightmove’s customers want the website that has the most property on, and the most viewers and they’re head and shoulders above the rest. Very little can threaten that and they have a very strong balance sheet which allows them to not just be able to survive, but to be able to invest in their business and proposition through this period where competitors can't, and so that they come out stronger again. And you know, I don't think any of us are in any doubt that the housing market will start moving again at some point in the future. I don’t know how much or how soon, but people will still need to move houses. So, that's kind of how we've been thinking about focusing on the long term in that respect.
Interviewer: Okay. I wonder if we could also look at the income side. Louise, a lot of companies have been cutting dividends, and while I recognise the type of companies in which you invest may be more insulated from that, how are you managing that in the portfolio? Are you having to take the decision on, where a company has cut, whether you hold or whether you sell out?
Louise Kernohan: I think it's fair to say that this level of dividend cuts hasn't been in anybody's scenario planning. So I think the last time that I checked there were 41 companies in the FTSE-100 that have cut or suspended, and 96 in the FTSE-250. So this is - you know, unprecedented I think is an overused word at the moment, but I mean, it's the right word. So yes, it goes without saying that this is not an easy scenario. A positive for our situation is that our focus on high quality businesses, with, as we’ve spoken about, strong business models, resilient earnings, strong cash flows, strong balance sheets, has led us to start this in a strong position and we estimate that the level of income cuts for us is around 15% to 20%, which would be, I mean, it's moving around quite a lot, but it's less than half of the broader market. So, by not owning the UK banks, by only having minimal exposure to oil has been really helpful during this period. We also entered the year with almost a year's worth of dividend in reserve. So, we're in a strong position on that front. We've always generated some additional income, up to 10% from option writing and that will be helpful this year too. Also to remember that given our strategy that we've been implementing for the past few years of actively choosing to sell higher yielding companies such as the oil majors, which have high yields but low growth prospects, to reinvest in lower yielding companies with higher growth prospects - as part of that process we were planning to run with an uncovered dividend this year anyway. So, whilst the situation isn’t one of anybody's choosing, we started it in a very strong position, so sitting here today we're feeling that we're in a strong position. In terms of what we're not going to do - we're not going to start chasing yield. So, we're not knee jerk selling out of companies that have cut the dividend if we still believe in the long term prospects of that business, and we're not investing in companies that are still paying the dividend at the detriment to investing in the high quality standards that we always do.
Interviewer: Okay. Looking a bit longer term then, it seems clear that the economic growth will be harder to come by as we recover from the virus. You mentioned healthcare earlier, do you think it will be a case of finding pockets of structural growth?
Ben Ritchie: Yes, it's quite interesting actually, Louise and I were chatting the other day, and looking through the portfolio and we actually have more opportunities to deploy money than we have things that we want to sell at the moment. So, I think it’s a good, good position to be in. And we skipped through the portfolio and there wasn't really anything we wanted to sell which is always helpful. You need something to sell to be able to buy, but I think that focusing in on those opportunities is a positive for us at the moment and I think that's absolutely the case. I mean, healthcare is an obvious one in some ways, and we’re operating in an environment where a) that's a relatively stable business and b), there's likely to be more investment in it going forward, but actually when you look at our healthcare exposure, it is more sophisticated than just owning the big pharmaceutical companies. Louise in her other role as the pharmaceutical analyst on the UK team has made a great call on being very enthusiastic about Astra(Zeneca) and Glaxo(SmithKline) for much, much longer than the last few months. Over the last couple of years they've been really good investments for this particular portfolio, but we've also been able to benefit from exposure to companies like Genus, which helps with the production of food through its expertise in production of the sort of reproducing, reproduction capabilities for pigs and for cows. Things like Dechra, which again, is a veterinary science business. Something like Abcam, which is all about antibody production, owning things like Novo Nordisk, again taking advantage of our ability to invest overseas. So we do have that big healthcare exposure, but it's not just big pharma, it's also little businesses as well. And when we look across the picture, we see some interesting opportunities in a number of different end markets to be able to grow. But I think the point is, is that you do have to be very selective. You do have to be niche, but actually there are those potential opportunities out there and I think we are looking at a world going forward from this, and it may be a bit different with a sort of three to five year view, but I'm pretty sure in the near term the environment is going to look a lot like the environment which we've been in. Which is low growth, low inflation, low interest rates. And that is going to create an environment, which as you eluded to earlier, where growth is probably going to be at even more of a premium than it was before. And I think when we look across the portfolio we see good opportunities in a range of areas and also quite a diverse range of different earnings drivers as well, from insurance to clothes, life books through to emerging market asset managers through to branded consumer goods and on to specialty chemicals. You know, we see lots of little areas, but there probably isn’t a big unifying theme behind all of that. It's just lots of little, lots of little areas which we're looking to try and take advantage of, and it's that combination of lots of stock picks all put together that ultimately builds quite an attractive portfolio overall.
Interviewer: Okay. Louise how comfortable are you with valuations in today's market? Do you think they fully reflect the problems out there?
Louise Kernohan: Well, the problem with valuations at the moment is that all the multiples require some estimate of earnings or cash flow. And so that number in the equation is obviously extremely uncertain at the moment. So that means that valuations are uncertain. So if we see a good recovery from here, so what people call the V-shape, then valuations are attractive right now. But on the contrary, if we're standing at the start of deep recession, then on the whole valuations will be expensive, and particularly considering the recent recovery. I think it's also fair to say that we entered at the start of this year with valuations on the whole not being particularly cheap. It's actually quite difficult to summarize on the whole, but I think what is fair to say is that given how volatile markets have been and still are, the markets clearly have a lot of inefficiencies at the moment. So there's a lot of opportunities. So the key is really to look on a stock by stock basis and try to find those companies that have been hit due to concerns, but in fact actually those concerns aren't valid. We have seen that already so far, for example companies like Coca-Cola Hellenic, the soft drink company. It's share price was hit along with some of the worst during March. But at the end of the day, it's a soft drink bottler across a range of geographies, and so whilst not immune because not many companies are, it should prove relatively resilient through this and so we topped it up and we have seen some recovery. And there's lots of examples where there are mis-pricings so that's really what we're trying to find. And as Ben said, there's a lot of opportunity at the moment. Where we really benefit as well is that Ben and I both work on large equity teams. So, we've got a 16 strong UK equity team with full coverage of the FTSE-350, doing a lot of individual analysis of companies, talking to management, doing lots of in depth work. And we’ve got the same size European team, doing the same for European stocks of which we hold a number in the trust. So, we have a really good position in terms of having a lot of resource focused on this and I'm sure there's going to be a lot more opportunities that arise through this situation for valuations.
Interviewer: Okay, and just finally, what reassurance would you give to investors in the Trust that they should hold on through this period of rather nasty volatility?
Ben Ritchie: Yes, a very good question to ask, that one. I think, as Louise said earlier, from an income perspective, we feel in good shape. Though you know, we’ve taken a very, very hefty hit, but it's been a lot less than the wider market. So we think from an income perspective that we're still, given our reserves and potentially the ability to distribute income from capital, from an income perspective we think we're in good shape. From a capital perspective, we don't see any companies in the portfolio that are showing any signs of distress at all and we actually think if anything, there’s a very, very significant percentage of the portfolio which is actually in a pretty good place and provided things recover to some degree, will actually do pretty well. And some of those companies may even do a lot better than that over the longer term. And I think that the point that Louise was making earlier, we both run unconstrained money as one of our key elements and so everything we're asking ourselves about every investment we make is do we think that this is a really attractive total return investment opportunity? That's the first point, and then we look at how much of that return is going to come from income and then we look at what the income requirements of the Trust are. I think that gives us a very different perspective. It's almost like looking down the pipe the other way from a lot of income managers - we start with well, what’s the yield and what's the dividend going to grow at, because ultimately at the end of the day the dividend is just the output of the business and we like to start with the business. I think that's a key thing as opposed to starting from the dividend end of things. If you do that, then generally speaking you're going to end up with a portfolio of really, really good businesses and that's ultimately what makes myself and Louise feel positive is the fact that we've got some really great businesses in the portfolio and their prospects are looking good. At the end of the day, I think as Louise was mentioning earlier, we think that the companies are being managed well and we are ultimately delegating control and management of the businesses to the management teams. You know, by and large we think they've been doing a pretty good job throughout this crisis and meeting the challenges well. And while we don't know how things are going to evolve, assuming, I think it’s fair to assume that over the coming months and perhaps years we will see a recovery of maybe slow but a steady recovery out of this, this trough, then you know, we think we're well placed to go well from here. You know, the performance over the last sort of three or four years since we've taken the helm of the Trust has been good. And if anything, this environment we think sort of suits our style and approach.
