The Asia Pacific ex IT and Global Emerging Markets sectors are offering the widest discounts in the investment trust space at the moment, according to data from the AIC.
Our research shows the average discount of regional equity trusts is currently 5.57 per cent – this has decreased compared to one-year and three-year views, where the average discount is 6.49 and 6.55 per cent respectively.
Discounts began widening at the start of this year, which puzzled many fund managers and analysts. Now though, following the series of headwinds the markets have encountered such as the plummeting commodity prices and the global growth slowdown, it perhaps comes as no surprise to investors.
What will come as even less of a surprise is that the sectors with exposure to Asia are trading on the widest discounts and, conversely, the UK Equity Income and Europe sectors are on the tightest discounts. All UK equity sectors (UK All Companies, UK Equity Income and UK Smaller Companies) are trading on narrower discounts than their one and three year averages.
Source: FE Analytics
Does this mean that it’s time to step away from the UK and turn to more volatile areas of the market?
Charles Tan, director of investment companies research at Cantor Fitzgerald, says that Asia Pacific and emerging market regions are attractively priced from a fundamentals and a valuation perspective, but he doesn’t feel brave enough to call the bottom.
“Many an investing legend has said before that timing the market is a fool’s game. Sentiment still feels negative and exogenous factors like US Fed rate hikes (or rather speculation of their timing) still seem to have the ability to send emerging market equities’ volatility markedly higher,” he explained.
“That said, buying in at these levels does seem pretty attractive as valuation multiples [P/E and P/B ratios] have come right down, approaching five-year lows, and historically, this has been a good opportunity for investors with a long term view to top up their allocations.”
In terms of trusts, Tan highlights Advance Developing Markets (ADMF) as a well-diversified way to gain exposure to broader emerging markets.
The fund of funds is currently trading on an 11 per cent discount to NAV and has a 63.3 weighting in Asia Pacific equities, 17.4 per cent in Asia Pacific emerging equities and 10.7 per cent in US emerging equities – the remainder is being held in cash.
The £207m fund hasn’t fared so well over five years, having found itself in the third quartile with a loss of 16.19 per cent compared to its sector average’s loss of 9.89 per cent.
However, it is top-quartile for its performance over the last year, having outperformed its peer average and MSCI Emerging Markets benchmark by 5.18 and 3.97 percentage points respectively to deliver a loss of 9.47 per cent.
Performance of trust vs sector and benchmark over 1yr
Source: FE Analytics
ADMF isn’t geared and has an ongoing charges figure of 1.12 per cent.
For more bullish investors that are looking for frontier exposure, Tan recommends Fundsmith Emerging Equities, or FEET, as an interesting take on the market, even though it is trading on a 3.8 per cent premium.
In Asia, he recommends looking for income-focused trusts as he says they should provide a more defensive exposure to the Asian equity market.
Aberdeen Asian Income, according to Tan, is attractive at the moment due to its discount of 6.5 per cent, its dividend yield of 5.6 per cent and the fact it is highly experienced management team which is headed up by Hugh Young.
Despite finding itself in the bottom decile for its performance over one and three years, is second quartile over five, narrowly underperforming its Asia Pacific ex Japan sector average by 10 basis points. It has also outperformed its MSCI AC Asia Pacific ex Japan benchmark by 10.26 percentage points over the same time frame to deliver a return of 16.06 per cent.
Performance of trust vs sector and benchmark over 5yrs
Source: FE Analytics
More importantly, it was in the top decile during the bear markets of 2008 and 2011, suggesting it is likely to thrive in falling markets.
Aberdeen Asian Income is 10 per cent geared and has ongoing charges of 1.25 per cent.
“Fidelity China Special Sits (FCSS) is also interesting for those with a stomach for such a niche exposure, but the manager Dale Nicholls has done an excellent job since taking over and the long-term potential for the Chinese economy is undeniable – as is the likelihood of further volatility in the short term,” Tan added.
Since its launch more than five years ago, the five FE Crown-rated trust (which was managed by star manager Anthony Bolton for much of the period) has returned 36.98 per cent, outperforming its MSCI China benchmark by 23.59 percentage points.
It is also trading on a 15.9 per cent discount, which may come as little surprise it given China has been the catalyst of most of 2015’s volatility, and is 27 per cent geared. The £766 trust has ongoing charges plus a performance fee of 2 per cent.
While Tan is seeing a wealth of opportunities in the Asia Pacific and emerging markets spaces, Tilney Bestinvest’s Jason Hollands is slightly more apprehensive on the regions, despite equities looking “tantalisingly cheap” on a valuation basis.
For potential investors, he says that temptation is magnified by the discounts that many investment companies are trading at.
“The reason why valuations are so depressed is because of the deteriorating outlook both for many of these economies – especially those exposed to demand for commodities or with high dollar borrowings - and in turn for corporate earnings, so one needs to tread with a little care,” he warned.
“Two years ago some advisers were claiming these markets to be incredibly cheap, but superficially cheap P/E ratio can prove to be a value trap if the earnings outlook drops away rapidly.”
For the time being, Tilney Bestinvest remains cautious on these markets because of the fragility of the overall global outlook. The combination of the China slowdown triggering global growth deterioration, years of quantitative easing having been implemented and the current low interest rates have limited the opportunities in the region, according to the managing director.
“There are now a few new levers that can be pulled, plus even a modest cycle of rate hikes in the US would represent a major withdrawal of global liquidity with adverse consequences for emerging markets,” he added.
“In the event of a global growth shock, the relative cheapness of emerging markets or otherwise, will be brushed aside by capital flows back into more liquid markets.”
Despite this, he says that adopting a truly long term position in Asia Pacific and emerging markets is still an option, although he would be inclined to drip-feed cash into any of these positions over a period of months rather taking the view that the markets have bottomed out.
One trust he thinks is worth considering is Schroder AsiaPacific, which is currently trading at a 10.5 per cent discount.
It has been managed by Matthew Dobbs for 20 years and, over this time, has returned 588.24 per cent, outperforming its sector average and benchmark by 62.26 and 295.88 percentage points respectively.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Its performance has been notably strong over the last two years though, having returned 8.39 per cent while its sector average lost 2.65 per cent.
As well as a 68.3 per cent weighting in Asia Pacific emerging equities and a 32.9 per cent weighting in Asia Pacific equities, it also has 1 per cent in North America and 1 per cent in the UK.
Schroder Asia Pacific isn’t geared and has ongoing charges of 1.1 per cent.
