By Thomas Streater
Jeffrey Roskell first arrived in Hong Kong on July 2, 1997, in
his mid-twenties to interview with Jardine Fleming. It was the day
after the handover of Hong Kong from Britain to China. Unsure
whether to take the position, the Cambridge University graduate
ultimately decided that the bigger risk was in not making the
move.
Today, 17 years later, Roskell is still living in Hong Kong and
working for the same firm, which through acquisitions is now part
of JPMorgan Asset Management. Now a regional investment manager
with the Pacific regional group in Hong Kong, Roskell manages Asian
equity dividend and income funds. He sat down with Barron's Asia
and spoke at length and with great enthusiasm about the case for
dividend investing.
Barron's Asia: Please tell us about the style of your Asia
Equity Dividend Fund.
Roskell: Our Dividend Fund is a lot less volatile than the
broader equity market. Why is that? There are two types of stocks
we invest in. One is cheap stocks. If the stock has a relatively
low price-to-earnings valuation, or a high earnings yield, and it
pays out just a normal percentage of earnings, the dividend yield
will be higher than other stocks. The other kind of stocks that
ends up with a high dividend yield pays a high percentage of their
earnings out in dividends. These tend to be relatively defensive or
have less volatile business models and that's why they can afford
to pay out more of their earnings, because they are more confident
of their ability to sustain those earnings. That would generally be
in sectors such as telecommunications, REITs, toll roads and
utilities.
Q: By focusing on higher payout companies, are you giving up
some growth?
A: You might think there's a trade-off. But if you look back at
history, have higher-dividend paying companies in Asia resulted in
lower capital gains? No. You have had better capital gains in a
back test of 15-20 years, and actually even in the last three years
in our portfolios. Not only have you had a better yield, you've
actually had a better capital gain. A lot of that is about
protecting downside in bear markets, so you make a better return
over the long term if you lose less money in a bear market.
Q: Your largest holding is HSBC, which some say is behind the
curve, too big or too cumbersome. Why do you like HSBC?
A: We like the self-help program that HSBC (ticker: 5.HK, HSBC)
has gone through, and continues to go through. It has sold a lot of
businesses and reduced exposure to a lot of other businesses. The
bank has been de-risking, and that has hurt revenues over the last
couple of years, and costs have been elevated, although it's in the
process of cutting costs.
At this point in time, HSBC is very reasonably valued at, let's
say, 10 to 11 times earnings, with a 5% dividend yield. It is, I
would suspect, the company in Asia that's most geared to rising
U.S. interest rates.
I've got no more foresight on when U.S. rates will rise than the
market, but it will happen over the long term. When you're getting
paid a 5% dividend yield to wait for that to happen, then I'm
getting a perfectly decent income, on a very reasonable valuation,
and I have that protection against rising U.S. interest rates. If
that optionality was priced in to the shares, and it was on 20
times earnings, then I would be concerned.
Q: Can you explain how it is exposed to rising U.S. interest
rates?
A: It has a very low loan-to-deposit ratio and a very large
percentage of its deposits are current accounts. In a rising rate
environment, the more loans you have relative to deposits, the
bigger the benefit of rising rates. But more importantly, its
deposit mix is such that a reasonable percentage of the deposits --
the cost of those -- will not go up, whereas if you have a bank
that has, say, the same amount of deposits for loans, or has a
deposit base where the cost of those deposits increases as rates go
up, the benefit is smaller. Most banks are beneficiaries of rising
rates, but HSBC is much more geared to it than other banks, as the
net interest margin will improve quite substantially.
Q: You also have a large position in Bank of China Hong Kong
(2388.HK) and DBS (D05.SG). What's the story with those?
A: It's actually quite similar to HSBC. Bank of China Hong Kong
is the other bank that's very much geared to rising U.S. interest
rates: Not quite as much current accounts within deposits, but a
very low loan-to-deposit ratio and the bank is well
capitalized.
DBS is the Singaporean bank with the greatest percentage of
current accounts, so it's the biggest beneficiary in Singapore of
rising rates. Loan-to-deposit ratios are much higher there, closer
to 90%, so there's less benefit from that, but again it has a
relatively high share of current accounts. What will happen to
asset quality when rates rise is the other question -- provisioning
might increase, because if rates are rising your borrowers are
paying more. Are they going to find that more stressful after a
period in which lending has increased substantially in Asia and the
loan book at DBS has also increased substantially? We think it is a
very sensible lender, we think its net interest margins will go up
when rates rise and we hope that more than offsets a marginal rise
in provisioning, which at the moment is quite low. There is not
much bad debt around because in a very low interest rate
environment, not many people are unable to pay back their
interest.
What you will see us do is change our positions to a reasonable
extent if we see valuations changing, and we try to assess the risk
reward of investment rather than make a point forecast.
Are there risks in owning banks? Absolutely. When rates go up,
how much bad debt will there be? The HSBC story is about the
optionality of rising rates and is it in the price or not? Are we
forecasting rising rates, or saying they will definitely rise? Not
necessarily, but if they stay where they are, I think the
valuations are reasonable. If they go up, we get a relatively cheap
or free option.
Q: All three banks seem exposed to the greater use of the
renminbi too, isn't that right?
A: DBS has certainly increased its lending to Chinese entities
and therefore has an exposure to, for example, Shanghai Interbank
rates. Bank of China Hong Kong would have the most exposure with
the growing usage of renminbi, it being the renminbi clearing bank
in Hong Kong, which is a good thing.
Q: How about REITs and toll roads. Wouldn't they be negatively
exposed to rising interest rates?
A: Yes. However, Australia is the place we still find quite a
number of REITs that we think have enough yield and growth and
therefore total return opportunity which is acceptable. Aussie
interest rates, if anything, are coming down, not going up. We have
a reasonably broad holding of Australian REITs, because most of
them are not that liquid with the exception of one or two, such as
Westfield (WFD.AU).
We do own some Hong Kong-listed toll roads. You get decent
yields, relatively predictable revenues and, certainly two or three
years ago, very attractive valuations. Now they are at reasonable
valuations. Yields are still mid-single digits, at least. They tend
not to get looked at by other equity investors, for reasons I
cannot explain.
Q: Energy is another sector you have a high weighting in.
Why?
A: Some integrated oil companies like China Petroleum &
Chemical Corp (386.HK, SNP) were very cheap late last year and we
built up a position in that company, for example, as we see growth
in its exploration and production business and improving
profitability in its refining business, which had suffered
materially over the years.
It was also getting the benefit of tighter environmental
standards in China which, because it invested in the right
equipment and some of its competitors hadn't, it was getting better
refining margins. We then got the positive surprise from the
announcement of the sale of its retail business and the stock did
particularly well until the middle of this year, when it became a
very big position for us. Since then we have reduced the position,
firstly because it had done relatively well, and then because the
oil price started to fall, and that has a material impact on the
earnings, so it's a much smaller position in our portfolio now than
it was.
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Email: thomas.streater@barrons.com
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