Interviewer: Great. Okay. Thank you so much Ben and Louise for those insights today. Thank you also to our listeners for tuning in. You can find out more about the trust at www.dunedinincomegrowth.co.uk and do look out for future episodes.
This Podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any of the investments of products mentioned herein, and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns. Return projections are estimates and provide no guarantee of future results.
Murray International Trust PLC: update from co-deputy manager Martin Connaghan
In this podcast we are joined by co-deputy manager Martin Connaghan. Here he provides an update from a global perspective, discusses recent changes to the portfolio and shares feedback from companies held by this investment trust.
Recorded on Thursday 27th August 2020.
For more information: www.murray-intl.co.uk
Transcript
Podcasts from Aberdeen Standard Investment Trusts - invest in good company.
Interviewer: Welcome to the latest from our Aberdeen Standard Investment Trusts podcast series. With me today is Martin Connaghan, co-deputy manager of the Murray International Trust. We're going to be discussing where he is seeing opportunities in a changed world. Hi, Martin. When we last spoke, we were in the thick of the crisis. And as the outlook has become a little clearer, Have you made any changes to the portfolio?
Martin: We have exited a couple of positions since May. I’m not sure the outlook necessarily became that much clearer since we last spoke, but we definitely have made some further changes to the Trust. In May we sold out of the Australian Coca Cola bottler Amatil, and we also sold out of Ultrapar which is a Brazilian fuel distribution business. And unfortunately for those sales, they were really driven by our regional colleagues either not covering or selling out of those stocks and us following suit. And so we also sold out of Public Bank, which is a financial stock in Malaysia and again, for fairly similar reasons. On the other side of that, we initiated a new holding in China Resources Land, which is a real estate developer which focuses on residential development, mainly in first and second tier cities in China and more recently, shopping malls. So it has a very solid balance sheet and a very solid management team that have a very good track record of turning projects around on time, utilising the land bank, and delivering solid margins. We also initiated a new position in Ping An Insurance, again focused on China. This is a bit of a financial conglomerate really, again very strong management team that have been on the front foot really with some very shrewd investments in technology. And this company's very cash generative - 2.7% dividend yield with 15% and 30% growth in net dividend over the last one, three and five years. And then finally, just in July, we initiated a new stock in Hon Hai Precision Industry which is a Taiwanese electronic manufacturing services business. It manufacture products mostly, and most famously for Apple, the iPhone and Nintendo on servers and tablets and PCs. It also has some quite interesting subsidiaries which expose it potentially to interesting markets and electric vehicles, etc. And, again, offers a pretty attractive 5.4% dividend yield at the moment. So, you know, we have been active, but always looking for opportunities to make changes to the portfolio if we feel we can upgrade the quality of the investments or drive further levels of diversification within the portfolio.
Interviewer: Okay, and you think that the outlook actually isn't getting an awful lot clearer, but what kind of feedback are you getting from companies? Where would you put them on the optimistic versus pessimistic scale?
Martin: Very polarised to be honest, depending on what their underlying business is exposed to in terms of markets or geographies. So it varies quite wildly. Taking some of the largest investments within Murray International Trust, for example TSMC which is the Trust’s largest single investment. It's had a very, very solid year and solid second quarter results in mid-July where they actually raised revenue guidance, seeing very solid demand for the product coming from 5G smartphone related product launches and high performance computing. So that's a company that has really done very, very well this year and the management team are in a buoyant mood as a result of that. But then on the flip side, something like CME (Chicago Mercantile Exchange), which is the world's largest derivative exchange, it's been struggling a little bit more recently. A significant portion of the revenues come from interest rate products, and after the collective action of central banks the world over, interest rate volatility has collapsed so market participants have not really seen the need to potentially hedge that risk, which has leaned on volumes and leaned on their results at the end of July. So, I mean, there's still a lot that we like about that company - it's just very cash generative, and doing a lot of interesting and clever things in data and the like. But, those are two examples of businesses that are, you know, seeing different opportunities and risks in front of them at the moment. I mean, very generally, you know, it's been a case of technology's been the standout performer. And healthcare has also been a very solid area of the market, so management teams from those areas are typically pretty buoyant. And then again, on the flip side, financials and energy stocks have been the laggards. So again, management teams perhaps a little bit more on the back foot there.
Interviewer: And has it allowed you to build a kind of aggregate view on recovery, whether that might be V-shaped at the most optimistic and L-shaped at the most pessimistic?
Martin: I mean, not to sit on the fence, but the likelihood is it’ll probably be somewhere in between the two. I mean, first of all, if we're talking about equity markets, then you know, the recovery has very much been a V-shaped recovery. Again, very much driven by the United States and a pretty narrow band of stocks from the technology space. But we think probabilities are pointing more towards somewhere between the two. And even then it could be quite country and region specific. If we scratch beneath the surface of the recent data releases, then you're already seeing quite marked country level performance gaps, largely reflecting the relative success or failure of policy makers in containing COVID. So, you know in the US a lot of the July's data was certainly providing signs that US activity were continuing on the process of normalisation. You know, we saw gains in payrolls and retail sales, industrial production, but July's numbers were noticeably smaller than the initial bumper reaction that we've seen previously. And I guess the expectation is that all this data probably shows a further
deceleration in that. And then taking China I guess as an example, you know, industrial production there it's continuing to expand but again, growth is tapering off a little bit, and has actually being a little bit disappointing in places relative to expectations given the notable surge that we've seen in exports there. And again, even within China, we've seen a striking gap opening up between the pretty much near full recovery in industrial production, but then the much more partial recovery in retail sales which are about six and a half percent below where they were in January. So we're definitely expecting a slowdown in the pace of recovery as we move into the second half of the year. And then the question mark is obviously what the longer term impact is. There's just a number of unknowns out there that could impact, that could improve the situation or make it worse very, very quickly. You know, we’ve already seen flare ups in Australia and South Korea and it really just depends on what the government response is to that. A vaccine, you know, that could change the situation very, very, very quickly. So we’re expecting a sort of slowdown in the pace of recovery, but unknowns and risks and potential positive catalysts are definitely out there and make it quite difficult to make a call with any degree of certainty at this point.
Interviewer: Absolutely. This Trust has always had a kind of meaningful weight to emerging markets, do you think they might have an advantage as the world's recover? They've got relatively less debt, they can possibly sustain higher growth because of that – are you sustaining you're weighting there?
Martin: Certainly, we’re maintaining everything for now. And as mentioned earlier, we've added to the Asian exposure with those two Chinese focused businesses. You know, those are positives things - like less debt and potentially, you know, higher growth. Those are definitely positives that we see within certain emerging market companies. But again, it also is going to be very much driven on the extent to which the outbreak is brought under control in some of these countries. Asia certainly thus far seems to be on a much safer footing in that regard, compared to say, Latin America, for example. So, as I mentioned, low debt and the prospect for better growth are things that we traditionally like about emerging market opportunities and the Trust still reflects that, but this isn’t a traditional environment that we find ourselves in and things such as, you know, the virus being brought under control and activity picking up in developed markets, and also, you know, investor sentiment improving will very much play a part in terms of how emerging markets fare as the world recovers as much as anything that emerging markets can do themselves in isolation.
Interviewer: And it's obviously been a challenging time for dividends, so it appears to have been very mixed across the world. How have you found companies in the portfolio have fared?
