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To provide investors with a total return primarily through investing in Asia Pacific securities, including those with an above average yield. The Company aims to grow its dividends over time.
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Actuary63,
I have always had respect for you technical ability and you have put more effort into your investigation than I did.
However by different methods we both come up with a similar number for capital return 1.4% against 1.5 - 1.6% but then I had a lower portfolio yield. These numbers I think can now be taken as a reasonable estimate of AAIF capital return.
Hello Everyone,
I have done my own calculations to examine whether AAIF is, to some extent, using the dubious approach of HFEL to boost its dividend income. Many thanks to ade2a for raising this important issue and doing his own calculations.
The first questions is what the underlying dividend yield on AAIF's stock portfolio is. I have calculated the weighted average dividend yield for all 58 stocks listed in the Annual Report to be 4.45%, which is a little higher than ade2a's figure based on the top 10 stocks. There is a huge variation in dividend yields, with many of the lower-weighting stocks having very high yields that pull up the average.
The next step is to calculate how much annual dividend income these stocks would have generated on a buy-and-hold basis. The market value of the stock portfolio at the end of 2023 was £430m, so the expected income on a buy-and hold basis would have been $430m x 4.45% = £19.1m.
Now let's compare this figure with the actual dividend income given in the Income statement for 2023. This was a higher figure £23.3m. Hence AAIF somehow generated an extra £4.2m of dividend income through its transactions in 2023. I'm afraid there is no other explanation than the same "dividend-washing" tactics of HFEL. The annual capital depreciation resulting from this approach is given by £4.2m / 430m, i.e. close to 1%.
In addition to this, the Capital column of the income statement indicates that £1.83m of the investment management fee is deducted from capital rather than income. This gives a total figure for annual capital depreciation of:
(4.2 + 1.83) / 430 = 1.4%
CONCLUSION
AAIF is generating additional dividend income by buying shares cum dividend and selling them ex-dividend (aka "dividend--washing"). Along with the management fee, this will results in a drag of 1.4% per annum on growth in future dividend income. In other words, the underlying dividend income on the portfolio needs to grow by 1.4% per annum just to maintain same dividend per AAIF share.
Now converting capital growth into dividend-income might be quite a sensible thing to do. I would prefer to have a dividend yield of 5.4% per annum growing at the rate of inflation than a 4% dividend yield growing at 1.4% above the rate of inflation. But the use of a covert dividend-washing strategy is not acceptable in my view. The AAIF fund managers need to come clean about what they are doing and justify their approach, explaining why it is preferable to writing call options on the shares they hold, which does not require a large turnover of the portfolio.
Lastly, we should not forget that AAIF is trading at a 14% discount to net asset value. This is creating a 0.8% increase in dividend yield which offsets most of the management fee. For this reason alone, I won't be selling my AAIF shares right now.
Name Yield Weighting Yield*Weighted Yield
TSMC 1.67% 8.20% 0.136940%
Samsung Electronics (Pref) 2.71% 6.60% 0.178860%
BHP Biliton 5.30% 4.50% 0.238500%
DBS 5.33% 3.50% 0.186550%
Oversea-Chinese Banking Corporation 6.08% 3.30% 0.200640%
MediaTek 4.60% 3.00% 0.138000%
Power Grid Corp 4.35% 2.80% 0.121800%
Venture Corporation 5.26% 2.60% 0.136760%
United Overseas Bank 5.80% 2.50% 0.145000%
Rio Tinto 5.37% 2.40% 0.128880%
Totals Average yield 4.65% 39.40% 1.611930% WEIGHTED YIELD 4.09%
NAV 238.59 Yield to assets 5.00%
Share price 208.00 Yield to share price 5.60%
Earnings 11.97
Dividend 11.75
We can see that the weighted yield for the top ten holdings is 4.09%. I am assuming these fundamentals are typical for the rest of the holdings. If charges were taken from income rather than capital the fund would yield about 3.2% we might want to add about 0.25% = 3.45% for gearing in favourable conditions.
