Investment Trust Awards 2016: best regional trusts

Best Japan Trust

Contenders: nine trusts in the Japan and Japanese smaller company sectors.

WINNER: JPMORGAN JAPAN SMALLER COMPANIES

Three years on from a major overhaul of its management team and investment approach, JPMorgan Japan Smaller Companies Trust has achieved our Best Japan Trust award. Disillusioned with poor returns under former star manager, David Mitchinson, the board had demanded change.

In response, JPM promised them a new investment process, with 'less outsize bets on sectors and companies', and a move towards a more concentrated portfolio with more of a 'buy and hold' strategy.

Shoichi Mizusawa, who heads JPM's investment team in Tokyo, was made lead manager, supported by Naohiro Ozawa, who is a smaller company specialist, and Nicholas Weindling, who had joined JPM from Baillie Gifford in 2006 and worked alongside Mitchinson for several years.

The trust's remit is complementary to that of JPMorgan Japanese Investment Trust - which has also been achieving better returns - in that it can invest in any Japanese quoted company other than the largest 200.

In practice, it tends to focus on smaller companies, seeking out those with robust business models and strong balance sheets which look well-placed to benefit from long-term structural trends in Japan.

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These include factory automation, the growth of e-commerce/mobile/internet, and the need to renew Japan's ageing infrastructure.

Weindling says: 'Smaller companies are a very dynamic part of the Japanese market. There are over 3,000 companies to pick from, and they are a very exciting part of the market with many strong trends that we can look to benefit from.'

HIGHLY COMMENDED: BAILLIE GIFFORD JAPAN

Sarah Whitley, who heads Baillie Gifford's Japan team, has been manager of Baillie Gifford Japan since January 1991.

She has achieved outstandingly good long-term returns from investing mainly in medium-sized companies, keeping portfolio turnover low by focusing on medium to long-term growth, and deploying plenty of gearing.

Whitley and her team are Edinburgh-based, but make regular visits to Japan to meet companies. She is not too worried about slow economic growth because she contends that the traditional correlation between Japan's economic health and corporate profitability has diminished.

She says: 'This is partly due to the ongoing internationalisation of corporate Japan, with more than half of profits now coming from overseas, and partly to the drivers of change within the economy, along with a greater focus on shareholder returns.

'There is also a thesis that the importance of the digital economy is mis-described by economic statistics first compiled more than a century ago.'

Best Asia Pacific Trust

Contenders: 16 trusts in the Asia Pacific excluding Japan sector.

WINNER: PACIFIC ASSETS

Pacific Assets Trust differs from its peers in two significant respects. Firstly it seeks to invest in companies that are not only well managed, with healthy balance sheets and good corporate governance, but which are also focused on sustainable goods and services, responsible finance or required infrastructure.

Secondly, manager David Gait has been cautious about the short-term investment outlook in Asia, so the trust has been only 90 per cent invested for much of the past two years.

This has not prevented it outperforming its benchmark and the average for its peer group every year since Gait took charge. It wins this award for the second year running.

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Gait is a leading member of the 10-strong sustainability team at Stewart Investors, one of two businesses formed by the division of First State Stewart in mid 2015.

Its investment approach is founded on the principals that guided First State Stewart from its 1988 launch, namely stewardship, an absolute return mindset, 'bottom-up' research, a long-term investment approach, a focus on quality companies with sustainable and predictable growth prospects, and strong valuation disciplines.

The team seeks a constructive long-term relationship with the managers of investee companies, 'establishing a rapport, and earning the right to engage'.

The trust's exposure to China is exceptionally low at 2.9 per cent, because Gait and his team have found few companies there that meet his criteria. However, a recent research visit encouraged hopes this is changing. In contrast the trust is very overweight in India at 33.4 per cent.

Three of the 13 clauses of Stewart Investors' Hippocratic oath for asset managers give a good guide to what investors should expect: 'I will remember that a share in a business brings with it responsibilities as well as rights.

'I will not forget in my search for returns that the primary risk faced by my clients is losing their capital. I will not succumb to irrational exuberance in good times, nor to unjustified gloom in bad times.'

HIGHLY COMMENDED: FIDELITY ASIAN VALUES

Fidelity Asian Values (FAV) achieved the best net asset value (NAV) returns in its sector in the year to end-January, and its three-year returns were just ahead of category winner Pacific Assets.

However, we have awarded the trust highly commended status as manager Nitin Bajaj only took over in April 2015.

The trust had achieved above-average returns in the two years before Bajaj took charge, with a mid-sized to large company remit under longstanding manager John Lo.

But the board asked for a change of focus in the hope that this would produce an even more competitive performance. Bajaj was appointed manager because he had been producing impressive returns for Fidelity Funds Asian Smaller Companies since September 2013.

Based in Singapore, Bajaj does not try to time the market. Instead he invests entirely on a 'bottom up' basis, calling on research from Fidelity's 50-plus Asia analysts.

He favours smaller companies because they are less well-researched and offer the opportunity to invest in the 'winners of tomorrow' before they become well known.

However, 20 per cent of the portfolio is in companies capitalised at over £10 billion, headed by Taiwan Semiconductor Manufacturing.

Best Europe Trust

Contenders: 12 trusts in the Europe and European smaller companies sectors.

