Why emerging market trusts should be in your 2012 ISA
Investors have been urged to pre-empt sharp discount contractions in the sector as it picks up the slack from its oversubscribed open-ended counterpart.
The soft-closure of Aberdeen Emerging Markets
could cause a surge in the popularity of emerging market trusts, according to Winterflood’s Simon Elliot.
The £3.2bn fund will be closed to new money from the end of next week, joining the likes of First State Asia Pacific
, First State Global Emerging Markets
and First State Greater China Growth
With many anticipating the possible closure of First State Emerging Market Leaders and Asia Pacific Leaders in the near future, Elliot believes the lack of established options in the open-ended universe should see an uptake in emerging market trusts.
"We saw a similar thing happen with Harry Nimmo’s Standard Life UK Smaller Companies
trust last year after the fund was closed," he said. "The discount came in quite considerably, which has obvious advantages for those already holding the trust."
"While there isn’t an Aberdeen equivalent, if we see increased demand a number of emerging market trusts could be set to benefit."
He points to Templeton Emerging Markets
and JPM Global Emerging Markets Income as two trusts that investors should consider adding to their portfolios.
"Mark Mobius’ Templeton Emerging Markets is a very good option," he explained. "It’s one of the largest of its kind, with a market cap of £1.9bn."
"Mobius and his team are among the most respected in the entire industry. The portfolio has a very good record, topping its peer group over both three and five years. It also holds up very well against its competitors in the open-ended universe."
According to FE data, Templeton Emerging Markets has returned 434.01 per cent over the last decade, beating its MSCI Emerging Market benchmark by more than 200 per cent. It has also significantly outperformed the index over three and five years.
Performance of trust vs benchmark over 10-yrs
|Templeton Emerging Markets
|MSCI Emerging Markets
Source: FE Analytics
The trust is the best performer of its kind over five and 10 years, and only Genesis Emerging Markets
beats it over three.
No fund in IMA Global Emerging Markets
comes close to matching Mobius over a decade, although Aberdeen Global Emerging Markets Smaller Companies
and Aberdeen Emerging Markets have a superior record over five years.
According to FE data it is currently on a discount of 6.4 per cent – slightly higher than its one-year average of 5.8 per cent.
"The large size of the trust is a result of its performance as opposed to inflows. Unlike open-ended funds it cannot be soft-closed and is not affected by inflows – last year Mobius’ turnover was only about 6 per cent," Elliot added.
He also highlights the much smaller JPM Global Emerging Markets Income trust as a good option.
"This is a very interesting portfolio, only launched in July 2010," Elliot continued. "It had a really good uptake and has already grown to around £190m assets under management (AUM)."
"It has a target yield of 4 per cent, which it has achieved, and the general performance has also been strong against its benchmark. As a result, it is trading on a slight premium [of 1.9 per cent]."
Performance of trust since launch vs benchmark
Source: FE Analytics
According to FE data, JPM Global Emerging Markets Income
has returned 16.91 per cent since launch, compared with 6.09 per cent from its MSCI Emerging Markets benchmark. It has also been significantly less volatile, and lost less during last year’s summer downturn.
"The portfolio’s mid-cap bias also means that it is a bit different from other emerging market trusts," said Elliot. "In order to adhere to its income target, it is anti-cyclical and has little exposure to high-Beta stocks."
The trust, which is managed by Richard Titherington
, has a total expense ratio (TER) of 1.32 per cent.