Manulife Asset Management leverages ‘Bona Fide Real Return’ to develop latest investment strategies
11 September 2013
News, Asia, Southeast Asia
By Hui Ching-hoo
Manulife Asset Management is now using its recently introduced ‘Bona Fide Real Return’ measure to define its investment strategies. The measure was introduced in its most recent report ‘Ageing Asia: The Asian Cash Drag’ and accounts for the significant effects of inflation, income taxes and credit risk.
Such factors undermine returns on bank deposits, the firm asserts; with savers in eight of the ten Asian markets in which the company has a presence suffering negative real returns. Over the past ten years, Bona Fide Real Returns have ranged from marginally positive at 0.6% in Malaysia and 0.4% in Japan to startlingly low at -2.2% to -2.3% in Vietnam, the Philippines and Indonesia.
Morten Frederiksen, lead manager for the Asia Pacific equity income strategy at Manulife Asset Management, tells Asia Asset Management that the Bona Fide Real Return is an information source for the company to drive its short- to medium-terms investment strategies: “We focus on whether the companies are able to deliver income streams via a regular payment of dividends and whether there is a sustainability element in terms of cash flow generation to ensure we deliver our investors strong and ongoing income streams going forward.
“Asia Pacific high-dividend equities are an increasingly attractive investment segment. Dividends and payout ratios have been rising steadily across the region, and this trend is expected to continue for some time yet. Dividend yield is currently above 3.0% for the region, and is expected to continue growing at 7-8% per annum over the next few years as companies in the region have strong cash flows and generally healthy debt levels.”
The strategy is market cap agnostic, with the flexibility to invest in attractive small-, mid- and large-cap stocks which meet our investment criteria. The firm applies a bottom-up investment strategy to identify companies with attractive valuations, competitive positioning, solid management teams and the potential for sufficient future cash flow to sustain or even increase dividend payouts over time.
“Despite the prospect of QE tapering, the economic outlook for the US remains relatively unchanged,” says Mr. Frederiksen. “Essentially, the unwinding of QE is expected to take place when the US economy is deemed to be in sustainable recovery. Increased QE in Japan, and possibly Europe, may end up countering any unwinding in the US. The intended impact of QE was to push global investors into riskier assets (including emerging Asia) and this may well correct the gap between economic fundamentals and market valuations.
“If another liquidity crisis similar to that experienced in 2008 were to occur, access to financing could become impaired, which would likely cause companies to cut dividend payments for a time to ensure liquidity. However, if the period is not prolonged, the result would likely be a short-term drop in dividends before a rapid rebound in payments and resumption of dividend yield growth. For this reason, we prefer companies with strong cash flow generation which have clean balance sheets and a comfortable debt position, as these are preconditions for raising payouts and also provide a margin of safety. Over the longer term, we believe the dividend theme will remain compelling in Asian markets.”
Several markets in the Asia Pacific region have very healthy dividend yields and attractive prospects, including markets like Australia, Hong Kong, China, Taiwan, as well as parts of the ASEAN region, says the fund manager. He also likes some relatively lower paying markets such as Korea due to the prospects for dividend growth and attractive valuations, providing some upside for the longer-term investor.
Michael Dommermuth, president of international asset management at Manulife Asset Management, notes: “Many people are aware that inflation lowers real interest rates. However, not many take into account factors such as income tax and credit risk. These factors have serious implications for returns on deposits, but vary widely across the region, highlighting the importance of asset managers having local-market knowledge when advising investors on retirement planning and offering appropriate saving and investment solutions.”
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