Over more recent years, Walls – whose five crown-rated Unicorn Mastertrust is a fund of investment trusts – has admitted that finding stand-out value in the closed-ended sectors has been much harder to come by than in the past.
As a result, he has been inclined to hold a high proportion of his portfolio in cash due to the lack of opportunities – with his weighting to the money market reaching 20 per cent at points last year.
However, the manager has been using that excess cash to up his exposure to Asian investment trusts as he says the sector is one area which is now offering decent value.
“We have used that cash to add to Asia, more than anything else,” Walls (pictured) said. “Our cash weighting is now down to 4 per cent, which is pretty low by historical standards.”
“We have been adding to our Asian names but it is an area where I think underlying ratings still look quite attractive, there are decent discounts on offer and also I think some of those markets will be some of the major beneficiaries of a lower oil price.”
While few disagree that Asian equities offer good long-term growth potential due to increasing levels of wealth in those economies’ middle classes, they have struggled relative to developed markets more over recent years as headwinds such as slowing economic growth in China and tighter monetary policy in the US have weighed on investor sentiment.
Performance of indices over 5yrs
Source: FE Analytics
However, 2014 turned out to be a good year as Narendra Modi’s election in India and a strong rally in Chinese equities means the MSCI Asia Pacific ex Japan sector is up 14.76 per cent over the past 12 months.
That improved performance hasn’t been reflected on the discounts on offer in the IT Asia Pacific ex Japan sector, though.
According to data from the AIC, 12 of the 15 trusts in the sector, or 80 per cent, are now trading on wider discounts than their one-year average, while 10 are cheaper than their three-year average discount.
Given those discounts, and as the 44 per cent plunge in the oil price over the past year will come as huge boost for the energy consuming economies like India and China, Walls thinks now is a good time to buy.
Fidelity Asian Values, which is headed-up by FE Alpha Manager John Lo, is now Walls’ fourth largest holding as it accounts for 3.9 per cent of his fund’s assets.
The trust is currently trading on a 12.09 per cent discount to NAV, after trading on a 7 per cent discount at points over the last 12 months.
According to FE Analytics, Fidelity Asian Values has returned 408.45 per cent since Lo took charge of the trust in September 2001, comfortably beating the returns of the sector and its MSCI AC Far East ex Japan benchmark in the process.
Performance of trust versus sector and index since September 2001
Source: FE Analytics
While it hasn’t always sat at the top of the sector tables, the investment trust has beaten its benchmark over one, three, five and 10-year periods and has outperformed the index in seven out of the last 10 calendar years.
The trust, which can also use derivatives, has ongoing charges of 1.5 per cent and is geared at 12 per cent, is overweight South Korea, India and Hong Kong and is overweight sectors such as technology and consumer discretionary.
Lo’s largest underweights are mainland China and financials.
Another trust Walls has been adding to is Schroders’ Asian Total Return Investment Company, which is trading on a discount of 7.7 per cent – wider than both its one and three-year average.
The trust has been managed by King Fuei Lee and FE Alpha Manager Robin Parbrook since March 2013, following the board’s decision to change its investment manager from Henderson to Schroders.
They took on the portfolio just a month before the May/June sell-off when the US Federal Reserve warned the market that it would “taper” its quantitative easing programme, which has meant the trust is down against its MSCI AC Asia ex Japan benchmark since they have been at the helm with returns of 10.06 per cent.
However, the closed-ended fund bounced back last year and is now one of the sector’s best performers over the past 12 months and has comfortably beaten the index with returns of 27.36 per cent.
Performance of trust versus sector and index over 1yr
Source: FE Analytics
Parbrook, who has run various open-ended Asian funds at Schroders for nearly 15 years, has a decent long-term track record as well.
Our data shows he has returned 926.67 per cent to his investors since he started running funds in the IA universe in October 2001, outperforming his peer group composite by a hefty 566 percentage points.
Asian Total Return has gearing of just 2 per cent and ongoing charges of 0.77 per cent.
Walls also uses Aberdeen’s Edinburgh Dragon trust, Pacific Assets, which is headed-up by First State, and Dr Mark Mobius’ Templeton Emerging Markets for more widespread exposure within his fund.
The manager launched his five crown-rated Unicorn Mastertrust fund in December 2001.
According to FE Analytics, the £23m fund has been the second best performing portfolio in the IA Flexible Investment sector over that time with returns of 223.10 per cent. As a point of comparison, global equities have returned 100 percentage points less than Walls’ fund over that time.
Performance of fund versus sector since Dec 2001
Source: FE Analytics
It is also a top decile performer over three, five and 10 years. The fund’s top 10 holdings include Foreign & Colonial IT, Caledonia Investments, Acorn Income and Herald Investment Trust.
Unicorn Mastertrust has ongoing charges figure (OCF) of 1.16 per cent.