Invesco Asia Trust (IAT) aims to outperform Asian markets using a contrarian strategy with a mixture of growth and value elements. Manager Ian Hargreaves has generated significant outperformance of the benchmark since taking over in 2015, as we discuss in the Performance section.
However, the discount has remained persistent, and the board has taken decisive action, deciding to pay out a dividend worth 2% of NAV each half year. Crucially, there will be no change to Ian’s tried-and-tested approach to stockpicking but the payout will come from capital, where the natural income of the portfolio is not sufficient. We note that the portfolio yield has risen to 2.6% in recent years, as a dividend paying culture has taken greater hold in the region. The full details are in the Dividend section.
The current discount of 14.9% is wider than the AIC Asia Pacific sector average of 8.8%, and much wider than the AIC Asia Pacific Income sector average of 4.5% – for which sector IAT will now qualify.
Ian’s approach focuses on stockpicking, and he aims to buy companies with undervalued growth prospects. This approach led the portfolio to have a cyclical tilt at the start of 2020; positioning that proved unhelpful in the unforeseen and unforeseeable pandemic. However Ian has been raising exposure to those sectors and companies which he thinks now look attractively cheap and have the best prospects of recovering faster and stronger. The result is a portfolio balanced between growth and value characteristics with major exposures to technology and ecommerce as well as consumer and industrial names which have been more out of favour.
IAT’s new offering mixes a high dividend yield with a total return strategy, a powerful combination in our view, which makes the discount look anomalously wide. Ian’s fundamental, bottom-up stockpicking has a good track record of outperforming the market in total returns. The new dividend policy means that this approach will carry on, and investors can continue to gain access to a variety of sectors and factors, including high-growth technology and ecommerce names, while also drawing a considerable yield. We expect the discount to tighten closer to the 5% average of the AIC Global Equity Income sector and perhaps towards the tighter discount of JPMorgan Asia Growth & Income: the other trust in the sector to take a total return approach and pay a dividend out of capital.
We also think this could be a good time to take a more valuation-sensitive approach when investing in Asia. We have seen a huge disparity in returns and valuations between sectors and countries in the rebound from the March lows. Inevitably some of this disparity will close, and there are likely to be opportunities in out-of-favour sectors. We would be nervous to be over-exposed to full on growth strategies presently (September 2020) and think diversification would be wise. IAT provides this diversification with exposure to technology and ecommerce names which Ian thinks are undervalued, given their growth potential alongside positions in the more battered consumer and industrial sectors.
|New dividend policy could see a rerating of the discount||Dividend will not be predictable as it will depend on NAV
|A strategy which has a track record of long-term outperformance
||High degree of macro uncertainty means world and Asian markets could see a double dip
|Balanced factor exposure should limit volatility to factor rotation
||Gearing, although generally modest, does increase exposure to down markets as well as up markets