Martin: It has varied again widly. You know, we're seeing quite a resilience perhaps in most of the North American names – the US is the only major market not to really suffer a drop in dividend payouts in the second quarter, in fact dividends in the US actually increased by 0.1%. And I think it was only about 10% of companies countrywide that actually cut dividends. I mean US firms have the benefit, I guess, of spending so much money on share buyback programmes the last few years, so those have been what’s been getting cut. It was about $700 billion last year in the US alone, so it's that that has been cut, rather than the dividends. So the US has been, you know, resilient. Names within Canada, you know, Canada grew dividend payouts by 4.1% in the second quarter. And then I guess on a relative basis, you know, Japan has fared pretty well where companies actually, increased or maintained their dividends, while overall dividend payers in the country fell by about 3%. So on a relative context, they've been okay. Sector wise, names within healthcare, communication services, which the Trust has a decent exposure to have also proven quite resilient. Most of the carnage has been within the UK and Europe, we have seen dividends, you know, 54% and 45% respectively in the second quarter. So it's been very, very mixed, but there have been, you know, areas of resilience and we do count ourselves quite fortunate that in Murray International Trust we are allowed to, you know, make full remit of that global mandate to try and secure dividend revenues to, you know, maintain payouts through to our shareholders.
Interviewer: And as we look into the second half of the year, actually the final quarter of the year really now, isn't it? But do you think market prices reflect the risks? I mean, as you said, market rises have been quite narrowly drawn lately, technology stocks and things like that, but what's happening to the rest of the market?
Martin: I will say, we're seeing too many stocks that are jumping up and down, and there's been bargains right here. And I'm certainly comfortable with the work that was done in the portfolio, potentially to do more of that where we can see a little bit of volatility, weakness kick back. But I think if you strip out that handful of technology companies then the market is looking a little bit more realistic in terms of where we should be given what's happened. European markets are still offering double digit year to date in sterling, in the UK we still have some uncertainty around Brexit negotiations for example. And markets like Spain and Italy which have just been so heavily impacted by COVID and emerging markets as mentioned earlier, you know, are not without risk. So I think if you rip out that handful of stocks which have been the focus of the market and which have driven the NASDAQ being up 30% in sterling terms yesterday - quite incredible. You know beyond that, we think the risks are pretty much reflected in what we're seeing. There's a number of very good businesses within technology and consumer staples and healthcare which have proven themselves to be pretty resilient through all of this. But just none of that’s, not really being missed by the market, we believe at the moment.
Interviewer: Okay, and just finally, turning to the portfolio today - how does it look today? Are there any really dominant themes that you'd highlight?
Martin: I think you're right in saying that the one we would point to is the one off diversification. Really trying to make full use of the opportunity set that we have available to us. Looking for companies that do different things in different parts of the globe and, you know, that has potentially been approach that has been punished at times over the last few years, but in terms of, for an income based mandate, trying to earn that income, and trying to secure the earning of the dividend income and trying to maintain our own levels of capital returns to shareholders, we feel that that's been the main focus of ourselves and we don't necessarily see that changing. And again, as we look at some of the names that we’ve put into the portfolio, like Broadcom earlier in the year, and AbbVie earlier in the year, Hon Hai, Ping An, China Resources Land – it’s what’s really been borne out in terms of the activity that we've undertaken this year. So if there is a theme to be evident within the Trust at the moment, it's certainly – I would point to the diversification, the desire for diversification.
Interviewer: Okay, thank you, Martin. For those insights today and to our listeners for tuning in. You can find out more about the trust at www.murray-intl.co.uk and please do look out for future episodes. And
Important information:
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments of products mentioned herein, and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up, and investors make it back less than the amount invested. Past performance is not a guide to future returns, return projections are estimates and provide no guarantee of future results.
The North American Income Trust plc: an update from manager Fran Radano
In this podcast we are joined by Fran Radano in Philadelphia as he provides an update on the current situation in North America. He explores recent updates to the portfolio of this investment trust and gives his thoughts on the outlook for the rest of this election year.
Recorded on Wednesday 19th August 2020.
For more information: www.northamericanincome.co.uk
Transcript
Podcasts from Aberdeen Standard Investment Trusts - invest in good company.
Interviewer: Hello, welcome to the latest in the Aberdeen Standard Investment Trusts podcast series. With me today is Fran Radano, manager of the North American Income Trust. Today we'll be discussing the dividend outlook and where he's finding opportunities in today's turbulent markets. Hi, Fran. Can you start by talking a little bit about the objective and the strategy of the Trust, just for a bit of context?
Fran: Yes, of course. The objective of the Trust is to create a concentrated, sort of best ideas portfolio of approximately 40 cash generative equities to pay a competitive dividend. It is however, it's well diversified - it offers a combination of both growth and income. Stocks in the portfolio are currently yielding around 4%. We've been able to pay dividend distributions at a high single digit rate over the years, while prudently adding to revenue reserves.
Interviewer: And the last time we talked, we were really in the eye of the storm. As the outlook has become a bit clearer, have you made any changes to the portfolio? Are there any sort of stocks you’ve added in?
Fran: Yes, so as you can recall, at the outset of the pandemic, we had our portfolio and it was largely best-in-class type names as you would expect from us. But we did have them flanked by a few companies that we thought were improving quality. And when we say improving quality, they were making strides to improve market share or revenues, they were firming up their balance sheets or sort of going through a restructuring programme to better position themselves. And companies in this category had the opportunity for both earnings expansion and valuation rewriting. That said, the pandemic truly changed everything and for a couple of these companies, that time proved vulnerable. So for better or worse, what we noticed was that nearly all stock de-rated fairly equally in March and early April. And some of those names that we were, some of these improving quality names, we were actually able to upgrade to high quality names and reduce some of our exposures elsewhere. So, some of the names we added were names that are very much a household type name. So Home Depot we added to in March, Procter and Gamble shortly thereafter, Digital Realty Trust which is a REIT that’s focused on data centres, which obviously is important when you're working from home or working from sort of disparate locations. And then within banking, we consolidated around a high quality bank in PNC.
Interviewer: Okay, and so how does the portfolio look today? I mean, what are the major themes running through it?
Fran: I think, you know given what I just said, I think this is probably actually the highest quality portfolio that we probably had for the last the eight years of the Trust. I think, while the US recovery off the trough levels has been impressive, it's obviously been aided by a combination of fiscal and monetary stimulus to levels we've really never seen before. And, you know, thus we don't expect the recovery to be linear from here, especially given the backdrop that we're in a hotly contested presidential election year. So you know, because of that, what we've really done is concentrated the portfolio and I would tell you that of the 39/40 names, the top third of those names are over 50% of the portfolio weight.
Interviewer: And it would be no understatement to say that markets have been a bit erratic in recent months. How, against that backdrop, how has the Trust performed? I mean, what are the notable contributors and detractors from performance?
Fran: Yeah, I think, you know, we just reached the mid-year point for the Trust and if you look at the Trust on a day to day, there's been some outlier gains on both sides of the ledger. And ironically, at the end of the day, at the end of the six month period, we've actually performed fairly in line with our benchmark. Although I can tell you, important for this Trust, that we've pretty successfully navigated the dividend minefield, and continue to put the board of directors in a very good position to continue to make progressive dividend payments that our shareholders have come to expect over the years. If something were to change on this front, we do have over nine months of revenue reserves that could be used to supplement any shortfall.
Interviewer: And where has that kind of dividend resilience come from? Is that because, in general, the companies in the portfolio haven't cut or have only cut or come back quickly. How does that work?
Fran: Yes. So I mentioned the underlying dividend yield in the Trust is around 4%. And I think that the reason they've been able to do this is by a combination of cash generation, a strong balance sheet and we don't have a ton of consumer oriented companies. Those tend to be risky and in an Amazon world, we've been very surgical in the types of names on the consumer side that we've looked at. So we’ve looked at very unique sets of circumstances on that front and on the energy side, which is obviously another point of contention on dividend and free cash flow, we've been very cautious on that front with just three energy names in the portfolio.
Interviewer: And what feedback are you getting from companies today? Are management teams generally more optimistic than three months ago, or do they think it's actually going to be worse than they felt?