The yield to NAV is about 5% therefore 1.6% let us say 1.5% of our income return one way or another will come from the capital account.
Many UK income funds distribute more than the yield on the underlying assets. There is no free lunch here and part of the income return from many funds is simply a return of our own capital.
2023/24 Final Results
Managers seem somewhat candid about the way the fund is managed.
Good news is that the total return matched the benchmark return. Of course the reduction in management fees is positive for the fund. Earnings did exceed dividends as expected but I think we need to dive deeper into those earnings.
As the managers reported a part of those earnings were from companies that paid a special dividend. Of course this dividend will not be repeated in following years. Furthermore as the Managers report some stocks were sold ‘xd’ this special dividend. The share price will obviously fall leaving less capital to replace this income somewhat weakening the income account in future.
It will be reasonable to estimate that future earnings growth will at best fall or we may have a year or two of lower earnings depending on management and market conditions.
Turnover at 40% is a little high for my liking. This implies the entire portfolio will be replaced in 2.5 years.
Maybe some of you have a different opinion.
Here I will have a quick look at the potential effect of gearing on the income and capital account in rising and falling markets. I will assume 10% gearing charged with interest charged 50/50 to income and capital.
A £25,000,000 fund.
First I would assume the interest rate will be marginally less than the yield on assets purchased. Now for rising markets.
Borrow £2,500,000 @ 4% since interest is only charged 50% to income and the yield on assets is higher than the interest payment there will be an increase in the revenue account. So e.g. interest payment £100,000, additional income from assets £120,000, £50,000 used to repay interest, £70,000 added to income account.
The capital account will be charged £50,000 annually to pay the interest. This will slowly decrease the capital base over time however if the assets grow fewer assets will be sold when the loan is to be repaid and there might be a net gain to the capital account.
This will benefit us as shareholders compared to an ungeared fund.
Revenue is increased by £70,000/£25,000,000 = 0.28% as long as the gearing is maintained.
If asset prices fall. The fall is magnified by gearing in this case 1.1X the fall in assets. Marginally more assets are required to repay interest from the capital account. If the loan is repaid more assets will be required to be sold than bought originally with the loan. This downward pull on the capital account will pressure the income account over time.
In conclusion gearing increases the risk of the fund. This will work in our favour if asset prices rise and there is a small boost to the income account roughly 0.25%. In weak markets pressure on the capital account will lead to modest downward pressure on the income account.
PS if 100 shares are bought when the loan is made and the price rises 100% only 50 shares need be sold to repay the loan. If the price falls 50% 200 shares or equivalent need be sold to repay the loan.
My apologies Oldandtired
You did mention borrowing costs charged 60% to capital.
As always there is no free lunch as investors we need to consider what may happen in various scenarios given the gearing. If I can get my head round it I might write a post.
There is a not so subtle difference between a dividend covered by earnings and yield on the Trust exceeding that of the underlying shares.
If you are not convinced look at what has happened to HFEL over the last 3 years.
Their dividend is still covered by earnings. But how are those earning produced? That is the rub.
Question; is the borrowing interest repaid from income or capital?
These are the sort of things we need to get to the bottom of.
The yield on NAV is 11.75/230 = 5.1%.
Charging to capital is not a free lunch the yield is increased but at the expense of capital returns.
Maybe all is well but I do not like a rapidly rising dividend and stagnant capital values we have seen the end of this story.
60% of management fees and finance costs are charged to capital, not income. Given the gearing of 8%, a 5% yield on nav does look as if it is covered by income.
Actuary 63 & Barchid,
The suspicions look likely to be correct.
I would suggest the 4.5% yield is likely typical for the portfolio in any event 11.75p / 230 NAV = 5.1%. Given the rough 1% fees the yield should be about 4.1% to NAV. Certainly not as bad as HFEL.
Issue is the higher yield becomes the fixation for the Managers rather than total returns which is what matters for both income and growth investors.
