However, when I looked at the investment trusts in the sector, I discovered that they were both trading at a premium to net assets. Aberdeen Asian Income (LON:AAIF) is now trading at a 3% premium, Henderson Far East Ltd (LON:HFEL) at 2%, and Schroder Oriental Income (LON:SOI) at par. Now one of the big advantages of buying an investment trust is that usually, you're picking up the assets at a discount. (There's actually a good reason for at least a small discount, since there would undoubtedly be an administration fee on any liquidation.) Looking for trusts which sit on too large a discount, and where you think the discount might close up, can be highly profitable - like looking for low PE stocks which you think might be rerated.
On the other hand, I was now being offered the chance to buy some Asian shares at a few percent more than they were worth. That didn't seem like a particularly good deal to me. So I broadened my search to all the Asian investment trusts. And what I found was intriguing. If I didn't include the word 'income' in my search, I could find trusts trading on a 10-15% discount to assets. For instance Aberdeen Asian Smaller (LON:AAS) trades at a 17% discount to assets, and although the yield is only 1.1%, it's still paying out. Compare the Aberdeen All Asia It (LON:ABAA) trust - run by the same management stable; it's paying a yield of 3.41%. That's still only moderate in terms of yield investments. My bet is that I've got a very good chance of seeing the discount close up from 17% to nearer the 8% average for Asian funds - and that would give me a 10% return on my investment, which more than makes up for the lower yield. (It's interesting to note, for China-sceptics, that Aberdeen funds tend to have the lowest exposure to China in the sector, at only 25% or so compared to Henderson's nearly 50%, according to figures calculated by WINS' investment trust team. The Aberdeen funds are very much run on a value basis, too, which seems appropriate for the current state of global markets.)
Edinburgh Dragon (LON:EFM) is another fund trading on a sizable discount, at 10%, with a yield of 0.8%. Or you could pick Scottish Oriental Smaller (LON:SST), with an 11% discount and 1.3% yield. Now those don't look particularly exciting figures on the face of it - but these are two of the top performing funds in the sector, and they've got two of the lowest ratings. Once stock markets pick up again, they could move forwards rather smartly if past performance is any guide - and there's been no change in the management teams. Why then are the income funds so overvalued on a price to book basis? Is there a fundamental reason behind the valuation?
Apparently not. WINS research shows that the main reason for the high valuations is simply demand - merely having the word 'income' in the title or a yield better than 3% guarantees that income-hungry investors will flock to the stock.
From stockopedia published on Jun 10 2010
