abrdn Closed-End Funds
FOR US INVESTORS ONLY
Important Information:
Closed-end funds are traded on the secondary market through one of the stock exchanges. The Fund’s investment return and principal value will fluctuate so that an investor’s shares may be worth more or less than the original cost. Shares of closed-end funds may trade above (a premium) or below (a discount) the net asset value (NAV) of the fund’s portfolio. There is no assurance that the Fund will achieve its investment objective. Past performance does not guarantee future results.International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods; these risks are generally heightened for emerging market investments.Concentrating investments in the specific regions subjects the Fund to more volatility and greater risk of loss than geographically diverse funds.Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).The Fund’s use of leverage exposes the Fund to additional risks, including the risk that the costs of leverage could exceed the income earned by the Fund on the proceeds of such leverage. Additionally, in the event of a general market decline in the value of the Fund’s assets, the effect of that decline will be magnified in the Fund because of the additional assets purchased with the proceeds of the leverage.Your portfolio may not have the same asset class weightings. Asset class weightings are subject to change.Diversification does not ensure a profit or protect against a loss in a declining market.Some of the information in this document may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies. These statements are only predictions and actual events or results may differ materially. The reader must make his/her own assessment of the relevance, accuracy and adequacy of the information contained in this document, and make such independent investigations, as he/she may consider necessary or appropriate for the purpose of such assessment.Any opinion or estimate contained in this recording is made on a general basis and is not to be relied on by the reader as advice. Neither ABRDNnor any of its agents have given any consideration to nor have they made any investigation of the investment objectives, financial situation or particular need of the reader, any specific person or for any loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information, opinion or estimate contained in this document.
abrdn Closed-End Funds
abrdn Australia Equity Fund, Inc. (IAF) March 2024 Update
In this podcast, Eric Chan joins Mike Taggart to discuss IAF.
IAF top ten holdings as of January 31, 2024:
BHP Group Ltd - 11.2
Commonwealth Bank of Australia - 8.8
CSL Ltd - 8.5
National Australia Bank Ltd - 5.9
Woodside Energy Group Ltd - 4.3
Rio Tinto PLC - 4.0
Macquarie Group Ltd - 4.0
Goodman Group - 3.9
Australia & New Zealand Banking Group Ltd - 3.7
Telstra Group Ltd - 3.6
00:00:00:00 - 00:00:32:11
Mike Taggart
Welcome to the latest podcast for the abrdn Australia Equity Fund, ticker symbol IAF. I'm Mike Taggart. Abrdn’s U.S. Closed End Funds Specialist. Today we have Eric Chan, an investment manager at abrdn and a portfolio manager on IAF. Eric, thank you for joining us today.
Eric Chan
Yeah, thanks for having me.
Mike
Eric Before we delve in, I want to discuss the Australian stock market overall because it seems to me that it's a developed market where active management can really potentially add value just from the way it's structured.
00:00:32:14 - 00:00:59:13
Mike
Is that is that correct assumption on my part?
Eric
Yeah, that's that's actually very much the case. To give you some background, the ASX 200, which is the main Australian equity benchmark, it's a pretty concentrated index. So just for some context is that the four major listed banks account for about 20% of the entire index. BHP, which is the largest miner alone, accounts for about 9.8% and Rio, which is the second largest miner accounts for another 2%.
00:00:59:18 - 00:01:29:14
Eric
So in other words, the four largest financial companies and the two biggest miners account for almost 35% of the index. To some other stats is that if you go a bit further, the top ten stocks account for 47% and the top 20 encompasses 50%. So what makes this concentration interesting is that it really favors active stock picking. So just by slightly overweighting or underweighting certain stocks, say within the banks or within the miners, you can easily contribute to your performance.
00:01:29:16 - 00:01:54:22
Eric
I guess the other major interesting part is that just again, because of that market structure going past the top ten, you get a lot of these sub industries, sub sectors that are large enough to really make a difference but are small enough and that their oligopolies stick. And so you can do very similar type of investing in that just by picking the winner within subsectors you can greatly add to performance.
00:01:54:24 - 00:02:23:06
Mike
Yeah, that's really interesting, especially for developed markets to have that kind of concentration. And so with that said, why should U.S. investors consider investing their dollars in Australian stocks right now?
Eric
Actually, now it is a great time to invest in Australian stocks. So just again, just some stat throwing at you, if you look at performance since November, which is kind of a pivotal time, because that's when we started seeing great expectations of cuttings started to rise.
00:02:23:06 - 00:02:47:22
Eric
And so global equity markets rose. Actually, the S&P 500 and the ASX 200 or the Australian index performed very similarly on a US dollar basis. They both rose around 22%. That being said, if you look at where these indices are now from a valuation standpoint, the ASX 200, which again the Australian index is at 16.5 times PE versus the S&P is 21 times.
00:02:47:22 - 00:03:17:22
Eric
So it's a lot cheaper for so far in the last say four or five months has been very similar performance. So and actually if you look historically in the past ten years, this valuation gap between these two indices is as has never been wider. So on a relative basis, I think Australian stocks look really interesting. The other kind of major thing you'd have to consider here is when you're looking at the economic outlook, I'm thinking it's a really good time to invest.
