Interest rates may indeed stay lower for longer after the US Federal Reserve opted not to raise rates at its most recent meeting this week. In such a low-inflation and low-growth environment, dividend-paying funds have become attractive.
The products aim to provide income by investing in higher yielding stocks with relatively stable earnings and revenue growth. Selecting the right equities could result not only in a sustainable dividend payouts, but upside in the share price growth as well. In fact, the manager’s stock selection process is a key differentiator when making a choice between products.
Against this backdrop, Luke Ng, senior vice president of research at FE Analytics, provides a comparison between two equity dividend funds: the JP Morgan Asia Equity Dividend Fund and the Templeton Asian Dividend Fund.
Investment Strategy
The JP Morgan Asia Equity Dividend Fund is a unit trust domiciled in Hong Kong, whereas the Templeton Asian Dividend Fund is a mutual fund domiciled in Luxembourg.
The JP Morgan fund uses the MSCI AC Asia Pacific ex-Japan index as a benchmark, while the Templeton product’s benchmark is the MSCI AC Asia ex-Japan index, Ng said.
“The JP Morgan fund’s benchmark includes exposure to Australia and New Zealand, but the Templeton fund does not,” Ng said.
The JP Morgan fund’s investment process starts with a quantitative screening to look for higher yield stocks, usually around 3-4% yield. Some small-cap stocks that present a strong case for growth may be added, even though the yield may not reach 3-4%, he said.
While the JP Morgan team tends to select 60-90 stocks based on data generated from their fundamental research, they maintain a flexible strategy by allocating exposure to cyclical (mainly banks among the financials) and defensive sectors depending on market condition, Ng said.
For example, the fund has been increasing its exposure to cyclical stocks as defensive stocks become increasingly expensive, he said.
In addition, over the past 18 months, the fund has reduced its exposure to Australia, given its higher valuations. However, Australia remains the top country allocation, Ng said.
The team has also increased exposure to South Korea, he said. “While these Korean companies traditionally pay lower yields, the government has been pushing for reforms that promote higher dividend payout.”
Regarding the Templeton fund, the team attempts to provide higher yield than that of its benchmark, the MSCI AC Asia ex-Japan index, Ng said.
“It has a strong focus on assets based on their bottom-up selection approach, in which the team identifies businesses that are trading at discounts versus what they should be worth, and intends to patiently wait over the long term until the fair value can be reflected.”
With no exposure in Australia and New Zealand, the Templeton fund’s top country allocation is China, followed by Taiwan and Singapore, he said.
In terms of sector, the top allocation goes to financials (33.5%), but it remains lower than that of the JP Morgan fund (over 50%).
Sector Weightings
| JP Morgan | % | Templeton | % |
| Financials | 50.1 | Financials | 33.5 |
| Telecom, Media, Technology | 15.5 | Telecom, Media, Technology | 23.8 |
| Utilities | 10.1 | Basic Materials | 17.2 |
| Basic Materials | 9.4 | Consumer Products | 9.2 |
| Industrials | 8.8 | Industrials | 7.8 |
| Money Markets | 5.4 | Money Market | 7.7 |
| Others | 0.7 | Utilities | 0.9 |
Source: FE Analytics, funds’ factsheet. Data as of June 30.
Performance
The JP Morgan fund has received a four-crown rating and the Templeton fund a one-crown rating from FE Analytics, indicating that the JP Morgan fund has been stronger in terms of alpha, volatility and consistency over the past three years, Ng said.
While both funds have a focus on high-yield stocks, their volatility ratios are generally lower than their respective benchmarks and peers, he said.
The volatility ratio of the JPMorgan fund is 12% and the Templeton fund is 12.9%, for the trailing three years, according to FE.
The JP Morgan fund has delivered a 7.25% return over the past three years in US dollar terms as of 30 June, outperforming the market and its peers, Ng said.
However, the Templeton fund has fallen by 8% over the last three years. Because the fund realises value over the long-term, the fair value of the underlying holdings have yet to be reflected in the market, Ng said.
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The JP Morgan Asia Equity Dividend Fund versus the Templeton Asian Dividend Fund over the last three years, according to FE Analytics.
