Skip to the content

The trusts Winterflood has been swapping in 2014: Part 2

18 July 2014

In the second of a two-part series, the analysts at Winterflood reveal the Asian and emerging market trusts they are adding to, and ditching from, their recommended list.

By Alex Paget,

Senior Reporter, FE Trustnet

The investment trust analyst team at Winterflood have added Templeton Emerging Markets, Schroder Asia Pacific and Aberdeen Japan to their recommendation list at the expense of Genesis Emerging Markets, Pacific Assets and JP Morgan Japanese, according to the broker’s half yearly review.

FE Trustnet highlighted earlier this week that the firm have made a number of changes to their UK, Europe and Global recommendations due to tightening discounts and changing market conditions, and the same is very much true in emerging markets and Japan.

Here, we highlight the changes they have made, and the reasons they have given for doing so.


Global Emerging Markets
Added: Templeton Emerging Markets
Removed: Genesis Emerging Market


Winterflood had been using the £780m Genesis Emerging Market IT for their exposure to the developing world for many years.

However, due to increased interest towards emerging markets over the recent months, the discount on the trust has narrowed from 9 per cent to 6 per cent.

The team are wary of the contraction, believing a reversion to the mean could send the share price southwards, and are now recommending Dr Mark Mobius’ Templeton Emerging Markets IT instead.

Winterflood likes Mobius’ tried-and-tested value approach to running money, pointing out his well-resourced and experienced team are among the best in the business.

A discount of 9 per cent is also attractive and wider than it has been in the recent past, they say.

ALT_TAG “With a market capitalisation of £1.8bn the fund is one of the largest investment trusts and as such its shares offer good secondary market liquidity,” Innes Urquhart, analyst at Winterflood, said.

“With sentiment towards emerging markets apparently improving and discount risk largely alleviated by the trust’s active share buyback programme, we believe that the fund’s current discount of 9 per cent represents an attractive entry point.”

Urquhart added: “For investors looking for emerging markets exposure we believe the fund is worth considering.”

Mobius (pictured) has managed the Templeton Emerging Markets IT since June 1989.

According to FE Analytics, it has been the best performing portfolio in the IT Global Emerging Market Equities sector over 10 years with returns of 378 per cent, beating its MSCI Emerging Markets benchmark by more than 130 percentage points.

It has also considerably outperformed Andrew Elder’s Genesis Emerging Market trust over that time.


Performance of trusts vs index over 10yrs

ALT_TAG

Source: FE Analytics

The Templeton trust has had a tougher time more recently, falling further than most in 2013 with losses of 8.96 per cent.

Despite that, the Winterflood team say it is well positioned to benefit from an improvement in market sentiment.

Mobius is currently running large overweight positions in Russia, Brazil, Pakistan, Turkey and Nigeria and is underweight mainland China, South Korea and South Africa.

The trust isn’t geared and has ongoing charges of 1.1 per cent.


Asia
Added: Schroder Asia Pacific
Removed: Pacific Assets


Analyst Kieran Drake says that the Asia Pacific ex Japan sector is looking increasingly attractive from a valuation point of view.

However, to take advantage of that opportunity, Winterflood is now recommending Matthew Dobbs’ Schroder Asia Pacific trust at the expense of the First State-run Pacific Assets IT.

“Pacific Assets, which is managed by David Gait of First State Stewart, outperformed in the first half of this year, benefiting from its sustainability investment approach and tightening discount,” Drake said.

“However, it is now trading on a discount tighter than 1 per cent and we believe that there is better value at present in Schroder Asia Pacific, which is trading on a 10 per cent discount.”

Both trusts have had similar return profiles over the longer-term. However, our data shows that FE Alpha Manager Gait’s Pacific Assets Trust has considerably outperformed Schroder Asia Pacific over one and three years.

Performance of trusts vs index over 3yrs

ALT_TAG

Source: FE Analytics

Nevertheless, given Dobbs’ unconstrained, value-led approach and its current discount, Drake says that the Schroder Asia Pacific trust should perform better as sentiment improves.

Comparatively, Gait and his team are much more defensive, favouring quality stocks that tend to underperform in rising markets.


“Performance of Asian markets has improved since January although the prospect of the unwinding of US QE and a deceleration in Chinese growth continue to weigh on the region,” Drake explained.

“Despite this we are tempted to take a contrarian view on investment trusts investing in Asia at present given current discount levels. It has often paid to invest in the region when the outlook is mixed. Asia is one of the few investment trust sectors where value can still be found.”

He added: “We believe that Dobbs will continue to deliver outperformance over the longer term, given his experience and unconstrained approach.”

Like Templeton Emerging Markets, Schroder Asia Pacific isn’t geared.

Its ongoing charges are 1.11 per cent.


Japan
Added: Aberdeen Japan
Removed: JP Morgan Japanese


Having been one of the best performing developed markets last year, the rally in Japanese equities has stuttered in 2014.

Winterflood had backed Nicholas Weindling’s JP Morgan Japanese IT at the start of the year to take advantage of the next phase of the bull market.

However, after a lacklustre few months, they have decided to switch to the Aberdeen Japan trust instead.

“JP Morgan Japanese IT’s performance has been relatively disappointing over the first half of 2014 and its rating has therefore failed to improve, with the shares still trading at a 10 per cent discount,” Urquhart said.

“Its longer term performance record also remains unexceptional relative to peers. With no obvious catalyst for this to change we are now switching our recommendation to Aberdeen Japan.”

Aberdeen Japan had previously had an “All Asia” mandate, but shareholders approved an all-cap Japanese equity mandate in October last year.

According to FE Analytics, the Aberdeen Japan Investment Trust has returned 4.63 per cent year to date, while the IT Japan Equities sector and the JP Morgan Japanese IT have lost 2.54 per cent and 8.32 per cent, respectively.

Performance of trusts vs sector in 2014

ALT_TAG

Source: FE Analytics

Urquhart says that the key risk involved with the Aberdeen trust is its £55m size, which means that liquidity can be “patchy”.

However, he and the rest of the team rate Aberdeen’s proven strategy of investing in quality companies at reasonable valuations.


They point out that management has a long and successful track record in their open-ended funds.

Urquhart also says that its 7.5 per cent discount means that now is a good entry point into the trust.

“We believe that there is scope for the trust to be re-rated if performance continues to be strong and Japan remains in favour. Consequently we believe that the current discount of 7.5 per cent is attractive,” he said.

Aberdeen Japan has gearing of 9 per cent and its ongoing charges are 1.38 per cent.

ALT_TAG

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

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.