WINNER: EUROPEAN ASSETS

European Assets Trust (EAT) claims this award for the third year running. Manager Sam Cosh's preference for quality growth companies, with sustainably high returns on capital, strong balance sheets and healthy cash flows means the trust may lag a bit when markets are storming ahead.

However it helps to make it resilient in more difficult times, leaving it with comparatively low volatility for a medium-sized to smaller company specialist, and it has duly outperformed its benchmark, the Euromoney Smaller European Companies (ex UK) index, in each of the past six years.

Cosh is very much a 'bottom-up' stock picker, as he contends there is a low correlation between stock market returns and economic growth, besides which he considers macroeconomic forecasting very unreliable.

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However, he needs some framework for his selections, and believes that low energy prices are 'a fillip to consumer pockets and corporate cost bases'.

He therefore used the January market setback to add to some of his highest conviction holdings and to initiate stakes in companies he and his team had previously avoided for valuation reasons.

EAT has done well from relatively low exposure to core European countries such as France, Switzerland and the Netherlands, preferring Italy, Spain, and above all Ireland.

With higher-quality companies on demanding ratings for much of last year, Cosh and his team devoted more funds than usual to less highly rated companies which they hoped offered 'unrecognised growth'.

This did not work particularly well, but Cosh continues to search for gems in sectors such as financials.

EAT's impressive record, coupled with its commitment to distributing 6 per cent of net assets in dividends, has pushed its shares to a premium rating, allowing it to increase its issued share capital by 27 per cent last year by issuing new shares at a premium to NAV.

This has helped reduce ongoing charges to 1.1 per cent, compared to 1.7 per cent in 2010.

HIGHLY COMMENDED: JPMORGAN EUROPEAN SMALLER COMPANIES

JPMorgan European Smaller Companies has a good long-term record and has achieved the best three-year NAV total returns in this award category despite a disappointing year in 2014.

Longstanding managers Jim Campbell and Francesco Conti strive to reduce volatility and have been cautious since autumn 2015, due primarily to worries about the slowdown in China.

They have therefore reduced gearing from double figures to negligible levels, and could raise liquidity to 20 per cent if they become particularly bearish.

They have cut back exposure to cyclical investments in favour of companies which they expect to grow regardless of the economic environment, such as Temenos, the Swiss world leader in banking software.

They have also been buying into companies exposed to the European consumer, in the belief that confidence is being boosted by lower oil prices and interest rates.

Hopes that economic reform is under way have encouraged a relatively high exposure to Italy, but the highest country weightings are France and Germany. Ongoing charges were 1.32 per cent last year, but should be lower following a cut in the management fee in April 2015.

Best Emerging Markets Trust

Contenders: 14 globally or regionally diversified trusts in the emerging market sectors.

WINNER: BLACKROCK FRONTIERS

BlackRock Frontiers Investment Trust (BRFI) lost ground over the year to end January, but demonstrated its customary resilience in hard times by holding up better than the MSCI Frontier Markets index.

Over three years it has achieved much the best NAV total return in this category, well ahead of the gain in the Frontier Markets index, let alone the fall in the MSCI Emerging Markets index.

Since launch in December 2010, its NAV total return per share is 22.4 per cent ahead compared to a 6 per cent gain from the FM index and a 16.7 per cent fall in the EM index.

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Manager Sam Vecht, along with Emily Fletcher since May 2013, deserves credit for grinding out positive medium-term returns against such a difficult background. He remains convinced that the long-term potential in frontier markets makes them an attractive diversifier for investors' portfolios.

'The low correlation between frontier markets and all developed and emerging markets means that the inclusion of a frontier markets fund within a portfolio can bring significant diversification benefits to both global and regional investors,' Vecht says.

He attributes BRFI's relative success to three features. Firstly his willingness not to adhere to benchmark country weightings, characterised by his decision in late 2014 to cut back sharply on exposure to Nigeria and Saudi Arabia given the falling oil price.

Secondly a combination of extensive company research with macroeconomic analysis, bringing in factors such as currency prospects.

Thirdly the importance of the trust's closed-ended structure. This allows him the time needed to assemble positions in companies with high growth potential but very illiquid share registers.

HIGHLY COMMENDED: UTILICO EMERGING MARKETS

Utilico Emerging Markets Trust (UEM) retains our highly commended award. The trust was hard hit by last summer's steep sell off in China and other emerging markets, and its China holdings took another hit at the start of 2016.

Despite this, it ended January with compound NAV total returns of 10.8 per cent per annum since launch in July 2005. Add in a yield of 3.7 per cent, and it is hard to see why the shares have fallen to a double-digit discount.

Manager Charles Jillings says the medium-term prospects for emerging markets are encouraging. 'Valuations are as attractive as at any time in the last 10 years, and currencies have been so weak that at some stage there must be a recovery.'

On the risk of state or regulatory interference in the utility investments in which the trust specialises, he says: 'Significant shareholders can exert influence, but most countries are looking for further inward investment, so if you understand where it is being encouraged you can be fairly confident about medium-term stability.'

As an example, he says China is determined to clean up its environment and is therefore encouraging greater use of gas. That should benefit the gas transmission companies in which UEM has sizeable stakes.

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