Invesco Asia 02 July 2019

Invesco Asia (IAT) invests in Asian companies in order to generate capital growth. The strategy is valuation sensitive and contrarian, but the process ensures a diversified portfolio which has managed to outperform in different types of market in recent years.

Over five years the trust has handsomely outperformed the index and its peers. NAV total returns have been 75.7% compared to 64.1% for the index and 64.4% for the Morningstar IT Asia Pacific ex Japan peer group and the share price returns have been even better: 80.1%. The trust has outperformed in two of the past three down markets as well as during the 2016 and 2017 sharp cyclical rally.

Stock selection has been key to the alpha generated, with positions in India and China particularly significant. Some positions have been held for many years and generated excess returns for shareholders: Samsung Electronics in Korea, Netease in China and UPL in India, for example.

Historically, the portfolio has tended to trade on a significant discount to NAV and peers, and the board struggled to shift it within their 10% maximum. However, it appears that the strong performance has finally led to a significant shift, with the discount below 10% for most of 2019, although still wider than the average of the peer group which it has outperformed. It is currently on a 9.7% discount.

A tender offer in 2018 saw some discount playing investors reduce their holdings, and the board has focused on broadening the shareholder base which we believe has helped the performance to affect the discount unlike in the past.

A revamped dividend policy may also have been significant: this year the board, under a new chairman, has committed to a progressive dividend policy, and has signalled the intention to use revenue and capital reserves to fulfil this if required. The trust has also implemented an interim dividend for the first time, although the yield of 2% is still relatively low. However, should the trust pay the same final dividend on top of the interim already paid, the yield would jump to 2.9% on the current price. We note that trusts with a higher yield in the Asia Pacific sectors tend to trade on tighter discounts.

We like the balanced strategy of this trust, which allows the manager to take advantage of valuation opportunities and companies which are out of favour without being over-exposed to the “value” style of investing which has been under the cosh for many years. The long-term approach to stock-picking also increases the chance of generating alpha, in our view.

Currently it is hard to read the outlook for emerging Asia. So much depends on political decisions surrounding trade issues, whether that be broad policy issues or company specific concerns such as those regarding Huawei. We think focusing on stock selection is a superior approach in such an environment, as it is easier to add value by company analysis than by forecasting political decisions. IAT takes this approach, and the conservative net cash positioning of the manager, Ian Hargreaves, also fits well with a cautious approach to the current macro-economic and political climate in the region.

The progressive dividend policy could well see the discount come in too, in our view. The yield is only 2% at present, but if there was to be a little growth in the final dividend this year it could easily be above 3% (depending on share price movements), and we have seen trusts with a persistent discount have some success in narrowing or eliminating it through offering a decent yield.