EPP: Pacific Ex Japan ETF With Consistent, Decent Yield, Nothing Exciting

~ by Snehasish Chaudhuri, MBA (Finance).

iShares MSCI Pacific ex Japan ETF (NYSEARCA:EPP) is an exchange-traded large-cap/ value fund ("ETF") that invests in diversified stocks in public equity markets of Asia/Pacific developed regions. The fund uses representative sampling techniques to create its portfolio and seeks to track the performance of the MSCI Pacific ex Japan Index. The underlying index is composed of stocks from four countries - Australia, Hong Kong, New Zealand and Singapore. EPP is managed by BlackRock Fund Advisors. It has a very large asset base of $2.17 billion. Expense and turnover ratio stands at 0.47 percent and 15 percent respectively. EPP generates decent but steady yield on a consistent basis and is currently trading at a marginal discount of almost 0.11 percent.

EPP Has Been Generating Consistent Yield In a Range of 3.6 to 4.8 Percent

iShares MSCI Pacific ex Japan ETF was formed in 2001 by BlackRock, Inc. and has been paying semi-annual dividends since 2008. The fund generates consistent yield, mostly within a range of 3.6 to 4.8 percent. Annual average yield since 2013 has been 4.23 percent. Total return over the long run also has been decent. Between 2016 and 2021, EPP generated an annual average total return of 8.5 percent. However, EPP’s returns were always much lower than that of the S&P 500 (SP500). The fund has invested heavily in the stocks of the financial sector. This is not surprising, because all these four countries are known for housing some of the largest financial entities of Asia-Pacific.

EPP’s Top Investments in the Financial Sector Delivered Strong Price Growth

Top equity investments of EPP included a bunch of financial stocks such as, AIA Group Limited (OTCPK:AAGIY), Commonwealth Bank of Australia (OTCPK:CBAUF), National Australia Bank Limited (OTCPK:NABZY), Westpac Banking Corporation (OTCPK:WEBNF), Macquarie Group Limited (OTCPK:MCQEF), ANZ Group Holdings Limited (OTCPK:ANZGY), Hong Kong Exchanges and Clearing Limited (OTCPK:HKXCF), DBS Group Holdings Ltd (OTCPK:DBSDF), Oversea-Chinese Banking Corporation Limited (OTCPK:OVCHF), United Overseas Bank Limited (OTCPK:UOVEY) and QBE Insurance Group Limited (OTCPK:QBEIF). Almost 37 percent of EPP’s assets are invested in this sector. Baring HKXCF, AAGIY and NABZY, all other stocks had a double-digit price growth during the past 12 months.

Star Performers in EPP’s Portfolio Belonged to Materials and Energy Sector

Significant investments in basic materials and energy sector included the most renowned giants of Asia-Pacific region - BHP Group Limited (BHP), Rio Tinto Group (RIO), Fortescue Metals Group Limited (OTCQX:FSUMF), Newcrest Mining Limited (OTCPK:NCMGF), Woodside Energy Group Ltd (OTC:WOPEF) and Santos Limited (OTCPK:STOSF). During the past 12 months, WOPEF registered a price growth of 25.6 percent. BHP, RIO, FSUMF and NCMGF grew by 22.4 percent, 18.3 percent, 36.3 percent and 14.6 percent respectively. No doubt, the prevailing economic scenario that is deeply impacted by the Russia-Ukraine conflict had a significant impact. Moreover, prices of precious metals are always on the rise.

EPP’s Investments in Communication, Real Estate and Retail Were Bit Disappointing

iShares MSCI Pacific ex Japan ETF also invested in equities of large-cap communication technology and services companies - CK Hutchison Holdings Limited (OTCPK:CKHUY), Singapore Telecommunications Ltd (OTCPK:SGAPY); and various retail stores such as Wesfarmers Limited (OTCPK:WFAFF), Woolworths Group Limited (OTCPK:WOLWF), Coles Group Ltd. (OTCPK:CLEGY) and Sea Limited (SE). The fund also had stakes in real estate firms like Transurban Group Stapled Securities (OTCPK:TRAUF), Goodman Group Stapled Securities (OTC:GMGSF), Sun Hung Kai Properties Limited (OTCPK:SUHJY) and Link Real Estate Investment Trust (OTC:LKREF). Unfortunately, the price performance of these stocks were not impressive enough. During the past 12 months, only WFAFF, WOLWF, GMGSF and SUHJY were able to post double-digit growth.

Is Lack of Geographical Diversification Limiting the Growth Potential of EPP?

Unlike most Asia-Pacific funds, which spread their stocks broadly across countries, especially in the emerging economies and tend to focus on developing markets, EPP invests in just four countries, all of them with fully developed economies. That doesn’t mean iShares MSCI Pacific ex Japan ETF hasn’t tapped into some of the extraordinary gains in emerging markets, because stocks based in Australia, Singapore and Hong Kong — which accounts for more than 95 percent of its AUM — should have benefited from a close relationship with high-growth economies in the Asia-Pacific region.

Resource-rich Australia helps feed the insatiable appetite of raw materials for emerging Asian economies, the reason many investors love to invest in the Australian equity market. Banking stocks from Australia and Hong Kong, which make up a significant part of EPP’s portfolio, have remained relatively unaffected by the global slowdown. Prices of gold, copper, nickel, lead and other metals are rising despite all the economic uncertainties around the globe. Price of metals stocks have achieved significantly high price growth during the recent past. However, there is a little concern. These markets rarely remain undervalued. So, the valuation becomes quite crucial while investing.

Investment Thesis

The iShares MSCI Pacific ex Japan ETF has always been invested in mature sectors and mature companies within mature economies of the pacific region, hence the yield has been significant. EPP’s major investments in financial, materials and energy sectors generated significantly high price growth during the past 12 months. These three sectors accounted for 58 percent of EPP’s total investment. Other investments, however, did not achieve that impressive price growth. The best part about this fund is its consistent and decent yield within a range of 3.6 to 4.8 percent. EPP’s portfolio has a weighted average price to earnings ((P/E)) ratio of 14.6, and is currently trading almost at par.

However, Australia, Hong Kong, New Zealand and Singapore, all these markets are very mature markets with a steady but low growth rate. Materials and energy sectors are also having a very stable growth rate, and once the impact of the Russia-Ukraine conflict is gone, these stocks will grow at a much lower rate. Financial stocks however will remain highly volatile. So, I expect the iShares MSCI Pacific ex Japan ETF to continue with its steady and decent yield, and it is a decent option to hold on. However, I don’t think that EPP is an attractive international hedge for U.S. investors. In my opinion, EPP’s portfolio lacks clear outperformance potential and better opportunities exist elsewhere.

About the TPT service

Thanks for reading. At the Total Pharma Tracker, we offer the following:-

Our Android app and website features a set of tools for DIY investors, including a work-in-progress software where you can enter any ticker and get extensive curated research material. 

For investors requiring hands-on support, our in-house experts go through our tools and find the best investible stocks, complete with buy/sell strategies and alerts.

Sign up now for our free trial, request access to our tools, and find out, at no cost to you, what we can do for you.