Fran: I would actually step back and say that company management has probably been more accessible than I can ever imagine. So instead of going to New York City or going to their city of residence, or travelling elsewhere, everything is on a conference call or a video conference, and we can see a lot of our holdings monthly, if not more frequently than monthly. So, given that backdrop, we just finished the second quarter earnings season for all intents and purposes. And I think, while management teams generally have been unwilling to give forward guidance given the lack of visibility or the variation of outcomes, they've remained very transparent to us and have generally managed through this crisis effectively. And the caveat here is they've been able to manage effectively with the help of the stimulus on both the fiscal and monetary side. You know, I noted the consumer facing companies that had some of the biggest challenges with store closures, which was a bit surreal for them, but given the use of omni-channel that’s helped offset some of that. And I would also say, probably most importantly given the portfolio's bias to quality, a lot of our management teams and CFOs have strengthen their liquidity positions at favourable rates right now, where they've raised some debt at very low rates just to firm the balance sheet in case this is longer than we expect. So, as a result, I think leadership teams feel better than they did at the height of the uncertainty, but are very cautious in their outlooks from here.
Interviewer: And is that supporting the dividend, overall dividend yield of the market – is that helping the outlook?
Fran: Yes, I think so. I think that the dividend side they feel comfortable paying out. I think what we need to consider is that in the US, share repurchase is a good percentage of returning cash to shareholders and what companies have done broadly, not just in this Trust but market wide, is suspend share repurchase. So, when we look at dividend payments continuing, I can tell you that return of cash to shareholders is down anywhere between 25% and 75% if you were to look at the share repurchase side. And dividends have generally held firm for the higher quality names, not all names, but the higher quality names.
Interviewer: And what do you see as the outlook for the rest of the year? I mean, obviously we have an election coming up - will that influence markets do you think?
Fran: Of course. So the broad market is right back at its high, but I would tell you that that it's been driven by an extremely narrow subset of stocks. The average stock is still down year to date, and not one or two percentages, it’s down by more. And then also, interestingly, growth has outpaced value to a degree that we've last seen in 1999. So clearly, a vaccine is at least partially priced into some names. Whereas that would tell you, many stocks still trade at much more modest valuations. I think, you know, we don't try to predict market inflection points, but this is an election year and we do believe President and Congress will agree to another stimulus package and combining this with sort of a ‘whatever it takes’ type attitude from the Fed, I think gives us some comfort, and at least sort of a safety net within the equity markets.
Interviewer: And what’s the Trust’s current position on gearing and has that changed over the last few months?
Fran: I would tell you that, over the years, we've probably had our gearing fairly steady at plus 6-8% geared. And it actually, coming into the pandemic, and in the beginning of the year, January, February, we actually did reduce our gearing levels quite a bit and got to almost a flat, if not negative, net gearing. And that wasn't really a market call, per se, it was simply because cash levels in the portfolio were rising, we felt comfortable with the size of our existing position, so we simply just paid back some of our credit facility. Since late April, we've taken some of that money back, but it's admittedly rather small in the grand scheme of things.
Interviewer: And just finally, just to wrap up, are there any kind of interesting areas you'd highlight any sort of opportunities you're looking at at the moment?
Fran: I would tell you that we do remain quite diversified. We're not shoving all our money into consumer staples because they're defensible, because they're also trading at very high valuations because of that. I think, as I mentioned earlier, I think our top 12/13 names are now 50% of the portfolio. And I think what we're doing at this time is really just focusing on our highest conviction names, where we feel most confident in preserving capital and getting cash returned to shareholders during this tumultuous period. There's still a few names on our watch list that we are considering, but we believe now that since the market has re-rated broadly speaking, it's much more of a stock pickers market from here, and we feel quite confident in our current portfolio.
Fran: Okay. Thank you, Fran, for those insights and your time today. Thanks also to our listeners for tuning in. You can find out more about the trust at www.northamericanincome.co.uk and please do look out for future episodes.
Important information:
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments of products mentioned herein, and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up, and investors make it back less than the amount invested. Past performance is not a guide to future returns, return projections are estimates and provide no guarantee of future results.
Aberdeen New Thai Investment Trust PLC: update from manager Orsen Karnburisudthi
In this podcast, investment manager Orsen Karnburisudthi provides us with an update on the only investment trust investing exclusively in Thailand. He discuss the ongoing impact of Covid-19 on this country and how the portfolio is positioned. He also shares feedback from companies and explores the dividend situation in Thailand.
Recorded on Monday 10th August 2020.
Transcript
Podcasts from Aberdeen Standard Investment Trusts. Invest in good company.
Interviewer: Welcome to the latest in our Aberdeen Standard Investment Trusts podcast series. With me today is the manager of the Aberdeen New Thai Investment Trust. Orsen Karnburisudthi will be talking about developments in the Thai market over the past three months. Welcome Orsen. Now when we spoke last time, we talked about how Thailand had been relatively lightly hit by the virus with a few cases and even fewer deaths. Has that kind of relative success continued?
Orsen: Yes the success has continued. We've had virtually zero local transmissions since May. So it's been over two months where there have been no local transmissions. The only cases coming in would be returning Thais. 99% of these are returning Thais from other countries. The other 1% would be certain cases like diplomats or army military drills. But all in all, the figures are very controlled. The total number to date is just about 3,300 cases with 58 deaths, and that number of deaths hasn't changed for really the past two, almost three months.
Interviewer: And what has that meant for the Thai economy? I mean, has it meant that key sectors such as tourism have bounced back at all?
Orsen: The economic data were stressing monthly high frequency data just tilt down, compared with the same period last year. For example, June exports and imports are down in the range of 20%. What's improving is that this degree is less compared with the previous two months. So it's really coming from a shutdown, a lockdown, that began in March. So the low point was around April May and you're seeing resurgence, companies starting to start production again. The challenge with tourism is that your ports remain closed. And there's no plan yet. And in the next several months, probably the rest of this year, to allow international commercial flights. So we're expecting tourist numbers to be down to about seven to 9 million visitors this year. That's down 85% from 14 million last year, so it's down almost 80%.This is a figure coming from the Tourism Authority of Thailand. So we're struggling along with many other countries in terms of tourists. That said there was a domestic tourism scheme with a 22 billion baht stimulus that encourages Thais to travel up country, in the rural areas with subsidies in hotels, restaurants and transport. So to some extent that would offset the much lower figure from international tourists.
Interviewer: And so is most of the weakness in the GDP numbers coming from that tourism hit?
Orsen: From -- that's one of two areas. The other area would be exports. As you know, global trade US China for the past several quarters has affected not only global supply chains. So these two factors, tourism and global trade has really caused GDP to be very weak this year. So the latest forecast is in the range of 8 to 9% down for 2020. So central bank is expecting negative 8.1. The finance ministry just a few weeks ago came out with minus 8.5. So that's the figure we're seeing. The earlier estimate was in the range of 5 to 10%. So this is really a fine tuning of forecasts.
Interviewer: And looking at stock markets now, I mean they were obviously very volatile across the world for a period of time, but as they’ve calmed down a little and the picture has become a bit clearer, have you made any adjustments to the portfolio or are you largely happy with where it lies?
Orsen: In terms of the market, the big drop was in March followed by the very swift rebound in April. The past two months, June and July have been pretty flat. So pretty much the rebound, the drop from February March back to the levels of June, the markets are pretty much back to the levels of around February right before the Coronavirus hit. So the asset allocation, in terms of the rebound overall in equity has pretty much been back to the levels like I mentioned. And what's changed is now how stock selection is more important in the sense that if you choose to make stock adjustments -- as you say to the portfolio -- for the past three months, we made several changes to the portfolio. We trimmed down several sectors, concentrating holdings for example, property and banks. These two sectors, we exited several stocks. We also added new stocks to the portfolio, initiating stocks iin transport and retail and also in mobile phone information, communication technology type businesses, so it's more strategic adjustments in terms of sectors which we like and also specific stocks.
Interviewer: And how does the portfolio look today? Are there any kind of big themes that you’d draw out?
Orsen: Yes, the biggest exposures for the Trust -- the largest sector is energy and utilities. We are underweight that sector however, it's a bigger sector but it’s underweight. Just by way of we're new to energy but underweight utilities because of just valuations. The next largest sector is construction materials. This is strategically overweight, in the sense that the lower oil prices since March has benefited margins, especially since March and April. So you're seeing these in better relative performances in construction material stocks. These would include cement and tiles. The third largest sector is commerce. This is a big – a reasonable overweight in a sense. We like specialty retailers now so consumer staples are retailing in a sense in a relatively resilient sector within the stock market. For these three sectors, energy and utilities, we have about a 16% rate, construction materials 13 and commerce about 10%.
