Ben Yearsley | Tue 10 April 2012
Article from Hargreaves Lansdown
Combine the growth prospects of smaller companies with Asia's vibrant economies and I believe a tremendous long-term opportunity presents itself.
An interesting way to access this theme is through the Aberdeen Asian Smaller Companies Investment Trust. Aberdeen's expertise in Asia is well known. Their Aberdeen Asia Pacific unit trust has been on the Wealth 150 since its inception in November 2003. Smaller companies and emerging markets are both higher risk areas in which to invest and any investment can fall in value as well as rise.
Aberdeen's Asia team is headed by Hugh Young and their approach is the same on all the funds they manage. They believe their focus on "quality" companies helps steer them through volatile markets. They suggest long-term share prices reflect the quality of the underlying business, so they look to identify their best ideas, but only invest when the valuation is right.
One benefit of the investment trust structure is that money does not flow in and out of the fund on a daily basis as it does with an open-ended fund. This means the team can take positions in some of the smallest companies in the region, which can be more illiquid (harder to buy and sell). This allows them the flexibility to take a long-term view and uncover opportunities that might be off the radar of most investors. None of the top ten holdings feature in the MSCI Asia Pacific Index, but all have been in the portfolio for at least eight years.
While Asian stock markets have started 2012 positively, which is beneficial for existing holdings in the fund, Hugh Young and the team note valuations are less attractive than they were, making it harder to find new opportunities. The portfolio is currently tilted towards companies capitalising on domestic consumption in the region. Consumer businesses make up almost 45% of the portfolio compared to around 13% of the index. Top ten holdings include Siam Macro (a Thai retailer), Multi Bintang (a brewer) and Godrej (a consumer products business).
At a country level the team have found excellent opportunities in India, Malaysia, Thailand, and Indonesia; while it is harder to find high quality smaller companies in China, Taiwan and Korea. Ultimately the decision on whether to invest is based on the quality of the companies alone, not their location.
Investment trusts can borrow money, otherwise known as gearing, to enhance returns. Aberdeen takes a prudent approach and gearing over the long term has typically been no more than 10% of the trust's assets. Nevertheless, while gearing can add value in a rising market in a falling market it can magnify losses. Furthermore, the share price of an investment trust does not necessarily reflect its underlying net asset value (NAV). This trust is currently trading at or around its NAV and those considering an investment might wish to monitor the price before investing if they believe it could fall to a discount.
We believe Aberdeen's Asia team is of the highest calibre in the region. For investors looking for exposure to smaller companies in the Far East we believe this could be an excellent addition to a more adventurous portfolio.
Find out more about investment trusts including the costs associated with buying, selling and holding them in a Vantage account.
The value of investments can go down as well as up, this means you could get back less than you invested. Therefore all investments should be regarded with a long term view. No news or research item is a personal recommendation to deal. If you are unsure about the suitability of an investment please contact us for advice.
Article from Hargreaves Lansdown
