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Giving up on Hugh Young and Aberdeen? You’ve got it all wrong, says Tan

19 February 2015

Cantor Fitzgerald’s Charles Tan explains why he thinks Hugh Young and his Aberdeen Asia portfolios will bounce back and re-take their positions at the top of the sector performance tables.

By Alex Paget,

Senior Reporter, FE Trustnet

Investors who think Hugh Young and his Aberdeen Asia investment trusts will continue to underperform have got it all wrong, according to Cantor Fitzgerald’s Charles Tan, who is backing the Aberdeen Asian Income trust to bounce back as a result of Young’s style and its current discount.

For most of the last 10 years, funds or investment trusts run by Aberdeen have been the default option for many investors looking for exposure to the Asia Pacific ex Japan region due to their focus on high quality companies and strong track records.

However, over more recent years portfolios run by Aberdeen’s veteran investor Hugh Young (pictured) have struggled relative to both their rivals and respective benchmarks.

According to FE Analytics, an equally weighted portfolio of Young’s Aberdeen Asian Income, New Dawn and Asian Smaller Companies trusts has lost 4 per cent over two years while the IT Asia Pacific ex Japan sector and the MSCI AC Asia Pacific ex Japan index have made 10 per cent and 7 per cent respectively.

Performance of composite portfolio versus sector and index over 2yrs

 

Source: FE Analytics 

While some have suggested this is part of a longer term theme because Young’s focus on high quality companies has had its day and means he is now in overly expensive stocks, Tan – analyst at Cantor Fitzgerald – is confident those portfolios will bounce back and currently has the Aberdeen Asian Income trust as a buy.

“On a personal level, we know and love the trust. Many retail investors will be familiar with the Aberdeen brand and what it stands for, which is a focus on quality and growth approach to stock-picking,” Tan said.

“Quite often, that means the portfolio is not the cheapest as from a straight up P/E view, the holdings can be quite expensive. However, as the argument goes, you do have to pay up for quality sometimes.”

Our data shows this has been the case over the longer term.

According to FE Analytics, Young’s Aberdeen New Dawn Investment Trust – which has the longest track record out of the three – has returned 571.4 per cent over 15 years, beating both the sector and index by close to 300 percentage points in the process.

Performance of trust versus sector and index over 15yrs

 

Source: FE Analytics 

Nevertheless, it has been portfolios run by managers with a value approach which have led the market over more recent years.


One of the best examples is in the open-ended sector: namely Jonathan PinesHermes Asia ex Japan fund. The manager isn’t afraid to buy very lowly valued areas of the market – such as Chinese ports – and this has meant the fund has topped the IA Asia Pacific ex Japan sector since its launch in October 2012.

Performance of funds versus sector since October 2012

 

Source: FE Analytics

As the graph above shows, the Hermes fund has also massively outperformed Young’s open-ended offerings over that time as well. However, Tan says investors should tread carefully when buying into the region and urges them to not chase recent strong returns.

“By and large, the likes of Fidelity, Aberdeen and First State are very much focused on companies which are playing the growing consumer story in Asia. Where I would exercise caution is in some of the beaten-up names,” Tan (pictured) said.

“Certain managers, like the one at Hermes, may see value there but Aberdeen and others see them as value traps.”

Tan highlights China – an area where Young has held nothing in recent years – as a potential trap.

He says flows of income for many businesses in mainland China are very cyclical in their nature and are likely to be at risk as the situation with the country’s housing market and shadow banking systems begin to unravel.

“I would be conscious of areas of the market which are exposed to any kind of volatility that might rock the market so I would be much happier focusing on a more stable Aberdeen approach on high quality names,” he said.  

Nevertheless, some have suggested that portfolios which focus on quality growth won’t continue to lead the market like they have done over the past 10 to 15 years.

Pines himself said defensive income stocks in Asia had reached bubble territory as investors had wanted exposure to the region, but due to macroeconomic headwinds like China’s slowing growth and tighter monetary policy had overpaid for that safety. 

Old Mutual’s John Ventre agrees with Pines and says funds like Hermes Asia ex Japan will replace the likes of Aberdeen as the leading light in the sector as a result.

“The very successful quality growth managers out there in the market, which we have owned historically, are probably not best positioned to capture the new dynamic in emerging markets,” Ventre said in January

However, Tan says investors are naïve to write off Young and his team, predicting that the Aberdeen Asia trusts will come bouncing back.

“My take on it is that you have to have conviction in the way you invest. Time has proven that Aberdeen’s strategy does yield results and yes the trust hasn’t been a stellar performer more recently, but over time I think it will be proven right again.”

“Over time, fund management groups like Aberdeen have shown they can outperform with a lower level of volatility – and that is down to their strong investment process.”

Tan’s favoured Aberdeen Asia trust, at this point in time, is the group’s Income offering – which has comfortably beaten its benchmark since its launch in December 2005 with returns of 175 per cent.

He says that now is a good time to buy given Young’s track record and that it is trading on a 3 per cent discount, despite the fact it offers a yield of 4 per cent and has increased its dividend in every year since it came to market.

Trust’s dividend history

 

Source: Bloomberg/Aberdeen

Tan says the trust is “certainly” presenting a buying opportunity.

“I don’t think you could justify it trading on a wide premium or discount,” he said. “Historically, it has traded between a 4 per cent premium and a 4 per cent discount, so it is definitely at the lower end of its range.”


Aberdeen Asian Income has, on average, traded on a premium over one and three years and has traded on a 4 per cent premium at points over the last 12 months. It is 6 per cent geared and has ongoing charges of 1.24 per cent.

Tan also says there is a good buying opportunity in Asia in general, especially when you compare valuations against developed market equities – which have massively outperformed since markets bottomed after the 2008 financial crisis and are markets where P/E ratios have returned to pre-crisis levels.

Performance of indices since March 2009

 

Source: FE Analytics 

“P/E ratios have recovered since the global financial crisis, but they quite flat compared to the likes of US and Europe, so it seems that in Asia stock markets have only recovered as much as earnings have.”

Data from Bloomberg shows the MSCI Europe and S&P 500 indices are trading on forward P/E ratios between 15 and 18 times, while the forward multiple on Asian equities is around 13 times.

Tan added: “If I were betting man, I would say it is a better idea to buy the region that hasn’t become more expensive over the last few years. We think Asia is cheap and Aberdeen is one of our preferred ways to play it.”

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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.