Henderson International Income investment trust manager Ben Lofthouse has been boosting exposure to Asia Pacific equities thanks to attractive valuations and signs of positive change in China’s state owned enterprises.
HINT has recently brought its exposure to Asia Pacific up from 24 per cent back in early 2014 to around 33 per cent mainly through the addition of Chinese equities, according to Lofthouse, with overall exposure to the region now almost in line with the trust’s exposure to Europe and equal to its current US weighting.
Valuations proved the initial driver of Lofthouse’s decision to increase the allocation to Asia Pacific equities. He says: “The overall valuation of the fund’s underlying portfolio had its forward price-to-earnings of 13.4x against the benchmark of 16x.
“But we have also have three sub portfolios within the fund and when I looked at these back in February, I had the US trading at about 15.5x and Europe on around 14.5x while the Asia Pacific portfolio was trading at approximately 10x.”
At the same time yields had also come down to around 5 per cent across many large cap and domestic Chinese names on the back of several years of fiscal tightening from the Chinese government, adds Lofthouse.
However despite the attraction of valuations, Lofthouse still needed an indication that China was moving in the right direction again something which eventually arrived in the form of planned reforms for the country’s highly subsidised and often corrupt state owned enterprises.
“The yields available really begged the question what would make us invest and what we saw to make us start adding was signs of SOE reform, he says.
“It is worth saying that it will take a long time to reform companies. This isn’t a three week or three quarter story. But what we saw was a focus from the Chinese government on the economic basis for SOEs and potential overcapacity in the system as part of its drive on corruption and bribery surrounding management teams.”
PetroChina is an example of one of the trust’s key holdings that has benefitted from the new direction for SOEs. The listed arm of the state owned China National Petroleum Corporation is currently part of the company’s top 10 holdings.
“For years PetroChina has been used to subsidise power prices but now it is being asked to look more closely at itself and what it was spending its money on,” says Lofthouse.
“Also the government is starting to look at whether it’s efficient to subside energy prices because can you really have a long-term competitive advantage in an industry if that industry is subsided?”
PetroChina was trading on a discount to overseas large cap oil companies when the trust first invested in it, according to Lofthouse, based on an “assumption that it would not be focused on returns” but has since proved a “fantastic” performer for the trust more recently as this sentiment has changed.