Although trusts focused on the Asia Pacific region are likely to be hit by slowing growth, there are still opportunities up for grabs.
Most Asia Pacific ex Japan trusts are currently less than fully invested, and it is not hard to see why. China is the dominant regional economy, and its confrontation with the US over trade terms, forced technology transfers and state interference threatens to exacerbate the deceleration in its growth, with companies in neighbouring states at risk of being caught in the cross-fire.
Rising oil prices are another problem for a region that is a substantial importer, as is a strong dollar, given that a lot of Asian borrowing is dollar-denominated.
Despite these worries, though, most Asia Pacific ex Japan trust managers remain optimistic about the long-term potential of this vast region, home to more than half the world’s population. Ewan Markson-Brown, manager of Pacific Horizon trust, captured its longer-term promise in his half-year report.
Growing middle class
“In Asia, more people have been lifted out of poverty at a faster rate than ever in human history. In many Asian countries, large segments of the population are moving from a focus on economic survival to the relative safety of belonging to the ‘middle class’. Savings and consumption are soaring, and there is growing demand for new goods and services.
“Technology development and innovation are increasing rapidly,” he continues. “As more people, economies and businesses are connected, ideas will spread and multiply and new businesses will be created at the expense of older less dynamic firms. The adoption of the new is as rapid – and sometimes more so – in Asia ex Japan as in the West.”
Asia’s longer-term attractions are enhanced by its mix of wealthy advanced economies with highly educated populations and emerging ones where labour remains cheap. Its stockmarkets offer exceptionally varied opportunities, with India for instance tending to flourish at different times from China. There is an equally diverse choice of trusts.
The nine generalists include both value- and growth-oriented strategies, a total return trust, and Pacific Assets (PAC), with its sustainability agenda. There are also three traditional income trusts which offer yields of 4% or more paid quarterly, and three smaller company trusts. As in most regions, the smaller company trusts have been exceptionally rewarding over 10 years, but have found it harder going recently, not least because their remit has precluded them from investing in China’s version of the FAANGs, which includes Tencent and Alibaba.
The growth-oriented generalists have ruled the roost in the past few years, with those with a high Chinese exposure performing particularly well until spring 2018. Their returns were hard-hit over the following six months, recovered in the first quarter of 2019, but have fallen back since the US/China standoff worsened. Despite this, they continue to top the five-year NAV performance tables.
JPMorgan Asian Investment Trust (JAI) has been a leading contender since Ayaz Ebrahim became manager in October 2015. With an above-average exposure to Chinese large caps, its NAV total returns pulled well ahead of the MSCI Asia ex Japan index in 2016 and 2017, and it recovered well from last year’s losses at the start of 2019.
The managers are supported by JPMorgan’s powerful regional research team, which includes four Mandarin speakers based in Shanghai. They have been hoping the growth in domestic consumption will help to offset the effects of the tariff battle, but are avoiding any gearing so as to minimise the damage if there are further setbacks.
JAI’s good three-year returns and the board’s decision to pay an enhanced dividend equal to 1% of NAV per share at the end of each quarter have combined to reduce the discount.
Schroder Asia Pacific (SDP) has appeared regularly near the top of its sector over the 23 years that Matthew Dobbs has been manager. He looks for growth at a reasonable price from good-quality shareholder-friendly companies exploiting long-term growth trends, and is supported by around 38 regionally based analysts.
The trust was another to benefit from an above-average exposure to China in the run-up to last year’s setback, with Dobbs being persuaded to overcome his earlier reservations about corporate governance in the communist kingdom. But it then suffered a particularly severe setback, and having turned more cautious on China it has struggled to fully recover. This has knocked its longer-term figures.
Schroder Oriental Income (SOI), which is Dobbs’s other longstanding charge,has fared very differently. With its emphasis on dividend-paying shares, it has had relatively little in China, and therefore looked dull in 2017, but held up better than most during last year’s upsets.
It currently boasts among the best 10-year NAV total returns of any Asia Pacific trust, combined with exceptionally low volatility and a steadily rising dividend. As a result its shares regularly trade close to or above NAV, and it has been able to issue new shares at a premium.
Schroder Asian Total Return (ATR) has similarities with SDP, including six of the same top 10 holdings, and it too benefited from riding the China market upwards. But it differs significantly, in that Robin Parbrook and King Fuei Lee, who have managed it since 2013, can use derivatives to protect the portfolio on the downside, and did so in 2018 when they not only trimmed exposure to technology stocks before they peaked, but also kept a relatively high level of hedging in place.
