Bridget Hughes: Hi. My name is Bridget Hughes. I'm one of the analysts at Morningstar. I'm here at the Morningstar Investment Conference for 2011, and I'm with Jesper Madsen, who is with Matthews International Capital Management. He's the co-manager on Matthews China Dividend, Matthews Asia Dividend, as well as Matthews Asian Growth & Income.
Jesper, we talked earlier about this idea of a global quest for yield, and I'm curious if you can elaborate a little bit more on what that is and how Asia dividend investing fits in to that context?
Jesper Madsen: Well I think, globally, people are looking for yield or trying to find yield, and also with inflation rates obviously being a problem globally, maybe less so currently in places like the U.S. and Europe, but obviously people are looking down the line and saying, what does this very expansionary monetary policy in both places mean for the future in terms of inflation as well.
Interest rates, or what people can make on fixed-income instruments are also are very low. The 10 year is sitting at less than 3% in the U.S. So as a result, it is very difficult for people today to find that combination of both yield and growth in that underlying dividend to give them the protection for future inflation as well.
And such, Asia is one of the few places, and this is probably not well known to most people, that actually deliver on both accounts. So, you have higher yields in Asia. Right now, for instance, if you take the Asia Pacific Index as a proxy and compare that to the S&P 500, the S&P would be yielding about 2% currently. If you go to Asia, you have a yield of about 2.9%. So, you get a yield pickup of about 90 basis points, and that includes Japan. If you take out Japan, you're actually sitting north of 3%. That combined with the fact that Asia has actually delivered faster growth rates in that underlying dividend makes Asia quite attractive from the perspective of somebody looking for both yield and growth in that underlying dividend.Read Full Transcript
Hughes: But even so ... when people think about investing in Asia, they are thinking of that spectacular growth that we've seen in recent years. As a dividend investor, do you sacrifice some of that growth?
Madsen: It is true. It's a well-known fact that obviously Asia has delivered both in terms of economic growth, in terms of how that has flowed into earnings growth. To the point now where Asia is about a third roughly of the world's market cap and the world's GDP, so it's an asset class in its own right, but what you look at oftentimes is that if you're a dividend investor, you are still a growth investor, especially if you're looking for companies that can grow sustainably those dividends. You might have to give up some of the high-flying Internet stocks, and so on and so forth, but it all comes back in terms of looking at which companies can actually over longer periods sustain their earnings power and grow those dividends over longer periods.
So it's still very much a growth mandate, if you will, but it's just saying OK, at the end of the day, it all comes back to the dividend. Why are these companies generating these earnings if not for the dividend, and then what companies can we find that will grow and sustain that dividend. So it's more of a core earnings growth or what I call a higher quality earnings growth over the longer periods.
Hughes: In addition to that cash return and that core growth that you can get from the dividend, the return, what else does a company's dividend policy tells you about its management?
Madsen: Obviously, we've seen, unfortunately, several scandals come across the newswires as of late, and the dividend actually is a very important component in trying to gauge the corporate governance of a company as well as the integrity of their financials.
For instance, if you look at the last few months, we've had about 20 incidents of smaller U.S. listed Chinese companies that have been involved in one way or another where a flag has been raised in terms of lapse of corporate governance, and none of those paid a dividend.
Now, you have to go back to January to find a notable exception to that rule whereby there was a company there that did pay a dividend, but again we're talking about one out of 20. So that gives you a sense. You still have to do your homework; you can't just lean on the dividend and say that will protect me against poor corporate governance or poor fiscal reporting or financial reporting, but it does at least give you an extra layer of security. Also, just engaging a management team with questions about the dividend policy is quite telling.
Hughes: And that's unusual, right, there aren't many people asking about dividends?
Madsen: Oftentimes it is not a question that people stop to ask, but by asking about how a company allocates capital, where does that flow back to minority shareholders, all of a sudden you start seeing management, in the way that they respond, it almost tells you who they're working for, and obviously if you are a minority shareholder you want to make sure you are aligned with the interest of the majority shareholder, otherwise there might be trouble down the road. So it is a very helpful signal to anybody investing in Asia to say OK, they pay a dividend, the cash was probably earned in the first place, so the financial reporting is probably of a higher standard, and also I have now aligned myself with the majority shareholder.
Hughes: I was looking at the China Dividend Fund and noticed that the top holding was China Mobile, which is a very popular China holding among many funds that invest there. Can you talk about that particular investment in terms of how it fits in with the Dividend Fund, and then may be something else that's less common or less well known?
Madsen: So, as for China Mobile, that again is about a 4% yield. The growth has obviously come off over the years. It now has more than half a billion customers. So it is difficult to obviously grow at the same pace as it did in its earlier years. But that said, if you combine moderate growth rates in the dividend with about a 4% dividend yield, you're still looking at what struck us as being a fairly attractive total return profile for investors. Also, it is a way for us to gain broad exposure to the domestic consumer in China with a very large, and I would say, a very stable business model.
Now, you can counter that then by looking at some of the more, perhaps interesting from a growth perspective, smaller companies where you might take on a little bit more volatility. So, for instance, a less-known way to maybe get access to some of the consumer trends that we're seeing in China, such as car penetration for instance, Sichuan Expressway, is a holding of ours. It's a toll road operator in the inner parts of China. Related to the parts that are now being industrialized, it is the next wave of industrialization in China as you have factories move from the coastal areas further inland, and as such, we start seeing car penetration and car ownership increase, and therefore being the owner of these assets is quite an attractive place to be.
So it's a less obvious way to get exposure to the Chinese consumer, but some of the more obvious ways tend to be higher priced, and as a result, the dividend yield might not be there, and therefore we have to look elsewhere and use our imagination maybe a little bit more.
Hughes: I know Matthews has invested for income in Asia for many, many years, so this isn't anything new, but as I was looking at some of your more recent portfolios there, we had talked about how you're balancing high payouts with low payouts, and so on, why is it important to sort of diversify that way?
Madsen: So it is, again, if you have a mandate of total return, two things matter to you, one is the yield you're being paid today, and then how much will that grow over time? You have to then balance the stability of that cash flow, and that's why you maybe anchor the portfolio strategy in large companies like China Mobile, for instance, and that enables you to then take on maybe more growth, a tad bit more risk, perhaps a little bit lower yield today, not always, but oftentimes, but that is with a company that might be able to then grow at a faster rate than some of these larger companies. So the combination for two is what is attractive and what we try to do and balance with the portfolios.
Hughes: Great. Thank you so much for your time and enjoy the rest of the conference.
Madsen: Will do. Thank you.