00:03:17:24 - 00:03:39:17
Eric
And I say that because as we get into the second half of this year, I think that economy is really well set up for a recovery. We're going to start seeing rate cuts. We're also going to see we've already started seeing signs of a housing market recovery. There's been record immigration into the country, which will help boost domestic consumer spending.
00:03:39:19 - 00:04:02:17
Eric
And that's actually been a weaker part of the market because of higher mortgage rates. And again, in the second half of the year, we'll start seeing potential tax cuts that should again help give a boost to that consumer spending. So overall, the Australian market as an economy is pretty well set up to grow this year.
Mike
So a lot of good things going on in Australia.
00:04:02:19 - 00:04:26:08
Unknown
Could you tell us in order to kind of derive that information and find, you know, these undervalued securities in the securities with the growth potential and figuring out how to weight securities in your portfolio, given the weights in the underlying stock market? You know, it takes a lot of research. And so could you tell us about the structure of your research team and your investment process?
00:04:26:09 - 00:04:50:13
Eric
So abrdn as a, as a firm, Our major focuses on long term quality, which has proven to be a winning style over the longer term, not just in Australia but in other regions in Asia as well. We ground our approach in deep fundamental analysis and rigorous stock selection and we're very clear to integrate ESG into our processes, which we think is actually a value add.
00:04:50:15 - 00:05:11:19
Eric
Our reputation as long term investors means that we typically get first rate access with companies that we research and we really highly value our on the ground research team. For example, just to give you again, I'd like to throw a numbers at you, but in Asia alone with about 40 research analysts that are again on the ground within Asia.
00:05:11:19 - 00:05:46:13
Eric
So for example, for the case of Australia, if we wanted to get a sense for China in iron ore, we have a team in China, we have a team in Hong Kong that can help out and give us on the ground color across the firm as a whole. Again, we have more than 100 research analysts and investment professionals and then we actually do 700 to about a 700 to 900 company research meetings a year to get that again, that very firsthand in-person connection with companies and really figure out what's happening on the ground.
00:05:46:15 - 00:06:11:12
Mike
Because you're not just you're not just meeting with with companies in Australia, you're meeting with companies that these Australian companies do business with. Is that correct? And then you get a sense of kind of like the ecosystem of the entire region, right? And that helps inform you about the business climate that you're then able to put on to the to the Australian valuations and help you understand that?
00:06:11:12 - 00:06:54:22
Mike
Is that what I'm hearing?
Eric
Yeah, that's the way, that's, that's, that's the way to think about it. So a lot of Australian companies are large global companies. And so again, having that on the ground is really up again. For example, just take a mining company like BHP, they produce a lot of iron ore and it’s Australia’s largest export, 75% of iron ore goes to China or having again, like I said before, having that on the ground research helps, we have a lot of other companies that that for example, could manufacture in China, manufacture in in ASEAN, and that's as a global theme that's becoming more prevalent.
00:06:54:24 - 00:07:18:00
Eric
So again, we can get that on the ground research that helps inform our investment decisions and in this case, within Australia
Mike
And then I guess finally, you've mentioned already that financials and mining companies make up a large portion of the stock market, and I can see that reflected in the sector weightings of IAF’s Fact sheet. But I also see that health care makes up about 15% of the portfolio.
00:07:18:00 - 00:07:44:23
Mike
Is that a function of the market or is that by design?
Eric
Overall health care is quite a large part of the index. Health care is about 9%. So that would mean that we're 6% overweight and that that was a very intentional choice. Health care in Australia tends to be filled with a lot of very high quality global companies, an example of which is, say, CSL, which is one of the leaders in its space on a global scale.
00:07:45:00 - 00:08:13:09
Eric
We saw some pretty major dislocations in some of the share prices in the health care sector and we use that opportunity as being long term investors and we saw that that valuation mismatch was completely unwarranted.
00:08:13:11 - 00:08:33:06
Eric
So we decided to increase our weight and we just kind of let that ride and it's actually paid off quite a lot.
Mike
Well, excellent, and thank you for that insight and for the overall update on IAF. Eric, it's been a pleasure speaking with you.
00:08:33:08 - 00:08:59:20
Eric
Yeah, it's been great. Thank you.
Mike
And thank you everyone for listening to this podcast. There are three convenient ways to learn more about IAF on the internet. Visit abrdniaf.com. Email us at Investor.Relations@abrdn.com, or give us a call at 1 800 522-5465. I'm Mike Taggert of abrdn. Thank you for listening.
00:08:59:22 - 00:09:46:12
Unknown
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for informational purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn.
00:09:46:14 - 00:10:13:06
Unknown
The companies discussed in this podcast have been selected for illustrative purposes only or to demonstrate our investment management style and not as an investment recommendation or indication of their future performance. The value of investments and the income from them can go down as well as up an investor's. Make it back less than the amount invested. Past performance is not a guide to future returns, return projections or estimates, and provide no guarantee of future results.
IAF top ten holdings as of January 31, 2024:
BHP Group Ltd - 11.2
Commonwealth Bank of Australia - 8.8
CSL Ltd - 8.5
National Australia Bank Ltd - 5.9
Woodside Energy Group Ltd - 4.3
Rio Tinto PLC - 4.0
Macquarie Group Ltd - 4.0
Goodman Group - 3.9
Australia & New Zealand Banking Group Ltd - 3.7
Telstra Group Ltd - 3.6