Riding the recovery
This helped mitigate ATR’s losses in the sell-off, and it has recovered strongly year to date, not least by riding the recovery in consumer-related shares and some financials in Hong Kong and China, each of which accounted for nearly 28% of the portfolio at end April. With the best five-year total returns in its sector, it too has been issuing new shares at a premium.
Predictably for a Baillie Gifford-managed trust, Pacific Horizon (PHI) is exceptionally growth-oriented, with Ewan Markson-Brown focusing on companies with the potential to increase their earnings at around 15% a year for at least the next five years. He contends that innovation beats stability and that new businesses have an advantage over old, so PHI holds a lot of disruptive companies and more medium to small companies than most of its peers.
He warns that this can result in short-term volatility and it has, with an exceptionally weak 12 months to end March 2019 following an exceptionally strong couple of years to end March 2018. The shares’ premium rating indicates that their holders share the manager’s confidence that its holdings “will reward them disproportionately in the coming years”.
Aberdeen’s four Asia ex Japan trusts have won a lot of awards over the years, and its smaller company trust – now known as Aberdeen Standard Asia Focus (AAS) – still boasts much the best 10-year total returns in the sector. The management team’s longstanding value-oriented approach has meant the trusts have historically lagged in rapidly rising markets, but more than made up for it in more difficult times.
However, with value lagging growth for an unusually long time, the boards of both Edinburgh Dragon Trust (EFM) and AAS have been concerned. This prompted the managers into a number of changes, including a greater willingness to invest in carefully selected Chinese stocks despite ongoing worries about corporate governance and state interference, and a move to a more focused approach at AAS, plus December’s appointment of group guru Hugh Young as sole manager.
Dragon and Aberdeen New Dawn’s (ABD’s) one-year returns indicate that the tide may be turning in their favour, as both suffered less than average in last year’s setback and have achieved above-average gains in the first five months of 2019. Both recently deployed some gearing, both remain underweight China and overweight Hong Kong, Singapore and India, which has performed well over the last year, and New Dawn also has a modest exposure to Australia.
So far, however, AAS has not notably improved, so is not yet challenging the very cautiously managed Fidelity Asian Values (FAS) for shorter-term dominance of the Asian smaller company sector.
Pacific Assets (PAC) is the only regional trust that has continued to totally avoid direct investment in China and has long been massively overweight India. This, together with substantial cash holdings, served it well in last summer’s crash. As a result it has the best one-year NAV returns in the region, and also boasts the best 10-year NAV returns of any generalist.
It has been managed since 2010 by David Gait of Stewart Investors. He and his team focus on the quality of potential investee companies’ management, franchise, financials, corporate governance and sustainability, and he has yet to find any Chinese companies which meet his criteria and trade at attractive valuations. He therefore gains exposure to China through companies listed elsewhere, including several quoted in Japan.
Gait’s commitment to investing in companies that contribute towards global human development without exceeding their ecological footprint should appeal to investors worried about climate change, and is gaining a following as more managers elevate environmental concerns in their investment considerations.
Asia Pacific trusts look to long term
|Share price (p)||Disc/prem(%)||Yield (%)||NAV total returns over|
|1 yr||3 yrs||5 yrs||10 yrs|
|Scottish Oriental Sm Cos||1015||13.2||1.1||2||38||48||300|
|Aberdeen New Dawn||238||11.4||1.8||1||62||54||192|
|Fidelity Asian Values||425||plus 2.5||0.7||1||45||78||234|
|Henderson Far East Inc||350||plus 1.4||6.3||1||44||51||141|
|Aberdeen Asian Income||205||7.9||4.5||0||46||42||201|
|Aberdeen Std Asia Focus||1055||12.9||1.2||0||42||43||330|
|Schroder Oriental Inc||247||plus 0.9||4||0||47||65||286|
|Martin Currie Asia Uncons||368||12.7||4.5||-2||50||55||116|
|Schroder Asian Total Ret||349||plus 1.7||1.8||-2||66||97||178|
|Schroder Asia Pacific||430||8.5||2.2||-9||63||82||255|
|Pacific Horizon||320||plus 1.7||0||-15||64||65||173|
Source: Figures derived from data supplied by Winterflood Secutities as at 31 May 2019