Depends what you're looking for, barchid. For someone who needs income from their investments, the AAIF dividend has grown over the last 10 years from 7.9p per share to 11.75p per share, which is more than the increase in the CPI over the same period. Investing for growth can produce great returns, but market volatility works against drawing a regular income from growth stocks. Maybe it doesn't matter if you know when to take profits.
Actuary/ade
I had quite a significant holding in this trust for quite some time but ultimately the lack of capital growth encouraged me to sell about two thirds of them recently after their recent short lived spurt up as I was coming to the same conclusions, though I was never involved in HFEL.
Generally Aberdeen (or whatever they call themselves now) trusts have been a sad shadow of their glory days especially compared to the likes of Allianz trusts, for instance.
Fair point, here are the dividend yields on the top 10 holdings.
Taiwan semiconductor - 2.35% (7.4% portfolio weight)
Samsung Electronics preferred stock - unknown div yield (5.3%)
BHP - 5.37% (3.5%)
DBS - 5.57% (3.4%)
OCBC - 6.22% (3.3%)
Powergrid - 4.37% (3.2%)
Foxconn - 3.15% (3%)
Venture - 5.47% (2.8%)
Charter Hall - 3.7% (2.4%)
China Resources Land 6.65% (2.4%)
If we ignore Samsung, the weighted average dividend yield is 4.43% for 9 stocks that make up 31% of the portfolio. I think it's plausible that the rest of the portfolio would take the yield above 5%, but it's a pity they don't state the underlying portfolio yield.
Actuary 63
Surprised you are awaiting the results of my evidence. I certainly will be posting again after the results.
I considered you were the most technically competent on the HFEL board once you have all the info.
Hello ade2a,
I'll look forward to the results of your investigation. The managers' statement about dividend coverage is far more plausible for AAIF than HFEL. The net asset value of the trust is 230p, implying a dividend yield of slightly over 5% on net assets. DamienMoore's comments would also be of interest.
The managers always say that.
Have a look at the history of HFEL and the discussion board.
I will be posting on the likely sustainability of the dividends and having a look at the underlying holdings.
Thing is with these income funds there are ways of increasing the earnings beyond that of the underlying holdings.
Too many income funds are performing some of these 'nefarious' techniques.
The managers have said that the dividend yield is covered by the income received from their investments. I see the dividend yield as a sign that Asian shares are too cheap. Remember that the dividend yield is calculated on the share price which is at a large discount to nav.
The recent hike in dividend might be seen as good news I would be somewhat cautious. If the rise in dividend is matched by a rise in capital value that is fine.
I have been on something of a campaign at HFEL for the last 3 years or so the trigger was a dividend yield that was double the yield on the underlying assets. In that time HFEL has underperformed its benchmark and has been the worst performing fund on a total return basis and the Manager has been sacked.
AN increasing dividend matched by rising asset values is fine, an ever increasing dividend yield is a sign of trouble to come.
The discount here is much bigger than comparable investment trusts. I think that Asian shares will outperform shares in the western world over the next few years after a long spell of underperformance. Asian shares look much better value and have better growth prospects.
As China goes -so all Asia
"The Company confirms that it has changed its name to abrdn Asian Income Fund Limited with effect from 1 January 2022."
Surely...
"abrdn asn ncm fnd ltd"?
Its holdings still look good and varied especially having HSBC holdings and also BATS Malaysian stock in top 10 ( as at 1st Jan ). Its trading at a discount to NAV of roughly 7percent, and this is quiet bb. Maybe good time to buy some very soon..
Holdings 31/10/2015% of Assets Oversea-Chinese Banking Corp. Ltd.3.3 HSBC Holdings Plc HK3.3 Venture Corporation Limited3.3 SingTel3.3 Swire Pacific A2.8 Taiwan Mobile Co.,Ltd2.7 China Mobile Ltd.2.7 AusNet Services2.7 Canon, Inc.2.5 Singapore Technologies Engineering Ltd This I.T looks a good holding and trades at 6.5% to 31/12/15, has a divi of 5.45%. Though has stocks very similar to MYI which has a higher divi of 5.65%.