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Liontrust's Williams warns on high income ETFs
by Robert St George on Oct 09, 2013 at 07:35
Mark Williams, co-manager of the Liontrust Asia Income fund, has warned income-focused exchange-traded fund (ETF) investors to consider the benefits an active approach can offer in the event of another market crash.
The manager argued that while strategies focused on dividends traditionally outperform, investors should be wary of concluding that high income ETFs are the optimal vehicles in this area, as they fail to take an active approach.
Williams observed that, as would be expected, income stocks tended to beat the market in bear phases. During the 1997-98 Asian financial turmoil, for example, MSCI Asia Pacific ex-Japan constituents with top-quintile yields outperformed the wider index by 50%. They also did so by 45% during the 2000-01 dot.com crash, and by around 15% in both the 2007-09 financial crisis and 2011-12 euro woes.
But the manager highlighted that they equally outperformed in rising markets: by 20% in 1996-97, by more than 10% in 1998-99, and by around 5% in both 2001-07 and 2009-11.
Nevertheless, Williams doubted that attempting to wrap such high-yielding companies into an ETF would guarantee index-beating performance. He suggested that the experience of 2008, during the credit crunch, showed why this would be the case.
In Asia in 2008, 55% of firms listed in Korea and Hong Kong slashed their dividends by more than 5%. In Taiwan 85% of firms cut dividends, 45% in China, followed by 25% in India.
With this in mind, Williams said that active managers would have anticipated dividend cuts - ‘You could see things like trade were drying up,’ he recalled - and sold out accordingly, protecting investors from the consequent falls in share prices.
In the year to the end of August, Liontrust Asia Income returned 12.4% compared with 9.3% from the average fund in the IMA Asia Pacific ex-Japan sector.
Over the same period the iShares Asia Pacific Dividend Ucits ETF generated 6.85%, while its benchmark Dow Jones Asia/Pacific Select Dividend 30 index produced 6.98%.
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