Interviewer: And, obviously you're talking to companies all the time. What feedback are you getting from them – are they generally optimistic, pessimistic? How are you finding their mood?
Orsen: I think they're more on the cautiously optimistic outlook in the sense that there’s been a gradual loosening of restrictions, but still wary, as is the government of whether there will be a second wave. That's what we're seeing in other countries. So far, we haven't seen any wave but I believe corporates are just being prepared and not being overly optimistic about the trajectory of growth. So retailers have seen a rebound. Rebound since March, April lockdowns. Banks are reasonably cautious in the sense that they have forbearances in terms of their loans. But they have set up a lot of provisions just to be cautious. Construction materials I mentioned, most companies have a pretty muted top line growth, demand will be flat and not down. But their margins will be better just because of lower input prices, lower energy prices, for example. I think overall, what you're seeing from second quarter results, companies are reporting weaker numbers, especially on the top line, most have weaker margins. I think the outlook is pretty, pretty cautious. Just looking at how spending -- how people are spending or how businesses are investing at this point.
Interviewer: And what about the impact on dividends? Is that caution reflected in companies still holding back on dividend payout?
Orsen: Dividends are paid typically as a percentage of profits. So, for the most part companies are maintaining their dividend payout ratios as a percentage of profits. The main exception would be banks where the central the central bank is encouraging banks to reevaluate the capital position to conserve capital and discouraging paying interim dividends. That said, banks capital positions are quite strong -- capital ratios of over 15, 16%. And any worst case scenarios could just take away one or two percentage points. So, I think companies, or at least banks, are just being conservative at this point. Other corporates have declared interim dividends thus far. And it's really just reflecting if profits are lower, then the dividends would be lower proportionally, but dividends are still being paid.
Interviewer: And the Trust has historically had a reasonably high yield. Are you reasonably confident that can be sustained for the year ahead?
Orsen: Yes, looking from the company’s -- the dividend yield, and the amount of yield that corporate and the Trust are paying, it still seems reasonably optimistic that the Trust could maintain a good dividend.
Interviewer: And I mean, looking at markets today, do you think they fully reflect the risk that is still out there? Or is it very much kind of sector by sector. Are there still kind of bargains to be found really amongst volatile markets?
Orsen: I think there are still surprises. Even when companies report their second quarter numbers, there’s still an immediate reaction to the share price either way, either it's a positive or negative surprise. For example, banks that announce large provisions, front loading their provisions, for example, had an immediate drop. That creates opportunities because these are the more conservative banks that are setting these provisions early. For example, construction materials companies, for the most part, have much better margins just because oil prices are low, because spreads have improved because of these dynamics and energy prices. So you're affecting that in the share prices as well. So, the market still sees opportunities, especially across sectors for views, sectors, which we believe will do well in this environment. And the way that our portfolio is positioned, we do like materials just by way of margins. We like commerce, just by way of the resiliency as well as prospects of top line growth.
Interviewer: And what is the Trust’s current position on gearing? Have you been able to use it to your advantage through this period?
Orsen: The gearing is currently 12, 13%. Pretty much unchanged over the past three months. It's just been used just -- as the market hasn't been too volatile. So we haven't really changed the gearing much. Part of it was used to pay for the Trust’s dividend that was paid earlier. But I think we're comfortable keeping around the 10 to 13% level in these circumstances. Of course, if the market drops sharply or increases either way, then I think we could readjust accordingly.
Interviewer: And just finally, could you give some of your views on the outlook for the second half of the year and what investors might be able to expect?
Orsen: The second half is going to be a recovery kind of outlook, just following the trajectory of the economy. The second quarter GDP numbers aren't announced yet. But that would be in the upcoming weeks. We're expecting the GDP drop of low double digits. I think the consensus is 13% compared with the second quarter of last year. If you work out how first quarter is, second quarter and the forecast for full year of about 8 to 9%, then we're seeing slight growth, positive numbers for the second half. So that's what we're expecting in terms of top line and profit momentum for sectors. Of course, this would affect certain sectors, for example, domestic oriented consumption, investment type, government spending type of exposures, and I think our Trust is quite well positioned to that respect.There's still challenges in the tourism and export sectors. Tourism would be reflected in the hotel companies and the airports companies. Even also medical tourism, these are seeing these same poor numbers before in the second quarter. And the outlook is still challenging, at least for the second half of this year. Beyond the second half we’re just thinking a continuation of the recovery. Back to spending, back to a certain sense of normalcy over the course of 2021. And for 2021, we're expecting a GDP growth of in the range of 3 to 5%, which isn't too bad. It isn't back yet to the level of 2019. But going to a certain level of normalcy, granted that global trade through exports or tourism isn’t likely to come back very quickly.
Interviewer: Great. Okay. Thank you Orsen for those insights today, and thank you to our listeners for tuning in. You can find out more about the trust at www.newthai-trust.co.uk. And please do look out for future episodes.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only, and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments of products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns, return projections or estimates and provide no guarantee of future results.
Aberdeen Standard Asia Focus: update from the manager
In this podcast, investment manager Hugh Young joins us from Singapore to provide an update on recent events in Asia. We learn more about the underlying portfolio of this Trust as Hugh discusses recent changes and where he is seeing opportunities.
Recorded on Tuesday 28th July 2020.
Transcript
Podcasts from Aberdeen Standard Investment Trusts, invest in good company.
Interviewer Hello and welcome to the latest in the Aberdeen Standard Investment Trusts podcast series. With me today is Hugh Young, manager of the Aberdeen Standard Asia Focus Investment Trust. We're going to be talking about the ongoing fallout from COVID-19 and how he's managing the Trust in these uncertain times. Welcome Hugh. The last time we spoke we were in the early stages of the COVID-19 outbreak and the outlook was still very uncertain. Have you been able to build any clarity around both the economic and corporate outlook in the intervening couple of months?
Hugh: Well, I wish I could be clearer but of course, things are still quite uncertain. Asia has been dealing with COVID arguably much better than many other parts of the world. And COVID has been substantially under control in large economies such as China and smaller economies such as Singapore. Although we have seen second waves of COVID coming in Australia which has caused further lockdown, so I think at the moment it's very much a matter of reacting day by day to news on COVID. I think what has happened, and what has stabilized, is the way much businesses is done within Asia. So I think people have been quick to adapt to new circumstances, change business practices and employ novel practices where necessary. So that's stabilized, but the outlook for broader economic growth is still uncertain given COVID. And of course, we have some of the traditional issues cropping up again. So in recent weeks, we've had the renewal of tension on the US-China trade front, which has really been running sore for a couple of years. So as ever, life is not terribly certain - it never has been. But of course, we're still finding plenty to do and luckily plenty of value within the portfolio.
Interviewer Okay, so how would you kind of describe your current mood? Are you generally optimistic or pessimistic – where do you lie on that?
Hugh: Well, as a fund manager, I think one always borders on the pessimistic and is always looking out for the worst things that can possibly happen and trying to protect things on the downside. And it's certainly hard to be super optimistic about economic growth and this year economic growth is going to be very, very poor. I think to a large extent markets are discounting that and recognising that, so no one expects economic growth to be exciting this year. There are expectations and indeed, growth should pick up next year - there should be a rebound. Not necessarily a complete V-shaped rebound, but nonetheless still a strong rebound in economic growth and in earnings growth. But this year we're not expecting great shakes out of growth in either economies or indeed corporate earnings.
Interviewer And markets have obviously moved a long way. I mean, to the point where people are suggesting that they're looking rather over-optimistic. I mean, to what extent do you think they're adequately reflecting the risks?
Hugh: Yes, I think there's, in broad market terms, I think there is a degree of truth in that when you look at the major indices. Of course, if you dig down and look at the major indices, you'll see that they've really been fueled by the stock prices of a handful of companies and typically that’s the Amazon and Netflix of this world that have been powering the global indices. So as far as we're concerned, where we have a big hunting ground for opportunities among small caps, thousands of small cap within the Asian region. There's still the opportunities, but certainly I worry, looking at some of the major markets, that things have become a little stretched. But that’s largely among the larger cap companies, and very much focused on the internet.
Interviewer And as markets have become a little less volatile, have you made any changes to the portfolio?
