ABERDEEN ASIAN INCOME FUND LIMITED
Legal Entity Identifier (LEI): 549300U76MLZF5F8MN87
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2021
FINANCIAL HIGHLIGHTS
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Dividend per Ordinary share
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Earnings per Ordinary share – basic (revenue) |
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2021 |
9.50p |
2021 |
8.95p |
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2020 |
9.30p |
2020 |
7.41p |
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Net asset value total return{AB} |
Ordinary share price total return{AB} |
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2021 |
+11.0% |
2021 |
+5.2% |
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2020 |
+12.9% |
2020 |
+12.1% |
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MSCI AC Asia Pacific ex Japan High Dividend Yield Index total return (currency adjusted){B} |
MSCI AC Asia Pacific ex Japan Index total return (currency adjusted){B} |
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2021 |
+8.1% |
2021 |
-1.8% |
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2020 |
-1.4% |
2020 |
+19.0% |
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Dividend yield |
Discount to net asset value per Ordinary share |
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2021{A,C,D} |
4.1% |
2021{A,C} |
12.1% |
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2020{C} |
4.1% |
2020{A,C} |
6.9% |
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Ongoing charges{A,E} |
Net gearing{A,C} |
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2021 |
1.01% |
2021 |
9.6% |
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2020 |
1.10% |
2020 |
6.9% |
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{A} Alternative Performance Measure (see definition below). |
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{B} Total return represents the capital return plus dividends reinvested. |
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{C} As at 31 December. |
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{D} Yield is calculated as the dividend per Ordinary share divided by the share price per Ordinary share expressed as a percentage. |
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{E} Calculated in accordance with the latest AIC guidance issued in April 2021 to increase the scope of reporting the look-through costs of holdings in investment companies. |
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STRATEGIC REPORT – CHAIRMAN'S STATEMENT
Dear Shareholders
This is the first Statement following my appointment as Chairman on 1 January 2022. I should like to take this opportunity to reiterate, on behalf of the Board, our sincere thanks to Charles Clarke following his retirement on 31 December 2021, for his enormous contribution to the Company as a Director since 2012, as Senior Independent Director and Audit Committee Chairman in 2017 and 2018 and as Chairman since 2018.
Background and Overview
For 2021, the second year of the coronavirus pandemic, Asian equity markets experienced a fairly volatile market environment. However, despite these choppy market conditions, I am pleased to report that your Company delivered an excellent performance for the 12 months to 31 December 2021, consolidating the strong performance in the previous year. On a total return basis the net asset value per share (NAV) rose by 11.0%, surpassing the MSCI All Countries Asia Pacific ex Japan High Dividend Yield Index's return of 8.1% as well as the MSCI All Countries Asia Pacific ex Japan Index's decline of 1.8%. This robust result attests to the portfolio's composition, driven by the Investment Manager's prudent investment approach of investing in quality companies with strong balance sheets. As a fellow shareholder, it is pleasing to note the longer term performance as well, with NAV per share increasing 38.5% over 3 years and 395.6% since inception in 2005. The share price total return for the year was 5.2% which was behind that of the NAV reflecting the widening out of the discount at which the shares trade to 12.1% at year end.
2021 was an eventful year for stock markets. Guarded optimism prevailed for most of the first half amid vaccine rollouts and a brightening economic outlook. The latter half of the year saw a reversal of sentiment as the rapid spread of more transmissible coronavirus strains, inflation concerns and the prospect of monetary tightening by major central banks put markets on tenterhooks. The spectre of higher interest rates, in turn, drove a powerful rotation from high-growth companies to value stocks.
Asian currencies have added yet another layer of volatility, largely underperforming our base currency, sterling, over the year as investors priced in growth risks from a hawkish Federal Reserve, monetary policy normalisation, inflationary headwinds and Omicron. A notable exception was the Chinese renminbi which strengthened as domestic monetary policy turned more benign in contrast to the developed economies.
In this environment, market performance across Asia was uneven. Taiwan and India emerged as the frontrunners, while China was the standout laggard. China's problems are largely home-grown. Regulatory upheaval was and remains, a major source of market stress. Liquidity problems continue to plague heavily indebted property developers, while economic activity is still disrupted by clusters of Covid-19 cases and Beijing's zero tolerance stance. The travails of the past year have clearly reinforced the need for deep fundamental company research when investing in China.
