Scottish Oriental Smaller Companies, JPM Global Emerging Markets Income and Fidelity China Special Situations are among trusts that might be worth considering against the US-China trade war backdrop, according to Kepler Trust Intelligence’s Thomas McMahon.
The recent US-China spat over tariffs has created an attractive entry point for Asian equities, with some investment trusts trading at attractive discounts.
Since the start of March, global stocks with the highest exposure to China have underperformed, as the below chart shows.
Source: Kepler Trust Intelligence
Although discounts on the AIC Asia ex Japan sector haven’t changed much since the end of 2017, Kepler Trust Intelligence senior analyst Thomas McMahon, said emerging markets strategies, which have significant Asia exposure, have widened more recently.
“As we expect the US economic recovery to be benign and the pace of tightening to be slow and comfortably absorbed by the market, we think reasons for the consensus among fund managers to be overweight Asia and global emerging markets more broadly for 2018 remain intact, McMahon said.
“These markets are now back to 2016 levels in terms of forward P/E [price-to-earnings], and on a significant discount to developed markets,” he added.
Given current valuations, McMahon said the market is focusing more on earnings and idiosyncratic stories, a reason he believes investors will do better with “skilled active managers”.
Below, FE Trustnet takes a closer look at some closed-ended strategies with different levels of exposure to Asian emerging markets.
Aberdeen Asian Income, Schroder Oriental Income and JPM Global Emerging Markets Income are strategies with defensive characteristics that could perform well if the current environment persists.
Currently trading two standard deviations below its one-year average discount is Aberdeen Asian Income, which McMahon said, could suit investors who are more concerned about tech valuations and those who think talk of Chinese rebalancing has seduced investors into more expensive areas of the market.
The £377.2m trust is overweight Singapore, Australia and Hong Kong and underweight China due to a quality-focus, a fact that “has hurt relative returns”, McMahon noted.
McMahon said: “The dividend is well-covered and the track record of dividend growth is strong, with a 2.9 per cent increase in the pay-out for 2017.”
The trust, currently trading at a 7.7 per cent discount to its NAV, traded on a premium when emerging markets were out of favour.
However, the analyst noted, “it seems unlikely it will return to this status while the economic outlook for the region is positive.”
Over the last three years, the trust has delivered a 16.55 per cent total return compared with a 33.19 gain for the average IT Asia Pacific sector peer and a 26.78 per cent gain for the MSCI Asia Pacific ex Japan index.
Performance of trust vs sector & benchmark over 3yrs
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Source: FE Analytics
Aberdeen Asian Income is 7 per cent geared, has a yield of 4.4 per cent and an ongoing charge of 1.09 per cent, according to the Association of Investment Companies (AIC).
FE Alpha manager Amit Mehta’s JPM Global Emerging Markets Income is another trust highlighted by McMahon as trading below its one-year average discount.
Data from the AIC shows JPM Global Emerging Markets Income is trading at a 4.9 per cent discount to its NAV, is 6 per cent geared and has a yield of 3.2 per cent.
Over three years, the fund has delivered a total return of 18.57 per cent compared with a 23.45 per cent gain for the IT Global Emerging Markets sector and a 25.41 per cent gain for the MSCI Emerging Markets index.
JPM Global Emerging Markets Income has an ongoing charge of 1.30 per cent.
Next on the list is Matthew Dobb’s Schroder Oriental Income, a trust that McMahon noted is tilted to defensive stocks.
“The fund could be a better play for investors who think that cheaper areas of the market are likely to catch up and valuations could weigh on some higher beta areas,” said the Kepler analyst.
“Like all income-focused mandates it has more moderate returns over three years as tech and cyclicals have rallied.”
Over three years, Schroder Oriental Income has delivered a total return of 31.76 per cent compared with a 33.19 per cent gain for the average investment trust in the IT Asia Pacific Excluding Japan sector and a 26.61 per cent gain for the MSCI AC Pacific ex Japan benchmark.
The £625.7m trust’s main country allocations are to Hong Kong, Australia, Singapore and Taiwan and top holdings include Taiwan Semiconductor Manufacturing, HSBC and Samsung.
Schroder Oriental Income is trading at a 0.7 per cent discount to its NAV, is 8 per cent geared and has a yield of 3.9 per cent, data from the AIC shows. It has an ongoing charge of 0.86 per cent.
Another trust highlighted by Kepler’s McMahon is the four FE Crown-rated Schroder Asia Pacific, which is also run by Matthew Dobbs.
“Like Schroder Oriental Income, Schroder Asia Pacific offers less potential for a re-rating, with discounts trading at around their 12-month average and lower beta,” McMahon said.
“But both offer potential core exposure for the long term, in each case with a different positioning regarding sector and style,” he pointed out. “Last year it was technology, cyclicals and financials which led the market, with growth characteristics rewarded.”
He added: “This cyclical tilt has helped the fund to post the second-best NAV returns over three years in the sector.”
Schroder Asia Pacific has delivered a 48.12 per cent total return during the past three years, compared with a 33.19 per cent gain for the IT Asia Pacific excluding Japan sector and a 28.67 gain for the MSCI AC Asia ex Japan benchmark.
Performance of trust vs sector & benchmark over 3yrs
Source: FE Analytics
Data from the AIC shows Schroder Asia Pacific is trading at a 10 per cent discount to its NAV and is 8 per cent geared. It has an ongoing charge of 0.99 per cent.
Scottish Oriental Smaller Companies is Kepler Intelligence next recommendation for investors looking for attractive discounts, which he said now looks cheaper after the first quarter sell-off and trade war threats.
“Performance on the trust has been challenged in 2017 and 2018, hence the widening discount,” McMahon explained.
The trust has over a third invested in the Indian subcontinent and is significantly underweight China with industrials, consumer discretionary and consumer staples as main sector allocations.
Scottish Oriental Smaller Companies has delivered a 17.60 per cent total return over three years with a 33.19 per cent gain for the IT Asia Pacific excluding Japan sector and a 28.67 per cent gain for the MSCI AC Asia ex Japan benchmark.
The £302.3m fund is trading at a 13.1 per cent discount to its NAV, is not geared and has an ongoing charge of 1.18 per cent.
Finally, McMahon highlighted Dale Nicholls’ Fidelity China Special Situations is the last fund on Kepler’s list. The £1.2bn fund has a bias to domestic brands and small and mid-sized companies.
“Stocks with exposure to the Chinese domestic economy may not be as negatively impacted by any tariffs, and may even prosper, he said.
“The stock-picking approach and valuation-led investment discipline means this is the sort of strategy we would favour in a less beta-driven market.”
Over three years, the fund has delivered a 42.54 per cent total return compared with a 50.91 per cent gain for the average investment trust in the IT Country Specialists: Asia Pacific sector and a 22.36 gain for the MSCI China benchmark.
Fidelity China Special Situations is trading at a 12.6 per cent discount to its NAV, is 21 per cent geared and has an ongoing charge of 1.16 per cent.