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Rising into Falling Markets, with Lower Volatility

Our Asia Pacific Real Income portfolio design is continuing to provide investors with low volatility outcomes during uncertainty.

Date published
17 May 2022
Andrew Chambers Portfolio Manager, Real Assets
Daniel Fitzgerald, CFA Portfolio Manager, Real Assets

Portfolio Design Provides Low Volatility Outcomes During Uncertainty

We believe that it is our investment process, which targets a blend of listed Real Assets (Real Estate, Utilities and Infrastructure) and also incorporates a unique Sustainable Dividend Assessment” (or downside dividend analysis), which has helped the portfolio rise into falling markets in this low-volatility manner.

We see ongoing global geopolitical risks as well as uncertainty around inflation, interest rates and COVID-19. As such, global and regional equity and bond market volatility is likely to persist for some time. Below we outline why we expect the APRI strategy’s focus on income and low volatility total return outcomes will continue to serve investors well relative to broader Asia Pacific equities or real asset sectors.


Ignoring Benchmarks in favour of high-quality income

We don’t think it is appropriate to include any particular security in our portfolio just because it has a large weight in an arbitrary index.

Our focus on high-quality income stocks has kept the APRI portfolio away from speculative names and high multiple / low yielding stocks that have large weights in Asia Pacific equity market indices.

While these index stocks that have come under the most significant selling pressure during the recent market correction, we believe that the performance tilt away from expensive growth style stocks is only just beginning as economies continue to recover from the COVID-19 downturn.

For example, IT companies, which make up more than 20% of the MSCI AC Asia Pacific ex Japan Index , are not included in our portfolio. Their typically low Sustainable Dividends, and high Valuations are not qualities we want to include in a more defensive income-oriented strategy.


Listed Real Assets have long-term leverage to urbanisation – particularly in the Asia Pacific ex Japan region

To avoid stocks whose growth and returns are driven by the swings of the economic and business cycle, we prefer Real Assets. We see Real Assets as the ‘every day-use’ building blocks of the economy, and that their growth is driven by the structural mega trend of urbanisation. Our key thesis is that as urban population grows, so too will demand for Real Assets to service non-discretionary everyday needs such as electricity, transport and food shopping.

With a growing demand, coupled with the non-discretionary nature of the services provided, Real Assets typically demonstrate strong pricing power, with proven cash flows, with an ability to continually grow distributions to investors no matter the economic and business cycle.

The urbanisation growth thematic is expected to continue to be strong in the Asia Pacific ex Japan region, with population and urbanisation levels in select cities growing significantly faster than those in Europe, the Americas, and many other regions.


A core focus on Sustainable Dividends

Unlike many ‘high yield’ strategies, our portfolio construction process places great importance on our unique Sustainable Dividend Assessment which considers a stocks ability to maintain payments to shareholders through all different stages of the cash flow cycle, rather than a current or consensus dividend which may be artificially high.

As our assessment of a stock’s long-term Sustainable Dividend takes in a downside scenario for dividends. We are also not forced sellers when a company that is paying a very high dividend, that cannot be sustained, ends up cutting it.

By investing in the most attractive stocks on this measure, income makes up a larger component of a stock’s total return, thus helping provide a lower volatility outcome.


In-built Inflation protection

As economies reopen, the near-to-medium term path for inflation and interest rates is almost certainly up. While this is usually considered a headwind for equities, including listed Real Assets, we see opportunities for growing the income steam for APRI.

With inflation rising, APRI is well positioned due to our focus on owning Real Assets with inflation protection and pass-through mechanisms and strong pricing power. These types of Real Assets should exhibit meaningful cashflow and dividend growth as inflation rises, while companies without pricing power may struggle to raise prices.

We focus on Real Assets that have rents, tolls or charges that directly reference the Consumer Price Index (CPI) or have rents that are closely correlated to tenants’ sales.


Strong performance historically from higher interest rates

We believe that the market never priced in permanently low interest rates for high quality Asia Pacific Real Assets unlike many other high multiple sectors of the market. Furthermore, the typical longer maturity debt and expensive legacy debt of some of our Real Asset holdings mitigates the impacts of rising interest rates as they maintain their ability to refinance at lower rates than existing loans.

The APRI portfolio also has a strong track record of performing well during rate rise cycles. When we last saw significant and rapid rate rises in the US Fed Funds rate from December 2016 to December 2018, the portfolio outperformed the broader market and its Real Asset composite benchmark – again with lower volatility.


Past performance is not a guide to future returns. The return may increase or decrease as a result of currency fluctuations.
Source: Martin Currie Australia, Federal Reserve Bank of St. Louis; as of 30 April 2022
*Data provided for the Martin Currie Asia Pacific Real Income composite in US$ (gross of fees).
**The composite index is comprised of 50% MSCI AC Asia Pacific ex Japan REITS (Net Dividends) Index and 50% MSCI AC Asia Pacific ex Japan Utilities (Net Dividends) Index is used for performance comparison purposes. The portfolio is constructed in a benchmark-unaware manner.
The performance record noted above is clear representation of the strategy's performance over the period shown. Performance information showing five years (or since inception) in complete 12 month periods is available upon request.
See end notes for full GIPS disclaimer.

With inflation rising, APRI is well position due to the our focus on owning real assets with inflation protection and pass-through mechanisms and strong pricing power.

The Martin Currie Asia Pacific Real Income Strategy

Volatility is likely to continue to be a feature of equity markets for the near- to medium-term as global economies reopen, while grappling with accelerating inflation and the normalisation of extreme monetary policy settings.

A focus on income and low volatility total return outcomes has helped the APRI strategy navigate the falling markets over the last 12 months, but this strength does not diminish the potential for future returns.

We believe that the benefits of Real Assets in this environment are still being undervalued and that income focus of the portfolio will continue to provide resilience in market sell offs.

Key Attributes of the APRI Strategy
    • A unique blend of listed Real Assets with income growth driven by long-term demographic themes –Listed REITs, utilities and infrastructure - the essential building blocks of an economy for a growing urban population’s every-day needs
    • Proven investment process with Active Ownership – Proprietary multi-lensed investment approach, with fully embedded Stewardship & ESG.
    • Income-focused return profile – Unique investment approach aligns stock selection and portfolio construction with the need to reduce income shock and grow income with inflation
    • Benchmark unaware portfolio construction – Low security concentrations to provide income diversification so no single stock dominates
    • Experienced stock pickers - Deep industry experience generating best Real Asset ideas
End notes
Martin Currie Australia (MCA) claims compliance with the Global Investment Performance Standards (GIPS®). The Asia Pacific Real Income composite (EQ_17) contains fully discretionary accounts containing diversified portfolios of Asia Pacific ex Japan real estate investment trust, utility, infrastructure and like securities that are listed on an Asia Pacific ex Japan-based Stock Exchange. For purposes of compliance with the GIPS®, the Firm is defined as Martin Currie Australia (“MCA”) formerly Legg Mason Australian Equities (LMAE), and comprises all assets managed or advised on a discretionary or non-discretionary basis. MCA is a division of Franklin Templeton Australia Limited (FTAL), which is a part of Franklin Resources, Inc. MCAs predecessor firm for GIPS® purposes was Legg Mason Asset Management Australia Limited (LMAMAL), which was renamed FTAL on 1 October 2021. The MCA team continues to manage the Australian domestic equities portfolio of FTAL. The US Dollar is the currency used to express Inception date: 30 June 2016.
GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.