Q: What are your core beliefs when managing the Asia Pacific Dividend fund?

A: The fund was created with the idea to participate in the Asian growth, but in a conservative way. It is designed for investors who are less comfortable with investing outside the U.S. and into high-growth businesses. But although we invest in a growth environment, we seek stable businesses that are well-established and have lower capital expenditure requirements. Overall, the fund provides higher-growth exposure than a domestic U.S. fund, but with less volatility than in a pure Asian fund.

When selecting the companies, we always look for four key elements that, when combined, should generate outperformance over time. Those key factors are quality, value, market sentiment, and price momentum. The overall result is a portfolio that is biased towards quality and value and has a momentum element.

For this fund, the extra element is dividend yield. We look for companies with dividend yields that are 30% higher than the market average and for companies that demonstrate stable payouts. The dividend is a visible sign of the company’s health and a measure of stability. It has a positive effect on the discipline of the management. And because we set high thresholds for dividend payments, the companies have to generate the cash to meet them. Therefore, the companies we select tend to be more mature, with predictable cash flows, and awareness of shareholder value.

Q: Why do you believe that Asia Pacific is a good place to invest in?

A: Asia represents a long-term growth story, not just a recent fad. The global demographics, more than anything else, underpin the strength of the Asian market. As the population in the developed world ages and the number of retirees grows, there are fewer workers to support each retiree. At the same time, in Asia we find younger populations and a much greater number of workers. The lower average age affects the production capacity of Asia and results in faster growth of wealth creation.

There is going to be a transfer of the economic wealth as the retirees in the developed world monetize their savings by selling them. The buyers will be the people who are producing, and the producers are going to be Asian. I believe that this story will continue for a very long time. Through this transformative period, there are a number of ways to invest in Asia, and this fund is all about more conservative investing in Asian growth.

Q: Which countries in the Asia Pacific region do you include in the fund?

A: The fund was set to include the Asia Pacific region excluding Japan. That means that it can include more developed economies like Australia and new Zealand, but it remains predominately an Asian fund. That being said, Australia and new Zealand also provide a way to approach Asia, particularly through their natural resources, and we do exploit certain opportunities there. Currently, we have assets in Australia, China through Hong Kong, Hong Kong, Indonesia, Korea, malaysia, Philippines, Singapore, Taiwan and Thailand but not in India.

Q: In terms of the global demographics, doesn’t it make sense to invest in mainland China and India, since those are the two youngest nations with large domestic economies?

A: Yes, absolutely, and we get exposure to mainland China through companies that are listed in Hong Kong. In India, there are great companies with attractive returns on investment and good yields, but the Indian ADrs have run up quite a bit and trade at a high premium to the underlying local stocks. The difficulty with direct investing in India is related to the onerous bureaucracy and I don’t think I could add that an awful lot of value there.

But it is definitely a market that we look at. The long-term demographic story that will support Asia for the next decades is mostly true about India. It will take 50 years for India to reach the U.S. ratio of four workers per one retiree.

Q: How many companies do pay dividends in the Asia Pacifi c region?

A: I am not sure of the exact number, but we have a universe of more than 600 companies that pay out dividends. Before the Asian crisis in 1997, the companies tended to retain the earnings for investing into new projects. However, after the crisis, there was vicious retrenchment and credit became a lot harder to get. Companies spent a lot of time de-leveraging and selling off extraneous businesses. They stopped investing because they had created too much capacity, and it took them a while to utilize it.

Since the Asian crisis of 1997, there has been very little capital expenditure and cash has piled up on the balance sheets. We have seen a steady increase in the dividend payout ratios and the number of companies that pay dividends has increased due to the pressure from the shareholders. Gradually, the dividend culture has taken hold, which is a very welcome development.

So we have seen higher payouts and better returns across the region, including China, malaysia, Singapore, and Taiwan. Consequently, we are also seeing better valuations. In such a scenario, the major risk for the fund is that once the domestic Asian economies take off and utilize the excess capacity, which is a close point, the companies will start investing again. The question is if they will cut the dividends to fund the investments as in the bad old days.

Q: Do you believe that these companies have the business models or the margins to sustain the cash generation that allows them to pay dividends and reinvest in the business?

A: It varies from sector to sector. But, clearly, in recent years the margins look good across Asia. That has allowed many companies to look like good dividend payers and we have to recall their cyclical nature and the future danger. However, I believe that now there are enough companies with solid penetration in their respective markets, which are no longer too fragmented. We have reached a critical size of companies that can defend their margins.

Q: What are the milestones of your investment process?

A: The fi rst step of the process is quantitative screening of all the stocks in the Asia Pacifi c region with market capitalization of above $200 million. I believe that this threshold is high enough to guard against liquidity problems and low enough to include small and mid-cap companies in the mix. There are attractive small companies that represent steadily growing niche businesses, and we like to include them in the portfolio. Such are the companies providing services to larger customers, for example, and they don’t necessarily have to invest huge amounts of money to get bigger.