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FE Alpha Managers on a discount: Emerging markets

22 October 2013

FE Trustnet looks at three closed-ended emerging markets funds that are trading on a discount to NAV and asks the experts whether now would be a good time to buy into them.

By Alex Paget,

Reporter, FE Trustnet

While developed countries such as the US and UK seem to be witnessing an economic recovery of sorts and therefore improving investor sentiment, emerging markets have gone the other way.

Concerns about an economic slowdown – principally in China – falling commodity prices and a stronger US dollar have all contributed to negative sentiment on emerging markets, making them a particularly difficult place to invest in over the past three years.

Performance of indices over 3yrs

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Source: FE Analytics

However, many experts say that emerging market equities are now so cheap that it would be a good time for someone with a long-term horizon to buy in to them.

John Ventre, head of multi manager at Old Mutual, says that China is so cheap and under-owned that even if sentiment were to turn sour, it would be relatively unaffected.

If there was a turnaround in emerging markets, tightening discounts could give returns from investment trusts an extra kick.

FE Trustnet looks at three FE Alpha Managers who run closed-ended emerging markets funds that are trading on a discount to NAV and asks the experts whether now would be a good time to buy into them.


Will LandersBlackRock Latin American IT 9.35 per cent discount

As FE Trustnet recently highlighted, more and more fund managers are buying into battered Brazilian equities, with the likes of FE Alpha Manager Robin Hepworth saying that not only is it an exceptionally cheap market, but that the falling currency is also good news for its exporters.

While FE Alpha Manager Landers' BlackRock Latin American IT can invest across South America, the manager says it should really be called a Brazilian and Mexican fund as those markets make up 87 per cent of the portfolio.

His trust is trading on a healthy discount of 9.35 per cent, which is wider than its three-year average.

Landers has managed the trust since June 2006 and over that time it has slightly underperformed against its benchmark, the MSCI Emerging Latin America index.

Performance of trust vs index since Mar 2006

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Source: FE Analytics


Tom Tuite-Dalton, analyst at Oriel Securities, points out that Landers' trust is the only one that gives pure equity exposure to Latin America. He is also relatively positive on the region, although he advises taking a broader approach.

"Brazil and Mexico have both been out of favour for a while now, so I wouldn’t say that now is the time to be selling out of them. However, given the volatility, it may better to use a global emerging markets fund for diversification purposes," he said.

The BlackRock Latin American IT has a healthy 5.45 per cent yield. Gearing is 3 per cent and ongoing charges are 1.18 per cent.


Oleg BiryulyovJP Morgan Russian Securities on a 12.9 per cent discount

FE Alpha Manager Oleg Biryulyov’s JP Morgan Russian Securities IT is a country-specific portfolio, as the name suggests, and because of that is a high-risk investment.

While Biryulyov also manages the open-ended JPM Russia fund, investors can gain access to the trust for 12.9 per cent less than the value of its assets. This discount is wider than its three- and one-year averages, according to data from the AIC.

Russia itself obviously comes with its own risks and investors in the country have struggled recently. The economy is generally tied to the oil price and issues such as oligarchs, pricing manipulation and poor corporate governance can result in significant headwinds.

Nevertheless, Cantor’s Monica Tepes says JP Morgan Russian Securities is a good choice for investors who expect Russia to rebound.

"JP Morgan Russian Securities is a very high-beta portfolio, so if you felt the market was about to turn, then this would be a good choice. It rallies very hard in rising markets, but does equally as badly in falling markets," she explained.

Our data backs up Tepes’ assessment. The trust lost 73.08 per cent in the crash year of 2008 while its benchmark – the MSCI Russia 10/40 index – lost 61.91 per cent. However, it went on to smash the index when markets rebounded in 2009, with returns of more than 140 per cent.

Performance of trust vs index in 2009

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Source: FE Analytics

Its enormous fall during the financial crisis means that it has still underperformed its benchmark over 10 years. Despite that, and although it is highly volatile, Tepes says that emerging markets – including Russia – could be a very good contrarian play at the moment.

JP Morgan Russian Securities is not geared. It has ongoing charges of 1.51 per cent.



John LoFidelity Asian Values on a 9.6 per cent discount

Unlike global emerging market portfolios, open- and closed-ended Asia Pacific funds have actually performed reasonably well of late.

The downside to this is that investors now have to pay a premium for highly rated trusts such as Aberdeen Asian Smaller Companies and Scottish Oriental Smaller Companies.

FE Alpha Manager John Lo’s Fidelity Asian Values IT, on the other hand, is still trading on a 9.6 per cent discount, making it cheaper than the majority of its rivals such as Aberdeen New Dawn, Pacific Assets Trust and Edinburgh Dragon Trust.

Lo also manages the Fidelity Institutional Pacific ex Japan fund, which is a top-quartile performer in the IMA Asia Pacific ex Japan sector over five years.

Retail investors can take comfort in the fact that his investment trust has returned 235.68 per cent over 10 years, meaning it has easily beaten its peers and its benchmark – the MSCI AC Far East index – which is up 199.14 per cent.

Performance of trust vs sector and index over 10yrs

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Source: FE Analytics

Winterflood’s Kieran Drake says that given its relatively wide discount, now may be a good time to buy into the trust.

"The fund’s performance has picked up recently and on an NAV basis it is the best performing Asian trust over the last year," he explained.

"The fund is managed by John Lo with a fundamental bottom-up approach which benefits from Fidelity's extensive network of research analysts spread across Asia."

"The focus is on companies that have entrenched market positions, strong management and an ability to grow market share while maintaining pricing power."

"This approach gives the portfolio a bias towards growth," he added.

The trust is primarily exposed to China, Hong Kong and South Korea. Consumer discretionary and tech stocks make up most of Lo’s sector weightings.
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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.