Hugh: Yes, we have. Not huge changes, so the portfolio is still very much recognisable from when we last did a podcast. We've added sort of one new holding in Australia – an investment management company, we've been topping up a relatively new holding in Singapore of a hospital company, and various other companies we've been topping up - a financial company in India, for example, where the market’s been quite weak. Conversely, we've been continuing to tidy up in areas where we don't see that tremendous growth. So these are companies that might be in the financial sector. So conversely, having topped up a company in India in finance, we sold our holding in City Union Bank in India which has done well since we bought it. And we’ve been top-slicing various companies in Thailand, Hong Kong, and one in Sri Lanka.
Interviewer And looking at the top 10 holdings today, it's a real eclectic mix. We've got a precision toolmaker, a life sciences company, property company, convenience store chain. What binds them all?
Hugh: Yes, we do – and in a sense it’s been deliberate. We haven't put all our eggs in one basket. We spread our eggs, between countries and between sectors of the economy. And in fact our largest holding is to do with internet shopping which has done fabulously well in Taiwan. And really what binds them, is that in their fields, they're all typically market leaders. That might be a small market - so for example, in Sri Lanka, we have one of Sri Lanka's largest conglomerates who are involved in a variety of fields. But because Sri Lanka's a small country, it's also a small cap. And then we might have a highly specialist company involved in microscopes and the like in Korea, for example, but they're all leaders in their field. And the other thing that binds them is their strong balance sheet. So financial strength has been a key really since day one of Asia Focus all those years ago, because certainly when you're small cap, you never quite know when something goes wrong, and you don't want to be in the grip of the banks if something does go wrong. So that was one reason we've survived various crises quite well, given financial strength.
Interviewer Yes. And presumably that was important during this crisis as well.
Hugh: Absolutely, because certainly for some of our countries, and we do have a couple of hotel companies, about 4% of the portfolio also, which would have seen earnings just disappear. But both groups that we have are backed by a very solid parent, very strong balance sheets – they’re not developing, they're just running hotels. So they don't have huge capital expenditure demands, and they've got through it and they're now seeing business pick up again.
Interviewer And are there any areas where you're finding opportunities or looking around at the moment - either by country or by sector, that are sparking an interest?
Hugh: Funnily enough, I wouldn't say there's any particular area. Given price movements in markets and volatility in markets, suddenly something that you think is not of interest one day might be of great interest the next because of price movements accordingly. And then, of course we're always on the lookout for new investment opportunities. So that might be through initial public offerings, and also uncovering new stocks that not even we have heard of.
Interviewer And where is the trust on gearing at the moment?
Hugh: Oh, yes, that's an important point. Gearing has come down slightly. So we're give or take at about just under 10% geared on a net basis, which is a bit lower than we've been historically.
Interviewer And how are you feeling about the rest of the year? Do you believe earnings will bounce back or is it sector specific or really are we looking into 2021 before anything gets back to any kind of normality?
Hugh: I think general normality - yes, we're probably looking at 2021 for a return to normality. We are seeing, as we speak, a normalisation - so as I mentioned, companies having seen their business drop off the edge of a cliff in many areas. I mean, not all areas – again, a substantial amount of our portfolio has actually been a beneficiary of what's gone on. Certainly the newer companies, the tech companies and the like, even some of the retailers have been beneficiaries. So you’re going to see a mixed pattern, but certainly a better quarter coming ahead. So the bad quarter will have been the second quarter of this year, when the full effects were felt, and now you're seeing a steady improvement, but not a return to normality as yet. I think we have to wait until next year for that.
Interviewer And what about the major risks? I mean, obviously everyone's very minutely focused on coronavirus at the moment, but are there other things lurking in the background that might surprise markets should the coronavirus risks ebb?
Hugh: Yes. They're the broader risks that have been ever present and that we've dealt with since day one of the Trust’s existence. So they’re the broader economic risk of the resurgence of the China-US tension. We've even had India-China tension on the border. It hasn't affected the economies as yet, but again, issues such as geopolitical tension can always throw things off track. And then you have things peculiar to individual countries. It can be due, again, typically things to do with elections, and the like - changes, change of control, new regulations coming in, but these are the things that we've lived with for the last 25 odd years that the Trust has been going. So always things to worry about and we spend our lives worrying.
Interviewer Great. Okay, thank you Hugh for your time today and thank you to everyone for listening in. You can find out more information about the trust at www.asia-focus.co.uk. We're working to keep you updated throughout these tricky times. So please do look out for future updates.
Important information:
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments or products mentioned here in and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns. Return projections are estimates and provide no guarantee of future results.
Aberdeen Smaller Companies Income Trust: update from the manager
In this update from investment manager Abby Glennie, she discusses the current environment for smaller companies, the feedback she is hearing from companies within the Trust's portfolio and her thoughts on what the future might hold.
Recorded on Thursday 30th July.
For more information: www.aberdeensmallercompanies.co.uk
Transcript
Transcript of audio recorded on Thursday 30th July
Podcasts from Aberdeen Standard Investment Trusts - invest in good company.
Interviewer: Hello and welcome to the latest in the Aberdeen Standard Investment Trusts podcast series. With me today is Abby Glennie manager on the Aberdeen Smaller Companies Income Trust. We'll be talking about how smaller company dividends have fared during a tough time for company payouts. Welcome, Abby.
Abby: Hi
Interviewer: Hi. The most recent statistics paint a difficult picture for dividends. UK dividends have fallen by more than half in the second quarter. How have companies in the Trust fared by comparison?
Abby: Yes, so I think the dividend environment has clearly been difficult for all types of companies and that’s been for a variety of reasons. So you know, some companies have actually had challenging operational periods, but some of even the best performing companies have this pressure let’s say of not paying dividends, either because they’ve taken part government schemes, so the furlough scheme or some of the other assistance schemes, or they’ve just felt a bit of pressure to be cautious and hold on to cash reserves because the high level of uncertainty. And you know, there was pressure that sort of if you had taken part in schemes, you shouldn’t really be paying out to shareholders at the time. And I also think there just became a very sort of general view in the market that because of the unusual situation we were in, it was okay not to pay dividends. So companies weren't really being punished for not paying dividends. Now actually, what we've seen across the portfolio is, because we invest in quality businesses they have been businesses with good balance sheets, and they've gone into this in strong positions. Actually a lot of them because of the sectors that they're in and the services that they provide, are actually very resilient throughout this. So right through this period, we saw a lot of stocks in the in the portfolio continue to expect to pay dividends. The thing we've been looking at more recently is that there were some that have surprised us by saying they weren't going to pay a dividend when we thought they were in a position to be able to. And what we've noticed in the past couple of months is that that's really coming back again. So companies who didn't pay before, actually, they're starting to pay dividends quicker than the market expected. Some of them are even making up for the dividends they didn't pay before. So I think overall, while we're definitely not going to be immune from this sort of lower income situation, and where earnings are lower, dividends are going to be lower. But actually, we've been very pleased by the sort of high proportion of stocks in the portfolio that will pay dividends this year.
Interviewer: Okay, and you mentioned that companies are giving a bit more clarity on the outlook. I mean, what feedback are you getting from companies - has that generally left you feeling more positive or negative?
Abby: Yes, so I think there’s still a huge amount of uncertainty in markets, and the degree of that really varies between different industries. So, for instance, if you're in travel and leisure at the moment, I think there's still a high degree of uncertainty. But other industries who have operated throughout this for them more settled environment. So for, like food producers or technology businesses, you know, I think they're in a position to actually feel more certain about their outlook. Some of these companies have even been seeing improving trading through this environment. I think the challenge for a lot of companies from here is that there's a lot of areas that are just outside of their control. So for example, government rate restrictions, and what are demand levels going to be like. But for me, the highest level of uncertainty is probably about unemployment levels, because we're just not really seeing evidence of that yet. Certainly people are still on the furlough scheme, and when I talk to companies, a lot of companies are talking about just not the need to take back everyone off furlough, because they’ve sort of learnt how to operate more efficiently, to be honest. So I think how the government unwinds that furlough scheme and how companies sort of adjust staffing levels, not for cost expenses but just to balance the demand path I think will be tricky. And the other thing that we're seeing is that, I think a lot of the, a lot of the recovery is really going to be about things like consumer confidence and unemployment levels. So in that way we think that the market outlook is much more about main street than it is about Wall Street.
