3 Top Rated Trusts on Double-Digit Discounts

This trio of emerging market equity-focused closed-end funds have seen their discounts widen up to 35% year-to-date due to weakening sentiment. Are they now bargains?

David Brenchley 24 July, 2018 | 7:35AM

Beijing, China, emerging market equities, emerging markets, investment trusts, donald trump, trade war

Fears over a potential trade war has hit performance of some of the top emerging market funds and investment trusts. It’s no surprise, therefore, that sentiment towards emerging market equities has waned since Donald Trump upped his rhetoric against China in recent weeks.

Two barometers of investor sentiment released in the past week have shown a growing rotation away from emerging market equities. The Bank of America Merrill Lynch fund manager survey for July noted professional investors’ allocation towards emerging market equities saw the largest monthly drop in two years, down 23 percentage points to a net 1% underweight.

Elsewhere, Lloyds Private Banking’s latest investor sentiment poll of almost 5,000 individuals, of which 25% were investors, showed a month-on-month drop of 3.9% in sentiment towards the asset class.

Net investor sentiment improved throughout 2017, from 13.7% in February to 20.9% in December, according to Lloyds’ polls. But, since hitting a high of 25.3% in both January and February 2018, it’s now pulled back to 17.3%.

Bearing this out, funds in the Investment Association Global Emerging Markets sector saw net inflows of £520 million between January and May 2018. That turned quickly, though, and June saw net outflows of £463 million.

The combination of poor performance and waning investor sentiment has meant a number of top-rated emerging market equity-focused investment trusts have seen their discounts to net asset value wide.

All three trusts below have discounts that are larger than their 12-month and 10-year averages, yet are highly thought of by Morningstar analysts.

Witan Pacific (WPC)

Witan Pacific is a rare offering that pans the whole of Asia Pacific, including Japan. The fund is run using a blend of different managers, including Aberdeen, which as at 30 January 2018 accounted for 25% of assets, Matthews Asia with 40% of the portfolio, Dalton LLP with 10% and Robeco with 25%.

This gives the portfolio four distinct segments. Dalton, for instance, focuses on attractively valued companies with a small-cap bias where shareholder and management interests are aligned. Robeco has a long-term, value-aware process; Aberdeen looks for high-quality names; and Matthews Asia searches for dividend-paying stocks.

Since moving to the multi-manager format in May 2005, Witan Pacific has returned 242%. The trust’s dividend is up 162% to 5.5p since 2010, a period that has seem the payment increased every year.

However, it’s struggled over the shorter term, with one-year performance barely positive. Year-to-date it’s down 3.7%. As a result, its discount has widened by 22% since 1 January to 15.8% - the widest the discount has been since 2012. Its 12-month average discount is just 13.3%, while the 10-year discount is 13.7%.

But analyst David Holder still likes the offering, which he says give investors exposure to the broader Asia-Pacific region. “The blending of four high-quality managers should provide for a smoother investor experience, as will the absence of gearing within the trust,” Holder adds.

Aberdeen New Dawn (ABD)

A specialist in Asia and emerging market investing, Aberdeen uses its tried-and-tested investment approach with this mandate. The fund has been overseen since 1996 by Flavia Cheong, head of Asia ex-Japan equities.

While the process is little changed in that time, there have been some tweaks, including deeper examinations of stock picks that have under-performed and a recent willingness to buy Chinese A Shares and domestic stocks, to supplement those listed in Hong Kong.

Since Cheong started running the trust more than two decades ago, it’s up 650%. Two poor years in 2013 and 2015 have held returns back in the recent past, but it’s still up 33% over five years.

Morningstar analyst Mark Laidlaw says now’s the time for the team to “step up and deliver for investors”, but he still reckons Aberdeen “has the tools to come out in front” in a competitive peer group.

Year-to-date, though, it’s lost 4.2%. In that time, the discount has widened by 18% to 14.02% today. In comparison, the 12-month discount is 12.9% and the 10-year is a much narrower 9.4%. In the past to years, the widest its discount has been was just over 16% back in 2008.

JPMorgan Chinese (JMC)

A less general offering than the previous two, JPMorgan Chinese gives investors pure exposure to the fast-growing Asian country. As a result, it’s a more risky bet on China – and for those reasons, its performance in the year-to-date is worse than our other trusts losing 4.6%.

However, the longer-term numbers are much more favourable. In the past year it’s returned a huge 15%, well outpacing both Aberdeen New Dawn and Witan Pacific. It’s more than doubled investors’ money over five years. Since manager Howard Wong took over 13 years ago, the trust has grown fivefold.

The discount in the year-to-date has widened by a huge 34% to 15.42%. That compares to a much narrower 12-month and 10-year figures of 12.6% and 9.3% respectively. While the trust has been deeply out of favour in the past – reaching almost 19% in 2016, it also has history of trading on a premium, albeit back in 2010 was the last time that happened.

Its top 10 holdings are high conviction, accounting for 41% of the portfolio. Baidu (BIDU), Alibaba (BABA) and Tencent (00700) – the BATs – make up one-fifth of its assets. Morningstar analyst Germaine Share notes that since chief investment officer Richard Titherington joined in 2015, the trust has rotated away from deep value stocks to have more of a growth tilt now.

Share says the mandate is run by a “capable manager” with a “structured investment process”, though the ongoing charge of 1.38% in 2017 was expensive compared to peers.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Aberdeen New Dawn Ord231.00 GBX1.99
Alibaba Group Holding Ltd ADR176.21 USD1.99
Baidu Inc ADR223.71 USD0.47
JPMorgan Chinese Ord270.00 GBX2.86
Tencent Holdings Ltd350.40 HKD-0.11
Witan Pacific Ord321.00 GBX1.10
About Author David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk