Invesco Asia Trust (IAT) aims to grow capital by investing in Asian equities with a valuation-sensitive approach. Manager Ian Hargreaves focusses on identifying businesses which are cheap relative to their future earnings growth potential, looking across the whole market for new ideas. IAT pays out 2% of NAV each half year as a dividend, based on the valuation at the end of that period. This is paid from income (and from capital where necessary), with the focus of the manager remaining on generating total returns.
IAT is typically more exposed to value stocks and sectors than its growth-focussed peers, although it also holds significant positions in technology, e-commerce and classic growth areas. The manager is focussed on looking for companies that are worth more than the market believes, including looking for opportunities in undervalued companies with superior growth prospects, meaning this is by no means a pure ‘value’ approach.
IAT has had an exceptional 12 months, building on a longer track record of outperformance, as discussed in the Performance section. While Ian’s shift into cyclicals on valuation grounds has been rewarded, key growth stocks continue to contribute as well.
Ian has the ability to use gearing actively to express a view on the market. With index-level valuations above their long-term historical averages, he has taken net gearing down to zero. However, as we discuss in the Portfolio section, he continues to find opportunities at the stock level in both the growth and value sectors.
IAT trades on a discount of 9.3%, compared to the AIC Asia Pacific Equity Income sector average of 6.3%, with its discount having recently widened out considerably.
In our view IAT could serve as an excellent core Asia exposure. Ian has a good track record of adding value through stock-picking in both growth and value sectors, and the portfolio is balanced across the region on a geographic and sector basis, so this looks like an attractive way to be positioned at this point in time. We saw growth outperform value for a number of years pre-pandemic, and then get another boost from the working-from-home phenomenon. We then saw a sharp rally in value after vaccines were proven to work. As ever, the market direction is unclear, but it seems unlikely that either growth or value will see as strong a trend in their favour as has recently been the case. Similarly, Ian’s prudent caution in taking the gearing down while maintaining punchy exposure to individual stocks seems to make sense given the current state of valuations.
For income investors, the trust offers a decent yield with the potential for growth if the NAV continues to rise. This yield is delivered without Ian having to sacrifice total return potential, as he remains focussed on picking companies that are worth more than the market believes, without having to compromise in order to boost the natural yield. In our view there is no good reason for the discount to be so wide relative to peers, and we note that at times it has been significantly narrower in recent months.
|Dividend policy offers attractive yield while maintaining total return focus
||Dividend will not be predictable as it will depend on NAV
|A track record of long-term outperformance under this manager
||High degree of macro uncertainty means world and Asian markets could struggle post-pandemic
|Balanced factor exposure should help limit volatility to market rotations
||Current tilt towards cyclicals could detract if recovery disappoints