Coronavirus ii Super 60 update: Guinness Asian Equity Income

interactive investor's analysts bring you an urgent update on this ii Super 60 rated fund.

The coronavirus outbreak and subsequent pandemic have had a significant impact on the global economy and financial markets. Many share and fund prices have fallen sharply in a very short space of time, as has the cost of oil and other commodities. Volatility has reached levels not seen since the peak of the financial crisis in 2008, and many assets remain prone to sharp movements both up and down.

Given these unprecedented circumstances, with citizens in many of the world’s largest cities confined to their homes, we are collecting updates from managers of funds on the ii Super 60 list of high-conviction active and passive investments.

• ii Super 60 investments: Quality options for your portfolio, rigorously selected by our impartial experts
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Here is the latest from Edmund Harriss and Mark Hammonds at Guinness Asian Equity Income, written on 30 March.

Performance

• Asian Equity Income Fund is 5.84% (GBP, to 27.3.20), behind the MSCI AC Pacific ex Jap with valuations hit hard by corona. Fund has returned -21.1% vs MSCI AC Pacific ex Jap at -15.3%. 
• Since launch, (19.12.13) the Fund has delivered 53.7% vs MSCI AC Pacific ex Jap at 48.3% (GBP, to 27.3.20) outperforming by 5.4%. 
• Year to date, positive drivers of (relative) performance have been Chinese banks and Insurance, Hong Kong banks, China consumer discretionary, Ascendas and Link REITs, and Taiwan Tech.  
• Markets have otherwise caused valuations to go in all directions. Negative drivers of the portfolio include non-China Financials, non-Taiwan Tech, and non-China consumer discretionary.  The hardest hit stock in the portfolio has been Corporate Travel Management ( -40% ytd).   

Portfolio Positioning

• The Asian equity Income Fund is well positioned to drive through the current crisis and we are confident the businesses are robust enough to face the industry challenges of today
• Strategy for both funds is to invest in businesses whose sustained returns on capital puts them in the top quartile of all Asia or EM businesses – if they achieve this for long time these businesses are likely to go on delivering top quartile returns. We are trying to capture the ones that are priced as if they won’t. We don’t know when a valuation gap will be closed – but we are confident such a business is robust to face the industry challenges of today

Stock Changes

• Corona has caused share prices to fall offering opportunities to buy into stocks that we consider hitherto to have been too expensive. 
• In March, we took the opportunity to invest in names that meet our quality criteria, but are now a lot more attractively priced: Shenzhou (SEHK:2313) (textiles) and Zhejiang Supor A (household kitchen products, majority French-owned)
• These names have been on our watch list for a while.  Both offer robust returns on capital, cash flows and dividend streams.  We consider these stocks in terms of what they can deliver over the next 3-5 years.  
• We have sold Li & Fung (EHK:494), a Hong Kong based supply chain manufacturer, with a further sale in process to be disclosed.

Outlook and Dividends

• Our overall impression is that China and N. Asia has come through the worst of the crisis.   In the short term this shock has revised expectations on earnings but much in manufacturing is deferred demand that can be made up later in the year. Services and goods may falter later in the year with a delay on new orders from Europe but the companies we have in the portfolio are in the best position to deal with this.
• We have been working through downgrades of earnings forecasts this year – about 2.5% off where they were in January at 6.4%, with much of the earnings pushed into 2021 (back to expected growth of 9.8%).  
• As prices today don't tell us much about underlying expectations of a company, for now our Focus has shifted to look at financial stability in the existing portfolio. We have gone through the process of assessing cash, working capital requirements, debt repayments falling due in the next twelve months and dividend sustainability.  To this last point, we need to remember that many Asian companies have a dividend policy that is determined by payout ratio rather than a progressive payment.  Share buybacks are not a big thing in Asia, special dividends are more common.  Both these are likely to be scaled back.
• Corporate Travel is a good example of our review process, as the hardest hit in our portfolio: The company has net cash and also has sufficient cash to cover all debt falling due this year together with all trade payables even if we assume all its trade receivables turn bad.  It is an Agency business whose client receivables and client payables closely match – so they appear on the balance sheet but in fact are just passing through.  The company has access to additional credit lines, set up last year and which remain in place until August 2022.  The company operates a technology platform and has flexibility to scale back staff and operations in response to the disruption.  Most costs are variable.  In sum, the company can scale back and go into hibernation while maintaining liquid resources throughout.  The company announced its interim dividend on 19 Feb.  On 13 March the company withdrew its full year guidance but re-affirmed the dividend indicating no sudden requirements to conserve cash
• Only one stock (AAC Technologies Holdings (SEHK:2018)) in the portfolio of 36 has decided to cut its dividend as a prudent measure. 

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.