The two dominant fund groups in the region over the last 10 years have been Aberdeen and First State, but due to their performance and popularity with investors, a number of their open-ended funds have, or are close to being, soft-closed due to strong inflows.
However, the two groups also run various closed-ended funds in the Asia region which, by their nature, have a fixed pool of assets and are therefore not in danger of growing too big.
Therefore in the next of the series, we analyse Aberdeen’s Edinburgh Dragon Trust and First State’s Pacific Assets Trust.
Both portfolios are run using the two groups’ well-established approaches and have delivered consistent market-beating returns over the long term.
Simon Elliott, research analyst at Winterflood, says investors would be in safe hands if they were to invest in either trust, but there are some subtle differences in the way they are run.
“Aberdeen has a well-established value approach. However, the strategy is more about finding quality companies first, then looking at value second,” Elliott said.
“They have historically had low turnover in the portfolio and will look to buy and hold companies, which has helped the trust to perform very well over the long term.”“Pacific Assets is run by First State and value is definitely part of their investment process, but there is a lot more emphasis on sustainability.”
Elliott says investors shouldn’t confuse that strategy with SRI (socially responsible investing) as it is very different.
By sustainable investing, First State assess the sustainability of performance and positioning of a company and the degree to which a company will benefit from and contribute to achieving higher levels of human development by using the fewest possible resources.
Elliott added: “Like the Aberdeen trust, there is a focus on quality companies but it is a slightly more holistic approach which means the portfolio is quite distinctive relative to the benchmark.”
The Edinburgh Dragon Trust has delivered greater long-term returns.
According to FE Analytics, both trusts have beaten their MSCI Asia Pacific ex Japan benchmark over 10 years. However, Edinburgh Dragon has returned 326.30 per cent over that time, beating Pacific Assets by more than 50 percentage points.
Performance of trusts vs index over 10yrs
Source: FE Analytics
Nevertheless, the performance figures do look different over shorter time frames. Pacific Assets has comfortably beaten Edinburgh Dragon over one, three and five years and that has largely been because of the Aberdeen trust’s poor performance last year.
It lost 7.93 per cent in 2013, while the First State trust beat the index with returns of more than 14 per cent.
Performance of trusts vs index in 2013
Source: FE Analytics
Hugh Young, head of Asia pacific equities at Aberdeen, told FE Trustnet that the strong performance of lower quality areas of the market is the principal reason for the poor showing of many of Aberdeen’s funds in 2013.
Elliott says Edinburgh Dragon, in particular, was hurt because not only did it struggle in NAV terms, but its discount widened quite significantly as well.
Pacific Assets, on the other hand, had regularly traded on a relatively wide discount, according to Elliott. However, following the soft-closure of First State’s open-ended funds, interest in the trust spiked, causing that discount to narrow which boosted returns.Though the two trusts are made up of around 50 holdings, they are currently set up quite differently.
Pacific Assets has a large overweight position in Indian equities, which have rallied strongly this year on the back of recent elections. The region makes up 31 per cent of the NAV and four Indian companies feature in its top 10.
The First State team also has very little exposure, relative to the index, to China and Hong Kong and it also holds 8.3 per cent in cash.
Edinburgh Dragon is slightly overweight India, but its biggest regional allocations are to Hong Kong and Singapore.
The trust’s list of top 10 holdings is filled with more household names as well, with Samsung, Standard Chartered and HSBC all featuring.
The expert's view
Both trusts have bounced back this year as sentiment towards Asia has turned more positive.
Performance of trusts versus index in 2014
Source: FE Analytics
However, the outperformance of Pacific Assets is now reflected in a much tighter discount and Elliott (pictured) says Edinburgh Dragon therefore offers better value from here.
“We are recommending Edinburgh Dragon at the moment, which is trading on an 11 per cent discount,” Elliott said.“We had been recommending Pacific Assets last year when First State closed a number of their open-ended funds. While we still think it is a very well-run portfolio, at its current discount, we think a lot of that value opportunity has gone.”
Pacific Assets is trading on a 4.9 per cent discount, which is narrower than its one and three year average, though it has traded on a slight premium to NAV at times over the past 12 months.
Edinburgh Dragon’s discount is wider than its one and three year average.
However, investors should note that Edinburgh Dragon has gearing of 8 per cent which adds to its risk profile, while Pacific Assets isn’t leveraged at the moment.
Despite that, the Aberdeen trust is the cheaper of the two with its ongoing charges of 1.16 per cent as the First State portfolio has ongoing charges of 1.94 per cent, plus a performance fee.