At the corporate level, earnings rebounded as companies recovered from losses in 2020 when the pandemic was at its height. Many restarted payouts and issued special dividends on robust results. There were several welcome developments of note. Taiwan Semiconductor Manufacturing Co raised dividends despite an increase in capital spending. Samsung Electronics announced a special dividend and an enhanced three-year shareholder return programme. Australian miner Rio Tinto declared its biggest ever interim dividend. Singapore banks DBS Group, United Overseas Bank and Oversea-Chinese Banking Corp resumed their pre-pandemic payouts after the central bank lifted restrictions.
Overall, the case for income investing in Asia remains strong. Dividends fell sharply relative to earnings during the pandemic. However, looking forward, there is plenty of room for significant increases over the next couple of years, given low payout ratios and healthy free cashflow generation. It is also worthwhile noting that the region's high-yielding universe offers immense value and a broad opportunity set for investors. I should emphasise, however, the importance of careful stock-picking. Your Company has now delivered dividend increases for 13 consecutive years, which the Board attributes to your Investment Manager's focus on high-yielding companies with strong fundamentals.
Performance
The 11.0% NAV total return for the year ended 31 December 2021 compares favourably with the MSCI All Countries Asia Pacific ex Japan High Dividend Yield Index's return of 8.1% and the MSCI All Countries Asia Pacific ex Japan Index's decline of 1.8%.
The share price at year end was 231.0p equating to a yield of 4.1% and the share price total return for the year was 5.2% which was behind the NAV return. Despite regular share buy backs over the year, the price return has been impacted by the widening of the discount to NAV per Ordinary Share to 12.1%. The Board, in conjunction with the Manager, is actively continuing to promote the Company to new and existing shareholders. Your Company's strong performance relative to the MSCI All Countries Asia Pacific ex Japan Index was attributable to both positive stock selection and asset allocation, which is driven by where your Investment Manager finds quality companies with attractive valuations. The increase in gearing during the year to just below 10% further enhanced the performance compared to the indices.
Of particular note, the portfolio's light weighting in China contributed handsomely, thanks to your Investment Manager's discernment in adjusting the holdings within China and trimming the exposure over the year in view of regulatory uncertainties. As highlighted in the half yearly report, the portfolio has a modest weight to China, having steered clear of the internet stocks that do not pay dividends. Your Investment Manager is watching developments closely and will remain selective over the portfolio's exposure. In your Investment Manager's opinion, the bulk of the big policy changes have been rolled out and any further actions will likely be incremental. That said, regulatory change will remain part of the landscape and could continue to cause sharp lurches in investor sentiment in the near term. Indeed subsequent to the year end the holdings in China Mobile and CNOOC were sold entirely from the portfolio in compliance with the US Executive Order14032.
Further contributing to performance was the choice of companies in a broad swathe of countries, including Australia, Taiwan and Singapore. In addition, your Investment Manager capitalised on market swings to divest select holdings and reinvest in companies with better dividend and growth opportunities. Further insights into your Company's performance and portfolio changes are contained in the Investment Manager's Review.
On the environmental, social and governance (ESG) front, your Investment Manager's engagement efforts with the portfolio's underlying companies yielded some positive results. A key highlight was MSCI's ESG rating upgrade for AIA from A to AA due largely to the pan-Asian life insurer's improved performance on human capital development. Furthermore, Samsung Electronics announced a reorganisation, which simplified the company's structure, streamlined the management hierarchy and placed greater focus on a centralised sustainability committee. This was heartening as your Investment Manager has had a long-standing dialogue with the company on a range of ESG issues. Continued constructive engagement with the portfolio's holdings is a vital part of your Investment Manager's efforts to reduce risks in the portfolio while improving long-term gains.
Migration to UK tax residence and Change of Name
In September 2021 shareholders approved proposals to, amongst other things, migrate the Company's tax residency to the UK and to apply for UK investment trust status. The Company earns investment income from a diversified portfolio of investments with exposure to the Asia Pacific region, much of which is subject to overseas withholding taxes and this move to UK tax residency should serve to mitigate the level of those taxes and allow the Company to access lower rates in some jurisdictions due to the existence of a number of double tax treaty agreements between the UK and overseas jurisdictions. Since the year end, and as a result of these changes, your Company has also moved the provision of its custody services onshore to the UK from Jersey and entered into a new agreement with BNP Paribas Securities Services, London Branch that will take effect in Q2 2022. The Company remains a Jersey incorporated entity, subject to Jersey law and regulation and the oversight of the Jersey Financial Services Commission.
Shareholders also approved the change of the Company's name from 1 January 2022 to “abrdn Asian Income Fund Limited' in order to align the Company's name with the name of the Manager's business, which has changed to abrdn plc during 2021.
