IAF Fund Update October 2023

In this episode we are focusing on Australian equity markets with a manager of the abrdn Australia Equity Fund - ticker IAF. 

Transcript

CEF_IAF_Oct 23 Transcript

Mike Taggart: Welcome to the latest instalment of our abrdn Closed-end Fund podcast series, where we touch base with portfolio managers to gain perspective on their funds and their markets. I'm Mike Taggart of abrdn, and today we are focusing on Australian equity markets and specifically the abrdn Australia Equity Fund with portfolio manager, Eric Chan. Hi Eric, how are you? 

Eric Chan: Hi, very well, thank you. How are you?

Mike: I'm well, thank you. So first of all, before we get started, would you please take a minute to remind listeners of the abrdn Australia Equity Fund (ticker symbol IAF) of its investment objective and strategy to meet that objective? 

Eric: Yeah, sure. So, the fund aims to outperform the ASX 200 over the medium and long-term, the ASX 200 being the main Australian equity index. We look to achieve this by investing in high quality companies that are long-term compounders within the rich and deep Australian equity universe. The market has many options to choose from with strong domestic champions both large and small, impressive global leaders, and upstart disruptors taking advantage of long-term structural trends. 

Mike: And aside from broad diversification into the top 200 companies in Australia, why should U.S. investors consider allocating capital to the Australian equity market?

Eric: So, the Australian equity market’s a bit unique in that it's a combination of high-income yields, while also consisting of many companies that, again, have that long-term structural growth potential within developed market governance structures, regulations and disclosures. So, investors on the hunt for income have always looked to the Australian market, where the stock market has offered attractive dividend yields which are high, even by international standards, due to the market structural tax laws which favour dividend pay-outs.

Mike:  So, I think in the US it's like, you know, two or 3% historically is what the S&P 500 has paid out in terms of a dividend yield. What would that be in Australia? 

Eric: Well so, it varies depending on industry but banks, for example, now would yield six, 7%. You have quite a lot of stocks now which are in that kind of dividend yield range. I think what might surprise some people is that, despite being higher yielding and these companies paying out of their quite large cash flows, the Australian market is actually home to a lot of companies with strong market positions and they're well-placed to capitalize on, again, the structural growth trends of the global economy. Australia is rich with natural resources so, minerals such as iron ore, coal, gold, lithium means that the market will gain from the recovery and continued growth of China as it drives it towards greater economic heights. You've other globally leading Australian sectors, such as the healthcare sector, which has world class companies that benefit from the aging population and increased demand for medical services. And I actually think this is the most surprising, that the technology industry in Australia has been growing really fast and supported by contributions from both start-ups and very established companies. So, there's like a very rich equity market to play from. And then if you if you were looking to be a little bit more defensive, the Australian market has many strong domestically focused companies which are often in duopoly or all-of-opoly type positions - examples are the banks, the telcos, grocery stores and some retailers - which all helped just kind of support the market and provide relative shelter for investors, which is more independent of the state of the global economy. So, I think the Australian market has a lot of varied companies to choose from for different market conditions. 

Mike: Excellent. So, we have three things. We have higher yielding companies in general; we have a developed country benefiting from being in the middle of a bunch of developing markets; and then we have companies that operate independently from the global market, as you said. So, given all of that, how has the Australian equity market performed recently, say, year to date or in the past quarter? 

Eric: So, it’s probably more relevant in the last quarter. So, just total return for the Australian equities in the past few months - the market has fallen 4.2%. Weakness was more or less across the board. But I guess to kind of break it down a little bit further, performance of the market in July and August was relatively flat, which was actually pretty good considering that the Australian market got through a pretty difficult earnings season where we saw the market rebase forecast earnings lower. And this is in light of a difficult macroeconomic situation - higher rates, lower consumer spending and a still somewhat weak Chinese economy, which Australia feeds a lot of those commodities into. So, that that was July and August. So, that's relatively flat. But in September you saw that Australian equities fell and that it got to that down 4% range. And this is on the back of the market adjusting to a higher for longer interest rate environment, which is kind of in line with the rest of the global markets where we saw all overseas markets - the US, Europe - kind of all fall. Again, performance is generally weak across the board with more defensive sectors such as consumer staples, utilities and financials falling quite a bit less than the more you could say, sexy sectors like IT and interest rate sensitive sectors like real estate.

Mike: So, given what you were just saying about the fund's performance and the performance of the broader Australian equity market over the last three months, Eric, did the fund outperform the index for that period?

Eric: Yeah. So actually, despite the difficult environment, the fund has fared relatively well, and it outperformed the index, and it was thanks primarily due to prudent stock selection. Many of the companies we own in the portfolio released good results, which underscores their competitive advantages over the longer term. 

Mike: And then given all of that and everything you've said right now, what are the go-forward investment opportunities that you're seeing for the fund and its investors in this market where the mindset is higher rates for longer, especially as it's applied to the Australian equity markets?

Eric: So, from a macro perspective, I think it'll still be a pretty difficult environment. And I guess in that context we continue to think that strong stock selection will be key, and our focus will be picking the right stocks for that difficult macro environment. We're looking to keep the portfolio tilted defensively in these difficult times and given the market volatility, but we will look to utilize pockets and indiscriminate rotations to build positions in quality names at attractive valuations that play into these overarching structural growth themes that Australia has access to.

Mike:  Well, thanks Eric, for that update on the abrdn Australia Equity Fund (ticker - IAF)

Eric: Cheers, Mike. Thanks for having me. Thank you. 

Mike: And thank you everybody for joining us today. For those interested in learning more about the abrdn Australia Equity Fund (ticker – IAF), you have three options to contact us. Visit us at abrdn.com, that’s abrdn.com, email us at investor.relations@abrdn.com or call 1800 522 5465. Thanks again for joining. 

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