The Ian Cowie portfolio: why I just sold HSBC and bought this trust

In the second of his new weekly columns for interactive investor, one of the country’s top financial journalists discusses his investment portfolio and explains the thinking behind his latest trade. 

Asia was first to suffer the coronavirus crisis; might Asia also be first to recover from it? This long-term investor in the region certainly hopes so, if only because recovery anywhere in the world gives grounds for hope for us all, wherever we are.

Most immediately, when global markets moved into ‘risk on’ mode this week, Asian investment trusts were among the biggest winners in my ‘forever fund’. Shares in Baillie Gifford Shin Nippon (LSE:BGS), the Japanese smaller companies specialist, which was a long-term top 10 holding by value before falling out of the leaders pack last year, surged 6.3% on Monday for a 9% gain on the month. It remains down 20% over the year.

BGS bets all its chips on capital growth but pays no dividends. So I balance it with Henderson Far East Income (LSE:HFEL), which does what it says on the tin, delivering an eye-stretching yield of 7.6%, according to independent statisticians Morningstar.

Perhaps as the price of a high running income, HFEL has delivered tepid total returns over the years, but its share price advanced by 10% over the last month but remains 14% down over the last year.

Other holdings elsewhere in the region include Fidelity China Special (LSE:FCSS), up 7% on the week but down 8% on the year; plus Vietnam Enterprise Investments (LSE:VEIL), up 10% on the month but 16% down on the year.

Last week’s bitter disappointment when political intervention forced HSBC (LSE:HSBA) to suspend all income payments to shareholders in 2020, despite having plenty of profits and cash on hand to pay us, reminded me of a fundamental advantage of investment trusts; diversification to defend dividends. So, with a heavy heart and a lighter wallet, I sold all my HSBC and switched the cash into a new holding in JPMorgan Asia Growth & Income (LSE:JAGI) at 330p per share.

It’s early days yet but, reassuringly, JAGI gained 8% in the last week but is 3% down over the year. More seriously, my longer term reasoning is that HSBC generated 80% of its revenues in Asia, which was a major reason for me holding these supposedly high-yield shares that it turns out won’t be paying any income this year. So I wanted a more reliable source of dividends from a region where I expect to see high total returns in the years ahead.

Here and now, JAGI yields 4.5% and is due to pay its next dividend next month. That’s better than waiting until next year for money the bank may yet be forced to lend to borrowers who might never pay it back.

Most immediately, it is pleasing to see JAGI’s biggest underlying holdings are - in descending order by value - Tencent (SEHK:700), the Chinese internet services conglomerate that includes entertainment and artificial intelligence; Alibaba (NYSE:BABA), the Chinese e-commerce giant; Taiwan Semiconductors (NYSE:TSM), the self-explanatory group that makes chips to go with everything and, a major client, Samsung Electronics (LSE:SMSN), the Korean giant that may have made your mobile or TV.

Topically, in this plague year, JAGI’s top 10 assets also include WuXi, a Chinese healthcare and pharmaceuticals company. Which brings us back to where we began.

We probably won’t know whether we have seen the worst and a rally will be sustained until new cases of coronavirus fall consistently around the globe or a vaccine is found. But many equity indices - including the Dow Jones, FTSE 100, Nikkei and Hang Seng - are already 10% higher than their low-point last month.

That reminds us that stock markets are in business to anticipate or discount the future, not focus on the present or the past. I believe a significant part of the economic growth of the 21st century - in capital terms and income - will be generated in Asia.

Unlike America, which dominates my top 10 shareholdings, this view is not yet fully reflected in equity valuations. That’s why I am happy to hold a chunk of my life savings in Asia, via widely diversified and professionally managed investment trusts.

Of course, there will be bumps along the way - with the next likely big one being an argument about who is responsible for causing the coronavirus crisis - but investment trust shareholders are, to some extent, compensated for uncertainty by double-digit discounts to net asset value (NAV). 

According to Morningstar, the average trust in the Association of Investment Companies’ Asia Pacific Income sector currently trades at a discount of 10% to NAV, while the typical Asia Pacific Smaller Companies trust trades at a 10.2% discount. That’s good enough for me in bad times and unlikely to be available in better ones.

The author holds shares in BGS, FCSS, HFEL, JAGI, and VEIL as part of a globally diversified long-term equity portfolio.

You can see Ian's investment portfolio as at 2 April 2020 by clicking here.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

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.