Interviewer: Okay, and with that in mind, have you made any changes to the portfolio in recent months?
Abby: No, we really have made any changes recently. We added a few new stocks at the beginning of the COVID environment. We saw a few interesting investment ideas. We marginally increased our fixed income exposure you know for security of income. But actually, no, in the past few months, we haven't made any changes. I think we feel very comfortable with the positions we have, and how those companies are trading. And importantly as well, the performance of the Trust has been very strong this year so we're really continuing to run with those winners. And we're pleased, you know it's quite a busy reporting season again now, and we're very pleased with the positive reporting we’re seeing at our holdings. And importantly, as well as the sort of share price reaction to those. So even the sort of quality growth businesses which have held up well to this environment, when they are reporting good results, they are also again, seeing share price appreciation.
Interviewer: And, obviously markets have improved quite a long way, although it does seem to have been quite narrowly drawn. I mean, are there areas where you're still finding kind of good value?
Abby: Yes, I mean, because we haven’t been trading the portfolio kind of tells you that we still think there's value in the holdings that we have. So we think because of their operational performance, actually they continue to offer strong investment outcome. I mean, in tough environments, which I think is what we have for at least the rest of this year, probably going into next year easily. You know, I think investors will pay up for that quality growth, and certainly what we've been through the past few months, and just with the level of uncertainty we have in markets and we are going to have increasing unemployment, we're going to have tougher economic growth, how the government's going to pay back and fund all that they've done in recent months is hard to understand. So I just think in that environment, actually sort of resilience and quality and companies you can still grow irrelevant of, you know, all the headwinds against them. I think those become even more valuable businesses. And so when we think about valuation, you know, it's embedded within all of our investment decisions, but actually the value in terms of multiples on our businesses at the moment, even those which have re-rated, they're not at a level that puts us off being long term holders. I think we might see some short value rallies which tend to be bad for our investment process. We saw that in late May but really, I just don't think in this environment that those value rallies are going to stay.
Interviewer: Are there any kind of themes you’d highlight in the portfolio, or any sort of examples that highlight that?
Abby: Yes, I mean, so the themes are really outputs rather inputs of our process. For us it's much more about companies specifics and that bottom up stock analysis. I mean, we're pleased that even where we have exposure to more cyclical sectors, like for example electronics – you know, the names we hold within that very much focuses on those higher quality growth names, that have been resilient and performed well. I think also we’ve seen that through, we've got quite a few asset manager type related stocks that have traded well, so things like Liontrust, AJ Bell, Intermediate capital. But I mean, I guess the key theme in our portfolio is really an investment style which persists throughout. You know, we’re very true to that and we don't step away from that. So the real theme is about that quality and growth, that resilience.
Interviewer: And I mean, obviously there are still risks out there. Coronavirus hasn't gone away. We've seen, you know, a resurgence of the US-China poor relations. But I mean, does the price of smaller companies today reflect those risks do you think?
Abby: Yes, I mean, I think one of the challenges is that smaller companies often just get treated all with the same brush. So despite what resilience they might actually offer at an individual level, we see markets panic towards smaller companies. So we saw them trade off the most when we started this COVID-19 situation. It's the same as when we saw Brexit, back in 2016, when we saw that first trade up, everyone sort of rushes out of smaller companies because they have this risk perception. I think firstly, our investment process is set up to invest in smaller companies in a lower risk way. We do that through the quality focus. And actually, what I would say on an individual level is that often smaller companies can adapt more quickly, you know they're more nimble, and perhaps they play to market niches where they can still grow. And I think the easiest way for people to see examples of that actually is just to look at the businesses in their local community. And what many of them achieved during the lockdown situation. Now actually, a lot of them have thrived and you know it’s been much easier for those companies to adapt.
Interviewer: And just finally, there's been a lot of problems for traditional income funds with areas like banks and the oil majors hit quite hard. Do you think investors should be being more creative in the way they hunt for income, and in particular obviously, should that include a greater focus on smaller companies?
Abby: Yeah, so I mean, I guess what we've been pleased about is the resilience of many of the smaller companies. And, you know, I talked about their ability to actually continue to pay their dividends through the crisis or to return to them more quickly. And I think it'll be really interesting at the end of the year to look back at how smaller companies and income portfolios like this have held up relative to large cap. Because I think some investors will be quite surprised by that outcome. You know, within large cap in some of these sectors which the income funds rely on heavily have been some of the most challenged. Some of them are from pressure by their regulators to not pay any income. And a lot of them are big businesses, which are heavy users of government schemes, which also limits their ability to pay. So actually, you know, I feel like when, where we've positioned ourselves within the smaller companies with that quality resilient business, we sort of capture two elements – we’ve captured businesses with good balance sheets who have been in a strong position to pay. And we've also captured enough businesses in sectors who have traded well through this environment. They've also been in a position to pay. So I think, yeah, I think some people could be surprised at the end of this year.
Interviewer: Great, okay. Thank you so much Abby for those insights today and thank you to our listeners for tuning in. You can find out more about the trust at www.aberdeensmallercompanies.co.uk and please do look out for future episodes.
Important information:
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments of products mentioned herein, and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up, and investors make it back less than the amount invested. Past performance is not a guide to future returns, return projections are estimates and provide no guarantee of future results.
Shires Income: an update from the Manager
In this podcast Iain discusses recent portfolio adjustments, his thoughts on the UK equities market and the importance of quality stocks.
Recorded on Thursday 9th July 2020.
Transcript
Podcasts from Aberdeen Standard Investment Trusts, invest in good company.
Interviewer: Welcome to the latest in our Aberdeen Standard Investment Trusts podcast series where we catch up with our investment trust managers to discuss how the COVID-19 outbreak is impacting their portfolios. Today we welcome Iain Pyle, manager of the Shires Income Trust. Hi, Iain. Now, let's start with looking at markets. You know, they've recovered a lot of their capital value, but there's still plenty of uncertainty on the income side. What are you seeing among the companies in your portfolio?
Iain Pyle: Yes, good morning Cherry. I think companies everywhere still face a huge amount of uncertainty and that's inevitable after such a big crisis-like event as COVID-19 . But I think we are at the point where generally the uncertainty is starting to reduce rather than increase, and most companies are able to look through to the other side of the crisis. So there will obviously be lots of debate and variation about how quickly companies recover, but generally they’re starting to look through to next year and things being more normal than they are right now. Obviously, that varies hugely by sector, so there are still sectors where a lot is very unclear particularly travel and leisure, and the banking sector for example, where you really need to wait and see how the economy reacts to the end of government support to get a view on the outlook, even into 2021. From an income point of view for the companies in the portfolio, generally we try and hold companies that have pretty resilient income characteristics. So they have good balance sheets and they have cash flows which should be resilient despite a short fall in consumer activity. In most cases, we're seeing confidence improving on the outlook and on dividends at the moment. So obviously there's a large number of companies that have cut dividend payments this year, but they're starting to think about how they bring them back next year as activity picks up.
Interviewer: Okay, and did you shift the portfolio in response to the crisis at all? I mean, either selling sectors where the outlook had profoundly changed, or buying up opportunities where the price had fallen?
Iain Pyle: Yes, I mean, it's a slightly difficult crisis because everything happen so quickly to really move the portfolio and take advantage of valuation opportunities. And particularly with an income perspective, where we've seen share prices really fall dramatically often that’s been accompanied by dividend cuts or a marked change in the output of businesses. So we haven't done a lot of trying to pick up companies that have really been punished in terms of share price. What we have tried to do is just shift the portfolio slightly to make the income more resilient because at a time when so many companies are facing curtailed cash flows and having to spend dividends, we want to make sure that the income for the portfolio to the end shareholders is protect as much as possible. So the kind of things we've been doing have been adding to larger stocks with broad based international earnings that don't face balance sheet difficulties or regulatory pressure to cut dividends. So that would be the likes of things like BHP, British American Tobacco, AstraZeneca, GlaxoSmithKline. They’re all stocks where our analysts are fundamentally positive and where cash flows should be pretty resilient and they’ll continue to pay healthy dividends. We've also added to a few high yielding UK names like Direct Line Insurance for example, which is not massively affected by the crisis. And on the other side, I guess the way we funded that trade has been in two ways. Firstly, we've sold some names where dividend prospects have been deeply reduced like HSBC where there's a regulatory block on paying dividends for this year. And then we've also sold down some of the more growthy names in the portfolio that have done very well over the past year, but where yields are low. So that would be the likes of Abcam or LSE, which have been really good performers, but right now valuation doesn't look as compelling as some other things and they don't have the same income as the stocks we’re adding to. So it's really just a shift to make income a bit more resilient and maintain a high level of dividends for shareholders.