Dividends
Four quarterly dividends were declared over 2021. The first three were paid at the rate of 2.25p with the fourth interim at 2.75p for the year, representing a 2.2% increase in total dividends from 9.3p to 9.5p for the year. This increase maintains the trend that has been established over each of the last 13 years and means that the Company continues to be a “next generation dividend hero” as recognised by the Association of Investment Companies. It is very much our intention to continue to extend this record.
Based upon the Ordinary Share price of 231.0p the shares were yielding 4.1% at year end. The Board is very aware of the importance of dividends to shareholders and is pleased to confirm that the Company intends to target a total dividend of at least 9.75p per Ordinary share for the years ending 31 December 2022 and 2023.
In 2021 the Board has again chosen to use some of the Company's accumulated revenue reserves, which have been built up since the launch of the Company, with the aim of smoothing the impact on dividend payments to shareholders. In the year to 31 December 2021, about £0.9 million, or 0.5p per share, has been used (2020: £3.3m or 1.9p per share). The net revenue reserve at 31 December 2021, adjusting for the payment of the 4th interim dividend that occurred after the year end, amounts to £6.9 million (about 4.0p per Share) and any decision as to whether this will be utilised in 2022 (and by how much) will be taken at the time of each of the quarterly dividend declarations. Having these revenue reserves as well as the ability to use its capital reserves in support of dividend payments from time to time provides an added level of comfort to your Company's ability to pay dividends and is a significant benefit of the closed end investment company structure.
As we have cautioned in previous years, significant movements in the value of sterling may also impact the level of earnings from the portfolio as the Company earns dividends in local Asian currencies and pays out its dividend to shareholders in sterling. However, the Board is very conscious of the ongoing demand for yield and will continue to aim to reward shareholders when possible to do so. We are proud to have maintained a progressive policy despite the various economic, political and currency fluctuation risks seen both in Asia and in the UK since your Company's inception.
Share Capital Management
In line with the Board's policy to buy back shares when the discount at which the Company's shares trade exceeds 5% to the underlying NAV (exclusive of income), the Company has continued to buy back its shares into treasury. During the year the Company bought back 4.3 million shares for treasury at a discount (2020: 1.8 million shares). Subsequent to the year end we have continued to buy back shares and a total of 763,391 further shares have been acquired. These buybacks add to the Company's NAV and benefit all shareholders. The Company will continue selectively to buy back shares in the market, in normal market conditions and at the discretion of the Board, when the discount exceeds 5% of the NAV (ex income) over the longer term. During the year the level of discount at which the Ordinary shares traded has widened from 6.9% to 12.1%. At the time of writing the Ordinary Shares are trading at a discount of 13.2% to the prevailing NAV.
Gearing
On 3 March 2021, the Company announced that it had renewed both its three-year £10 million term facility and its £40 million revolving credit facility with Bank of Nova Scotia, London Branch, on an unsecured basis, for three years. £10 million has been drawn down under the term facility and fixed for three years at an all-in rate of 1.53%. Under the terms of the revolving credit facility, the Company also has the option to increase the level of the commitment from £40 million to £60 million at any time, subject to the identification by the Investment Manager of suitable investment opportunities and the lender's credit approval.
Reduction in Management Fee and Ongoing Charges Ratio (“OCR”)
The Board continues to keep all costs under careful review and remains focused upon delivering value to shareholders and regularly reviews the OCR. It is pleasing to note that the OCR has fallen from 1.10% to 1.01% during the year reflecting in part the on-going emphasis on cost control. As part of its oversight, the Board has negotiated a reduction in the level of the investment management fee payable to the Investment Manager. With effect from 1 January 2022, the management fee will be calculated on the following amended tiered basis:
- Average Value up to £350m – 0.8% per annum (previously 0.85%); and
- Average Value in excess of £350m – 0.6% per annum (previously 0.65%).
The Management Fee is calculated and accrued on a monthly basis (being 1/12th of the value resulting from the sum of (i) plus (ii) above) and will be payable quarterly in arrears. This amendment will result in a reduction of approximately £200,000 in management fees for 2022 which should flow through to a reduction in the OCR in 2022 and subsequent years. The Directors will continue to review the Company's expenses closely to ensure that they are in line with the market.
