Invesco Asia Trust (IAT) is managed by Ian Hargreaves, who aims to generate double-digit returns over a three- to five-year period by investing in good-quality businesses which are worth more than the market believes. Generally, returns are expected to come from capital growth, but a secular shift to paying higher dividends in the region means that the yield on IAT’s portfolio has risen to 2.8% (the shares currently yield 2.2%). Ian expects dividend growth to be a medium-term trend in the region, while IAT’s board is committed to growing the dividend, and has the ability to pay out of capital.
The trust has generated returns close to target since Ian took over in March 2011, with annualised NAV total returns of 9.4%, despite the market trending sideways over the past two years. IAT has tended to perform well in both rising and falling markets, helped by the strategy of balancing risk exposures (see the Portfolio section). Overall, the trust has outperformed its peer group by an impressive 16% over five years, with Ian beating the benchmark in both good times and bad. In fact, he has outperformed in seven calendar years out of the last nine.
Ian observes that the valuation gap between IAT’s portfolio and the index (MSCI AC Asia ex Japan) has widened in recent months as he has found a number of cheap opportunities after a weak period for Asian markets. These valuation opportunities and Ian’s optimism for the region in 2020 explain why the gearing has reached new highs, as we discuss in the Gearing section.
Despite the strong long-term performance record, the discount stands at 9%, wider than the AIC Asia Pacific sector average of 7.5%.
IAT’s manager Ian Hargreaves employs a sophisticated strategy which we think should allow it to do well in different types of markets. The stock-selection strategy balances growth and valuation inputs while the risk-management work ensures the portfolio is not overexposed to any risk factors or style, and the benefits of this approach come through in the consistent record of returns. Here Ian benefits from the depth of resources at Invesco, which allows him to understand the risks in his portfolio while retaining full autonomy over investment decisions.
That said, there is a value tilt to the portfolio which we believe could be attractive after a period in which growth has outperformed considerably in Asia. This comes from the contrarian approach Ian takes to identifying undervalued Asian franchises. The value tilt is more pronounced than it has been in the past, thanks to the opportunities that have opened up in the weak markets of late 2018 and in 2019.
Ian is excited enough by these opportunities and the green shoots he sees in the economic data to have raised gearing to new highs. As such, we believe IAT is well positioned should 2020 see a rebound in markets. Although Ian is more bullish and more positioned in cyclicals than he has been in the recent past, having met with him and discussed his approach and outlook we are convinced he remains a cautious, risk-aware investor, and the portfolio will continue to display its ‘all weather’ attributes.
We believe that if Ian is right that the data suggests an uptick in manufacturing, exports and cyclicals in 2020, this should drive shareholder returns in several ways. First of all, the portfolio’s valuation discount to the wider market should close. Secondly, should the region perform as well as Ian expects next year, we would expect discounts across the sector to move in. At the same time, given the trust trades on a significant discount to more ‘growthy’ peers (perhaps due to its value tilt), the discount relative to its peers’ should narrow. Given the strong track record and these catalysts, IAT’s discount is therefore too wide at 9%, relative to the sector average of 7.5%.
|A highly experienced manager with an in-depth knowledge of the region||The portfolio's cyclical exposure and gearing could hurt if the market falters|
|A wider discount than peers despite strong relative performance||The US/China trade war means there is significant uncertainty about the prospects for Asian markets|
|A flexible approach which has led to a strong track record of outperformance in rising and falling markets||The discount has proven stubborn and so could remain wide relative to peers'|