The portfolio is overweight Hong Kong-listed banks, utilities and telecommunication services, as Hong Kong equities are among the cheapest in the region, Barbour told FSA on the sidelines of the FSA Invesatment Forum in Hong Kong today.
Because the portfolio is denominated in US dollars, there’s a natural tendency toward US dollar-linked investments, which is also a reason for buying Hong Kong equities, he added.
Onshore China equities are considered too expensive and too volatile to invest in at the moment, he said. Another consideration is the transaction costs.
In the last decade, high dividend stocks have tended to have lower volatility among Asia ex-Japan equities, according to MSCI Style indices comprised from the broader MSCI Asia Pacific ex Japan Index.
While investors typically focus on dividend yield, he argued that high dividend stocks with a quality focus are currently very expensive.
The portfolio tends to avoid the most expensive stocks, Barbour said. It has a dividend yield of about 4% compared to 3.2% for the MSCI APAC ex-Japan Minimum Volatility Index, while the portfolio’s price-to-book ratio stands at 1.7 times versus 1.8 times for the same index.
The MSCI APAC ex-Japan Index has a P/B ratio of 1.6 times with 2.9% dividend yield.
The strategy was launched in 2013 after an institutional investor in Singapore expressed concerns about falling interest rates and lack of returns, Barbour said.
“[Institutional investors] are looking for good yield to replace that of fixed income, which is declining, together with reasonably low volatility. So in Asia, low volatility equities are sort of a no-brainer.”
The biggest risk to the strategy is if US interest rates rose substantially.
“Historically, [low volatility] stocks have had lower drawdown than the broader market. But because we have some of the bond proxies and high dividend stocks, it might initially underperform, although I don’t expect it to be a long-term thing.”
The base case is that interest rates will continue to stay low and rise gradually, he added.
“There’s already recovery in the US and it’s starting to recover in Europe, which suggest interest rates will rise. But unless you have a massive amount of inflation, there is no need for the rates to go up very much.”