Annual General Meeting (“AGM”)
The AGM has been convened for 10:00 a.m. on 11 May 2022 at the offices of abrdn, Bow Bells House, 1 Bread Street, London EC4M 9HH. There will be a short presentation by videoconference from the Manager followed by tea and coffee. This is the first time that the Company has held its AGM in London and the Directors very much look forward to meeting and engaging with as many shareholders as possible. However, given the evolving nature of the Covid-19 pandemic, should circumstances or guidance change significantly, rendering an in-person AGM inadvisable or not permissible, we will notify shareholders of any changes to the AGM by updating the Company's website at asian-income.co.uk and through an RNS News announcement. The Board encourages questions and feedback which can be submitted to the company secretary at: Asian.Income@abrdn.com .
Directorate and Succession Planning
As well as bidding farewell to Charles Clarke from the Board, we welcomed Robert Kirkby, a new independent non-executive Director, to the Board on 1 November 2021. Robert is a former advisory partner at KPMG Channel Islands and a fellow of the Institute of Chartered Accountants. In addition to his proven accountancy background, he also brings to the Board an in depth knowledge of the financial services industry, business strategy as well as regulatory and governance experience . He is a Jersey resident and has particular experience of, and a continued interest in, China and Hong Kong. Robert has a number of non-executive appointments including being Chair of Trustees of the Durrell Wildlife Conservation Trust, chairman of the audit committees of Digital Jersey Limited and Stonehage Fleming Family & Partners Limited and he is a director of VenCap Channel Islands Limited.
Environmental, Social and Governance (“ESG”) Investing
The Board continues its ESG-focused dialogue with the Investment Manager in the belief that companies with good ESG practices will be the winners over the longer term whilst benefitting society. The Directors are pleased to note that the Investment Manager's ESG engagement is positive and the Company's portfolio is rated 'AA' at year end by Morningstar (2020: Morningstar rated 'A'). Further details pertaining to ESG and also climate change are contained on pages 42 to 49 of the published Annual Report for the year ended 31 December 2021.
Outlook
At the time of writing Russian troops have invaded Ukraine, resulting in a tragic loss of life and war's concomitant effects of volatility on global stock, bond and commodity markets. The enormity of this situation together with its recency make it impossible to immediately foresee how this might impact investor returns, beyond the obvious supply chain disruption and its impact on inflation.
Alongside the ongoing conflict in Ukraine, there are other important challenges for 2022. Asia appears behind Europe in exiting the grip of the Covid pandemic, with the associated disruptions it has caused. Additionally, even prior to the Ukraine conflict, investor focus was drawn to the increasing risk of higher inflation globally, together with the interest rate hikes associated with that.
However, against this complicated back-drop, there is cause for some optimism. Inflation remains moderate in most of Asia compared to the rest of the world, so there is less risk of disruptive policy moves from regional central banks. Moreover, most governments have decided to live with Covid, which should support a gradual normalisation of economic activity. In addition, strong capex recovery helped by infrastructure spending in countries like India, also bodes well for the region. China continues to cause investor concerns with fears that important commercial centres are being affected by Covid-19 lockdowns. However, looking at the broader context, these measures are a continuation of rolling regional lockdown policies with domestic authorities having displayed a track record of balancing mobility restrictions whilst maintaining economic activity. The good news is that Beijing can pull the necessary policy levers to sustain growth thanks to subdued inflation, as well as the fact that borrowing costs have already been cut. Also China's policy easing – at a time of Fed tightening – could provide some support for its neighbours in Asia. Your Investment Manager's measured view is that Beijing wants to strike a balance between regulatory control and encouraging innovation, and a heavy-handed clampdown on all private new economy sectors is unlikely.
All in all, your Board remains cautiously optimistic. I believe your Investment Manager's long-held focus on companies with high quality balance sheets and growing levels of income will continue to prove advantageous during these testing times. Importantly, companies with solid financials and pricing power, such as those in the portfolio, will have a competitive advantage in the year ahead. Their strong balance sheets translate into more flexibility to invest in growth and less reliance on borrowing in a rising rate environment. Moreover, they can protect their profit margins by passing on cost increases and continue to generate positive cash flows, which is supportive of their ability to pay dividends to shareholders.
Longer term, Asia remains a good place for dividend-seeking investors. Business prospects are promising thanks to favourable structural trends, such as growing wealth, rising urbanisation and technological advances. Also working in Asia's favour is the abundance of solid companies with clear earnings' drivers, robust balance sheets and healthy cash levels. I remain sanguine that your Investment Manager will exploit these opportunities to the full and continue to deliver sustainable returns in the coming years.
Ian Cadby
Chairman
25 March 2022