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The Aberdeen income trust on a discount

The emerging markets correction over the summer has not been all bad news for investors in this sector, having opened up a particularly attractive buying opportunity in Aberdeen Latin American Income.

By Thomas McMahon, News Editor, FE Trustnet Follow
Wednesday October 23, 2013


Aberdeen Latin American Income is sitting on a 6 per cent discount despite the fact it offers investors a 5 per cent yield and is run by the manager of the immensely popular Aberdeen Emerging Markets fund.

Most trusts offering a decent yield have gone on to premiums, but the Aberdeen fund is trading 6.6 per cent below NAV.

Winterflood’s Simon Elliott says that there is no good reason why the fund has been overlooked by investors, and given its strong management team and cheap valuation it looks like a bargain.

"There’s quite a high Brazilian weighting, which has been a difficult market," he said. "But the fund is interesting and it’s probably just overlooked."

"I think there are certain types of investors who prefer to get exposure to income from a global emerging markets fund whereas there will be others who prefer to do it piecemeal."

"If you look at the rating of JP Morgan Global Emerging Markets Income, for example, that’s on a premium and getting more expensive, so probably most investors are going through the global route."

Data from FE Analytics shows that JP Morgan Global Emerging Markets Income is paying out a healthy 5.65 per cent, but is on a 2.9 per cent premium, meaning that yield is under pressure.

In total return terms it has performed well over the past three years, up 23.68 per cent while the MSCI Emerging Markets sector has lost 1.48 per cent.

Performance of trust vs sector and index over 3yrs

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Source: FE Analytics

The fund has taken a very off-benchmark approach, with 15 per cent in South Africa, more than twice that of the index. It is marginally overweight Brazil and slightly underweight Mexico.

It is another to have only just achieved a three-year track record, having been launched in July 2010, but the broader remit has seen it grow to £314m.

Investors with an eye for a bargain are likely to be more interested in the Aberdeen Latin American Income fund, however.

The trust was only launched in 2010 and has yet to gain serious investor attention, growing to only £60m in size.

Devan Kaloo, head of Aberdeen’s global emerging markets team, runs the portfolio with Bret Diment, Aberdeen’s head of emerging market and sovereign debt.

Data from FE Analytics shows that it has outperformed the MSCI Latin American equity index and the other closed-ended trust in the sector over the past three years, although in a poor period this amounts to a loss of 9.53 per cent.


Performance of trusts vs index over 3yrs

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Source: FE Analytics

It was hit particularly hard by the emerging markets sell-off because of the debt component of the portfolio, which makes up around 40 per cent of assets.

This could hold it back in a rising market, Elliott warns.

"If Latin America were to have a great run, it would lag a bit, but then you have got the yield pick-up," he said.

Latin American markets have been hit hard by the emerging markets slowdown, with the region hurt by falling Chinese growth.

However, as FE Trustnet reported last week, a number of high-profile managers have started to move back in.

For investors thinking of following them, FE Alpha Manager Will Landers’ BlackRock Latin American trust is also on a discount, this time as wide as 9 per cent, although it does not share the yield focus.

The Aberdeen trust has 56.4 per cent in Brazil and 24.6 per cent in Mexico, with small holdings in Uruguay, Chile and Argentina.

A 10 per cent coupon bond from the Brazilian government is its largest holding, at 14.7 per cent of assets; the bond matures in 2017. On the equities side, Petrobras, Banco Bradesco and Vale are the three biggest holdings.

The region is clearly geared to the health of the global economy, with the managers noting in their latest report that improving Chinese data, US monetary policy and the impasse in Washington were all major factors in its price moves.

Nevertheless, it looks cheap, with data from Numis showing the widest discount it has been on over the past 12 months is 6.5 per cent, while it was on a 9 per cent premium before the emerging markets crash in the summer.

Elsewhere in the investment trust universe it is hard to find yield on a discount. The Aberdeen Asian Income trust is on a 4.2 per cent premium while the Schroder Oriental Income trust is on a 1.2 per cent premium. Henderson Far East is trading 2.4 per cent above net asset value.

The trusts have performed much better in total return terms, however, particularly the Aberdeen and Schroders funds.

Performance of trusts vs sector over 3yrs

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Source: FE Analytics


Aberdeen Asian Income has made 47.66 per cent while Schroder Oriental Income has made 41.05 per cent. Henderson Far East has made 17.63 per cent.

The £72m JP Morgan European IT Income trust is on an 8.6 per cent discount, however, and is yielding 3.9 per cent.

The JP Morgan Global Emerging Markets Income is the only emerging markets portfolio to explicitly target yield, although Utilico Emerging Markets, which largely buys utility companies, is yielding 3.2 per cent from a 4.4 per cent discount.

Aberdeen Latin American Income has ongoing charges of 1.99 per cent.



 
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dlp6666 Oct 24th, 2013 at 10:07 AM

Although the Black Rock BRLA trust doesn't share the yield focus, according to your Trustnet factsheet it is nevertheless currently yielding 5.50% (3.91% according to Morningstar).

Strangely, the Aberdeen ALAI trust is showing on the Trustnet factsheet as only yielding 3.36% rather than the 5% quoted in the article (or 4.7% on Morningstar).

Can these yield discrepancies please be explained?

Reply
Thomas McMahon Oct 24th, 2013 at 11:42 AM

@ dlp6666

I spoke to Simon Elliott about the discrepancy in the yield being reported in various sources and he was confident in the figure we quoted. It is today being quoted at 4.8 per cent through various sources. I rounded up to five in the top line of the text. I am looking into the reason for the Trustnet factsheet being different.

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