Interviewer: Okay, and looking at the portfolio today, are there any sort of major positions you'd highlight - sort of either over or underweights and key themes?
Iain Pyle: So we always try and keep the portfolio sides pretty balanced. The reason being we want that resilience of income and we want to maintain a balance between income and growth in the portfolio. So we tend not to have big factor or sector skews in the portfolio. The one overriding bias we have is to own higher quality stocks. So generally things with higher return on capital, good competitive positions and strong balance sheets. And that hasn't really changed - that's a continuous skew for the portfolio. And you can see that in the factor exposure we have. So generally the portfolio is overweight quality and growth factors and slightly underweight value factors, with the exception of dividend yield. By sector at the moment, I guess we’re slightly biased as you'd expect from an income portfolio. Slightly overweight energy, telecoms, utilities and financials. But in all those sectors, we tend to have that quality bias. So for example, in something like energy, we're overweight effective, but we are doing that through companies that don't have much commodity risk in them. Conversely, we are underweight sectors where there's more limited income, like consumer staples and also industrials, where you have a high degree of cyclicality but you don't really get the yield benefits. When we think about what themes we're looking for at the moment, I think it hasn't really changed since the end of last year to be honest. Those themes should really be ability to deliver growth independent of the macro outlook, defensive income – so strong, resilient cash flows and keeping our eyes open for valuation opportunities so when there is stocks out there with high yields where we actually think this is a chance to buy a quality company and get some yield compression over time - they’re the two things we're looking for.
Interviewer: The trust has an exposure to preference shares to produce the yield . What happened to that part of the portfolio?
Iain Pyle: Yes, so the preference share portfolio makes up between 25% and 30% of the portfolio at any one time. The aim of it is always to deliver a pretty stable capital position, but a high level of income and kind of do the heavy lifting on the income for the portfolio. And what we found through the virus period if you like, it's done its job really. So the preference share portfolio has gone down slightly in value - I think over the five months to end of May it was down by 5%. But that compares to the index down 16%. So it's obviously being defensive as you would hope. And at the same time, where we've seen 45% of companies cut their ordinary dividends in the FTSE, we haven't seen any impact on the dividend payments in the preference shares because they sit above equity in the capital stack and they should continue to pay. So it’s been a really nice position for Shire delivering defensive capital and continuing to pay a really high level of incomes. So it's certainly been helpful through this period.
Interviewer: Okay. You mentioned earlier that you were looking for companies with kind of international dividend streams. You can also invest in companies that are listed outside the UK, I think a small portion of the trust, have you been using that flexibility at all?
Iain Pyle: So we've been using it a little bit. At the moment, we've got five positions that are not UK listed. Obviously, the whole portfolio, even the UK listed names tend to be very internationally exposed in terms of where they earn their money. But that ability to invest in markets outside of the UK gives us a little bit more flexibility. I think it's something we'll probably try and use more going forward, because that challenge of finding income means having that flexibility becomes more useful now than it has been in the past. A good example recently would be we switched some Shell into Total, in the oil majors, and there's a clear steer there to go from one to the other where Shell has cut its dividends. Total are confident of maintaining their dividend, and there's quite a significant yield gap between the two. That ability to invest overseas just allows us to switch from one to the other and take advantage of that yield gap.
Interviewer: Okay, and what about looking at markets more generally. Do you think that market prices today reflect the risks, or does that very much depend on individual sectors?
Iain Pyle: I think it always depends on individual sectors. Generally, markets are really quick to look through the crisis and we've seen that happen really quickly. Valuations are already looking through to 2021 earnings and thinking what is something worth once it recovers from the impact of the virus. So in a sense it’s been remarkably quick, remarkably surprising how quickly the market has come back. And valuation multiples now are above pre-crisis levels. So I think the market is - we may have come through that easy part of the recovery, if you like, and I think the market is maybe not quite pricing in the level of uncertainty we still have as we come out of this downturn. Obviously, that varies hugely by stocks and sector. And I think there's certainly areas where the market is too cautious, and that's where we as active managers can try and add some value.
Interviewer: And what about the gap between the UK and other markets? I mean the UK was looking very cheap, then there was a bit of a bounce. Is it back to looking quite cheap again relative to other markets?
Iain Pyle: Yes, so the UK continues to trade at a pretty meaningful discount for the developed markets, both in terms of earnings multiples and the dividends yield that it generates. To some degree that is justified because it's overweight to lower multiple sectors like energy, mining, telcos which are great for income, but they don't have the same growth potential of tech or healthcare, which in some other markets are more overweight. And at the moment in an environment where you have low interest rates, then that favours the more growthy companies. So it’s natural the UK should trade at a bit of a discount right now. Like I said, that makes it great for income investors, because you're earning a decent yield on it. And even if you do set to adjust the makeup of the index, then UK does still look cheap compared to other markets. So it's a reasonably attractive place to put money right now.
Interviewer: Okay, do you see any further worries over the income side or is most of the bad news in the market now?
Iain Pyle: That’s a good question. I really do think most of the bad news is out there. I think companies have acted pretty quickly to protect balance sheets and to cut dividends. And regulators have given a pretty clear message in, certainly the financial sectors, that they want to prioritise balance sheet strength over dividend payments this year. So I think most of the cuts are out there. There's probably a few companies where we’ve still got to see the dividend cuts come. I think BP would be one in our portfolio that stands out where I think we'd expect to see a dividend cut in the second half of this year. That's something that is in the prices, were expected by the markets. I don't think it will come as a surprise, but generally, most of the dividend cuts have come through. And if anything, as we move through into next year, hopefully we'll see dividends return rather than go back.
Interviewer: And what about the risk management side? I think that obviously that's always been a focus for you and good governance and things like that. But have you tweaked anything about the way you manage risk in response to the crisis?
Iain Pyle: I think the natural bias of the portfolio towards higher quality companies with strong cash flows remains as ever, and that is a great way to control your risk - by buying good companies. The most important thing for us right now is to stay active and to try and engage with our companies as much as we can. So continue to have plenty of calls with management and make sure we understand how the current situation is impacting their businesses. I think when we have those conversations, the things we're focusing on more than we would have done in the past have been the balance sheet, the credit metric, and the cash flow at the moment, and the ability of companies to manage through this crisis and continue to maintain a solid balance sheet and hopefully pay income.
Interviewer: And finally, this has obviously been a bit of a roller coaster for investors. I mean, what reassurance would you give for investors in the Trust at what’s been quite a difficult time?
Iain Pyle: Yes, it certainly has been a roller coaster hasn’t it. I think it must be the sharpest decline in equity valuations and probably one of the quickest recoveries that any of us can remember in markets. What I would say right now is generally the worst is behind us and the economic outlook is improving as we see virus cases decline. It's not going to be a straight line up from here by any means. We can see the risk of second waves. We can see very worrying trends in the US and Brazil and some other countries, for example. But if we look forwards and take a medium to long term view, which is what we try and do in Shires, then we're entering a period where you've got a huge amount of government stimulus and economic support. You've got the potential to see progress on vaccines to put the major risk to the market behind us in the next 12 months. And generally, companies are looking forward and being pretty optimistic. So I think we are - we're not going back to where we were in March, is how I feel it is. And in terms of the portfolio, we remain pretty confident on continuing to pay a very healthy dividend, provided the recovery continues. And that focus on quality companies means we've got things in the portfolio that will continue to grow and deliver for the long term. So I think it's still very attractive, but obviously the income that the Trust is generating is - remains very attractive right now.
Interviewer: Okay, great. Thank you Iain for those insights today and thank you to our listeners for tuning in. You can find out more about the Trust at www.shiresincome.co.uk and please do look out for future episodes.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments of products mentioned herein, and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up, and investors make it back less than the amount invested. Past performance is not a guide to future returns, return projections are estimates and provide no guarantee of future results.