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Cheap fund-for-trust swaps: Emerging markets

09 July 2014

FE Trustnet looks at some of the top-performing trusts that appear expensive on both a charges and valuation basis, and provides some possible open-ended alternatives to them.

By Joshua Ausden,

Editor, FE Trustnet

The introduction of clean share classes has put increasing pressure on investment trusts from a charges perspective. Groups have in many cases brought down their annual costs and removed performance fees, but on average open-ended funds have the edge over their closed-ended rivals from a costs perspective.

Add the sometimes expensive valuations as a result of narrowing discounts, and there is a strong argument for investors to cash in their profits from trusts and switch into funds.

In the next article of the series, we highlight some popular emerging market investment trusts and suggest some cheaper open-ended alternatives.


JPMorgan Global Emerging Markets Income IT – 1.45% OCF
Newton Emerging Income – 0.88% OCF


Adrian Lowcock, an independent financial adviser, thinks a good way of getting exposure to the emerging markets recovery is via an income-focused product.

Funds that focus on companies that pay sustainable and growing dividends tend to hold up better when markets are volatile, he says. He adds that the dividends themselves means that investors are essentially “paid while they wait”, until sentiment turns in favour of the asset class.

While emerging markets have had a tough time of late, income-focused funds have benefited from the general flight to yield. The £328m JPMorgan Emerging Markets Income trust, for example, is on a premium of 3.4 per cent – higher than both its one and three year average.

Richard Titherington’s trust is also quite expensive from a costs point of view, with ongoing charges of 1.21 per cent. This also doesn’t take into account a 10 per cent performance fee, which has pushed the OCF to 1.45 per cent over the past 12 months.

Lowcock highlights the Newton Emerging Income fund as a good open-ended alternative. The £224m fund has clean ongoing charges of 0.88 per cent, and doesn’t have a performance fee.

ALT_TAG He likes the fact that the team takes a long-term view and looks a big themes such as population dynamics. He adds that manager Sophia Whitbread (pictured), who is supported by Newton Asian Income’s Jason Pidcock, is wary of value traps and is avoiding Russia for that reason.

“Whitbread is currently most positive on Mexico which is reforming the labour force and boosting competition,” he added.

Newton Emerging Income, which is currently yielding 4.4 per cent, has just about broken even since its launch in October 2012, and is therefore slightly ahead of its FTSE All World Emerging benchmark.

Performance of fund, trust and index since Oct 2012

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Source: FE Analytics

The JPM trust has returned more, but has been slightly more volatile.



Templeton Emerging Markets IT – 1.28% OCF
Fidelity Emerging Markets – 1.03%


OCF With ongoing charges of 1.28 per cent, Dr Mark Mobius’ Templeton Emerging Markets IT was significantly cheaper than the average open-ended emerging market fund. However, the introduction of clean share classes has seen a number of funds drop their charges to around 1 per cent.

The Templeton trust is one of the largest in the entire AIC universe, with assets totalling more than £2bn. It remains a popular choice with investors, and its 10 per cent discount is only marginally higher than its one and three year averages.

However, Mobius and his team have had a very tough time of late, underperforming the MSCI Emerging Markets index over one and three year periods. Longer-term performance is still strong, however.

A growth-focused emerging markets fund that has performed much better and is significantly cheaper is the £619m Fidelity Emerging Markets portfolios, headed up by FE Alpha Manager Nick Price. It has ongoing charges of 1.03 per cent, and is ahead of its MSCI EM benchmark and the Templeton trust over one and three year periods, and since its launch in June 2010.

Performance of fund, trust and index since June 2010

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Source: FE Analytics

Rob Gleeson and his FE Research team rate the fund highly, and see it as a direct alternative to the recently soft-closed Aberdeen Emerging Markets and First State Global Emerging Markets Leaders portfolios.

They point out that the fund has a keen focus on quality and tends to cope better with severe bouts of volatility, as shown by its very strong showing in 2013.

“The focus on management discipline is an important feature of the fund and allows the manager to avoid unwanted surprises,” they said.

“In particular he likes companies that have a well-known larger parent, such as Coca-Cola subsidiaries worldwide. Additionally he favours the most developed of the emerging markets, such as South Africa and Russia, and invests in the foreign listing of the companies he likes if they are cheaper.”

“The London team is strong, comprising 47 equity analysts covering emerging markets worldwide.”



Pacific Assets IT – 1.94% OCF
First State Asia Pacific Leaders – 0.89% OCF

In the recent past, closed-ended versions of more popular open-ended funds have been highlighted as attractive alternatives for investors; however, with clean share classes and narrowing discounts both making trusts look less appealing from a valuation point of view, it’s now the funds that look a better bet in many cases.

The Pacific Assets IT and First State Asia Pacific Leaders funds are a case in point.

When First State’s David Gait took over the trust just over four years ago, Pacific Assets IT was on a significant discount to NAV and had lower ongoing charges than open-ended equivalents such as the Asia Pacific Leaders.

However, the trust is now on a discount of just 2.5 per cent and has an OCF including performance fee of 1.94 per cent. By contrast, star manager Angus Tulloch’s First State Asia Pacific Leaders fund has charges of just 0.89 per cent and doesn’t have a performance fee.

Gait’s focus on sustainability and a narrowing discount have helped the trust to significant outperformance versus both its benchmark and the Leaders fund over three years.

Performance of trust, fund and index over 3yrs

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Source: FE Analytics

However, there is now a strong case for investing in the £6.5bn fund, given where valuations currently stand. Though Pacific Leaders IT is still on a discount, it’s one of the most expensive emerging Asia trusts on the market, and the 2.5 per cent figure is much tighter than both its one and three year averages.

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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.