A Path from Skeptic to Champion of Dividend Investing in Asia
Portfolio Manager Sherwood Zhang, CFA, discusses the appeal of dividend investing in Asia.
Spotlight on Sherwood Zhang, Matthews Asia Portfolio Manager
Early in his career while working in Shanghai, Sherwood Zhang decided to pursue a master’s degree in the U.S. to “escape the boredom of the commercial banking business.” By 2007, with his M.B.A. from the University of Maryland in hand, Sherwood began working as a research analyst. He started focusing on dividend investing a few years later when he joined Matthews Asia.
“In the beginning, I’d never even heard of dividend investing in Asia,” he says. “And wondered, ‘Is that even a thing?’ So I understand when investors are skeptical because even I was a skeptic.”
Historically, investors have pursued China stocks for their growth potential and largely ignored their dividends. But listed Chinese companies paid record dividends in 2017, raising payments by more than one-fifth to US$156 billion (1.07 trillion renminbi), according to the China Securities Regulatory Commission.
“We still look for growth, but dividends help you be more disciplined,” Sherwood says. “Dividend investing helps you avoid some of the common value traps in Asia in general, such as stocks appearing affordable by price-to-book terms or other traditional valuation metrics,” he adds. “But if you really think about why they’re so cheap, it can be that they don’t provide returns for investors.”
Sherwood honed his process and investing discipline by, among other things, stress-testing companies with high leverage and spending significant time on the ground during research trips around the region.
“We consider a variety of data sources such as the financial information released by multinationals with a big presence in China, tourist spending and the visitor patterns of Chinese tourists abroad to get a sense of discretionary spending,” he says.
But does China’s economic slowdown matter?
“One perception is that you have to invest in a high-growth economy in order to benefit. But as active managers, that’s the value we bring,” Sherwood says. “China’s market is inefficient. That’s why I think the dividend is the best way to extract value. So I don’t worry too much about the slowdown because China is still a place of great change.”
China’s aging demographic is a potential concern for some market watchers. But growing health care needs and the country’s current shortage of senior care facilities are among the issues that are forcing China’s system to respond. “When you have a 1.3 billion population that starts aging, it creates a big demand for services and products. Even if China has problems, these are problems for companies to solve and that creates business opportunities.”
Among the region’s other economies that are showing more compelling demographics is Vietnam. Sherwood finds Vietnam’s young and well-educated population, improving corporate governance, stable politics and low cost of manufacturing to be exciting. To boot, Vietnam’s National Wage Council also recently increased the country’s minimum wage by an average 5.3%, helping to raise quality of life.
Sherwood visited both Hanoi and Ho Chi Minh City to research investment opportunities late last year. “Vietnam reminds me of China 15 years ago,” he says. “The Hanoi Metro is close to completion, there are more banks and services to invest in. And to my surprise, the younger generation of Vietnamese seem more open to cross-cultural exchange, foreign investment and interactions than existed a few generations ago. For example, there are more media now such as Mainland Chinese TV dramas that are a big hit with young Vietnamese.”