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Is there a buying opportunity in the Aberdeen New Dawn Investment Trust?

15 July 2014

Cantor Fitzgerald’s Charles Tan says Hugh Young’s trust is cheap and well positioned for growth as the Asian market recovers from last year’s sell-off.

By Daniel Lanyon,

Reporter, FE Trustnet

A widening discount and recovery in the Asian market have created a great buying opportunity in the Aberdeen New Dawn IT, according to Charles Tan, investment companies analyst at Cantor Fitzgerald.

The Asian market has had a torrid year, with the trust in particular hit hard: it plunged into the bottom quartile in 2013 and was the worst performer in the IT Asia Pacific ex Japan Equities sector. It is also bottom quartile over the past three years.

It has bounced back along with the rest of the sector this year; however, its discount remains wide – 10.7 per cent compared with a three-year average of 8.89 per cent – and Tan says the combination of these two factors means the trust is at the perfect entry point.

ALT_TAG “In 2014 we have seen Asian market equities in general pick up. There was a huge risk-off phase last year but now we are seeing the risk-on come back quite strongly,” he said.

“For the trust to trade on such a wide discount as it does now is quite an attractive way to get exposure to Asian equities compared with an open-ended fund, for example.”

“It is one to buy in the dips and when it is cheap and the discount is nice and wide, for the longer term. The reason it is so wide is probably because as the discount has widened, people have been slow to buy in to the story, but for us that makes it a bit more attractive.”

The Fed's announcement in March last year about tapering its quantitative easing programme led to a huge rotation of investors' money out of Asian markets and into the developed world. Tan says it is clear this trend has begun to reverse – but that investors have been slow to take advantage.

“What is really puzzling is the risk-on period has returned and the market is looking like it is recovering, but all of the emerging market trusts are trading close to par whereas the trusts specialising in Asia are at double-digit discounts.”

“When you look at the portfolios, most of the stocks are listed in Hong King or Australia and so have very high levels of liquidity, so it seems strange they are on such a high discount.”

“Tapering is due to come to an end in October and the message in the last FOMC meeting suggests all is on track and the market seems to have accepted that it is being weaned off this monetary slush fund.”

“What is keeping investors a little bit worried is the slowdown in Chinese growth. However, if that is the case, why not buy at a 10 per cent discount rather than buying into an open-ended fund?”

The Aberdeen New Dawn investment trust is not the only portfolio in its sector on a double-digit discount. Others include Fidelity Asian Values – 10.53 per cent, Invesco Asia Trust – 11.1 per cent, JP Morgan Asian Investment Trust – 11.68 per cent, Martin Currie Pacific Trust – 13.42 per cent, and Schroder Asia Pacific, which is on a discount of 10.13 per cent.

Aberdeen New Dawn has been the standout performer of these trusts over the past 15 years, with returns of 523.45 per cent.

Performance of trusts and sector over 15yrs

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Source: FE Analytics


However, it was also the worst hit by last year's correction.

Performance of trusts and sector since 22 May 2013

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Source: FE Analytics


Tan says this was to be expected, as the trust’s investment style means it is likely to underperform in down markets but outperform when they are rising.

It was top quartile in the rallies of 2012, 2010 and 2009, whereas it dropped into the bottom quartile in 2013, 2011 and 2007 when markets were hit by more bearish conditions.

While the trust has a team-based investment approach, it also benefits from the expertise of one of the most well-regarded Asia Pacific investors – Hugh Young.

“Young is the real figurehead out there and while he doesn’t run all the funds himself, the funds benefit from this approach because there is not too much emphasis on any one fund manager. It means you don’t get huge fund falls when one manager leaves, such as in the case of Neil Woodford,” said Tan.

Eastspring’s Robert Rountree recently told FE Trustnet he thought current market conditions and valuations implied investors should buy Asia funds and sell the US and Europe.

Aberdeen New Dawn’s regional overweight positions include Hong Kong, India and Singapore, while it is underweight mainland China, Korea and Australia.

The trust is geared at 7 per cent and ongoing charges are 1.06 per cent.

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