Emerging market trusts thump open-ended rivals
The significant discounts on portfolios in the IT Asia Pacific ex Japan and IT Global Emerging Markets sectors add to the appeal of investment companies.
Emerging market investment trusts have outperformed their rivals in the IMA unit trust and OEIC universe over the medium- and long-term, according to FE Trustnet
The vast majority of top-performing emerging mark
et and Asia Pacific portfolios over three-, five- and 10-year periods are investment trusts.
The superiority of trusts – which tend to have a longer-term focus than their open-ended counterparts – is particularly evident over 10-years.
According to FE data, only one open-ended Asia Pacific fund appears in the list of top-five portfolios over this period, even though there are significantly more of them. Just three of the 11 investment trusts failed to beat the average Asia Pacific fund.
The top-performer over the period is Aberdeen Asian Smaller Companies, which has returned 629.81 per cent, followed by Scottish Oriental Smaller Companies with 465.17 per cent and the Aberdeen New Dawn Investment Trust
with 342.27 per cent.
First State Asia Pacific
tops the open-ended funds table, with returns of 289.34 per cent.
Performance of fund, trust and sectors over 10-yrs
Source: FE Analytics
It is the same story in the global emerging market sectors, with all three investment trusts appearing in the top-four for returns over 10 years.
Genesis Emerging Market
, Templeton Emerging Markets IT and JPM Emerging Markets IT have all returned in excess of 400 per cent in the last decade, while the average IMA Global Emerging Markets fund has returned 253.33 per cent.
With returns of 441.93 per cent, only Aberdeen Emerging Markets makes it into the top-four. However, the FE five crown-rated portfolio has been significantly less volatile than all three closed-ended funds.
Performance of fund, trust and sector over 10-yrs
Source: FE Analytics
With the exception of JPM Global Emerging Markets Income and Aberdeen Asian Income, every investment trust across IT Asia Pacific ex Japan and IT Global Emerging Markets is currently trading below its true value. The average Asia trust is on a discount of 7.7 per cent, while the average emerging market trust is on 9.2 per cent.
FE Alpha Manager David Coombs, who heads up the multi-manager team at Rathbones, says he is always inclined to pick an investment trust over a fund when looking at emerging markets.
"These markets are very illiquid, which presents funds with a big problem when they get inflows," he explained.
"Emerging markets are very momentum-driven, from both local and foreign investors, as this is the first asset class that tends to get sold off when there is a flight from risk."
"Investment trusts don’t have this problem, because they don’t get bombarded with inflows and outflows. This means they have more freedom in what they can hold."
"To really make a difference in an emerging market portfolio, you need the flexibility to look at the small and mid cap markets. Investment trusts can take a longer term view, gradually up their holdings in the small and mid cap market, and not worry about having to constantly shift their weighting."
Coombs currently holds Genesis Emerging Market, Scottish Oriental Smaller Companies, Baring Emerging Europe
and the Edinburgh Dragon Trust
across his portfolios.