Aberdeen Asia-Pacific Income is a closed-end fund that holds short-to-intermediate-term debt issued by corporations and governments based in 10 Asia-Pacific countries and the U.S., notes Roger Conrad, editor of Capitalist Times.
The Australian dollar is the largest currency exposure with 27.6 percent of the portfolio. Australian dollar exposure is important to returns, as a protracted decline from here would affect the U.S. dollar value of the portfolio, as well as U.S. dollar cash flows to pay distributions.
The point here is that FAX is a conservative way to hold exposure to the Australian dollar. Our view is that the commodity price-sensitive Australian dollar has bottomed for the cycle.
The unit price can be affected near term by investor perception of currency risk. But so long as the fund itself is managing the effect of volatility on actual cash flow adequately, the dividend will hold — and it is the primary support for returns for income investors.
Keep in mind, however, that from Feb. 29, 2012, through Jan. 15, 2016, the Australian dollar fell from a high of nearly USD1.09 to barely US68 cents, a 37 percent decline. The dividend paid by FAX, meanwhile, has remained the same 3.5 US cents per unit.
The last dividend cut was in Jan. 2002, when the Australian dollar was selling at US60 cents. It’s possible a drop of that magnitude in the coming months could trigger another dividend cut at FAX.
On the other hand, the fund was considerably more weighted toward the currency 20 years ago than it is now. For example, U.S. dollar securities are 43.7 percent of the portfolio, a figure that’s probably understated as several of the remaining countries represented have more or less pegged their currencies to the U.S. dollar.
As for credit quality, the top 10 holdings are all government bonds. About one-third of the portfolio is either in junk-rated paper (8.5 percent) or obligations that aren’t rated.
When you buy an entity where the primary income is generated from a portfolio of investment assets, you’re essentially buying a black box. All you’re going to get in the way of public information is what management provides in snapshots on specified dates.
We’ve been willing to hold FAX in our diversified Lifelong Income Portfolio in large part because management has rewarded our trust with a consistent dividend — and the recent dip in FAX, notwithstanding, mostly solid returns on NAV (net asset value).
A good part of those returns is the result of management being able to identify and buy non-investment grade paper. The bottom line with FAX is that we still rate it a Buy up to $5. Note that dividends are paid in U.S. dollars, as its primary market is the NYSE.
Roger Conrad is founder and editor of Capitalist Times.
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