Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Invesco Asia. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Since the start of the year there’s been a growing discussion as to whether we’re seeing a resurgence in value stocks, after a long period in which growth investing has reigned supreme.
These conversations are not without merit. Investing styles ultimately influence investment decisions, so you can understand why an investment trust shareholder would want to understand what the person managing their money is thinking.
Nonetheless, sometimes these discussions meander into the sort of territory that extremely meta macroeconomic conversations can. There may be lots of interesting theories and hypotheticals at play, but you can lose sight of the fact that what you’re actually trying to do is just invest in good companies and deliver returns to shareholders.
And just as it seems silly to try and play games with your portfolio based on any macroeconomic predictions, so too does it seem unlikely that anyone can accurately predict which investment style is going to work well in the future, particularly in the extremely volatile world we find ourselves in today.
Not getting sucked in
Remaining immune from these conversations isn’t easy but it’s something the team at Invesco Asia Trust (IAT) arguably does well. The trust, which is managed by Ian Hargreaves and newly appointed co-manager Fiona Yang, has a disciplined valuation process that the team keep to as strictly as possible.
Hargreaves refers to the approach as ‘growth at a reasonable price’. The goal is to try and identify stocks which Hargreaves and his team believe will deliver minimum returns of 10% per annum over a 3 to 5 year holding period.
Part of the way they do this is to look at areas which the market may have overlooked or punished unfairly. In other words where expectations are easy to beat. If the valuations look attractive then they may buy. The reverse also applies to their selling decisions. Stocks that look like they have become too frothy, for example, will be disposed of, and the money put back into any cheaper opportunities available on the market.
But this is also not just a case of buying whatever is trading at low valuations. The IAT managers come up with their own valuation metrics for things like future earnings-per-share growth and expected dividends. So even if a company may look cheap according to generic valuation metrics, it must also meet the team’s internal criteria before it can be considered worthy of investing in.
A successful strategy
This approach to the market has borne fruit over the past decade. During that time, IAT was the best performing fund in its peer group of non-Japan Asia-Pacific-focused equity investment trusts.
And that long-term performance was partly driven by pandemic beneficiaries but also by investments in out of favour industries, where the benefits of the trust’s valuation sensitive investment process were on display.
This was particularly true of China. Like most funds focused on the Asia-Pacific region, IAT continues to have a large exposure to the world’s second-largest economy.
During the early stages of the pandemic, that meant having holdings in some of the country’s major tech firms. But as valuations began to bubble up over the course of the pandemic, the IAT team sold off and reallocated funds to hardware companies and cyclicals – firms which are more susceptible to macroeconomic cycles - instead.
As it turns out many of the internet firms got shellacked by a series of heavy-handed regulatory crackdowns by the Chinese Communist Party. In contrast, the hardware investments continued to perform well. Companies previously off people’s radar enjoyed an early post-covid re-opening.
It was a similar story with India, where IAT had long been overweight relative to its benchmark index. The country outperformed and trust shareholders were able to benefit from those gains as a result.
But here again, the IAT managers believed valuations were getting exceedingly difficult to justify, so they cut back their position. The result is that they are now underweight the Indian market, which has not performed well so far this year.
Stay the course
None of this activity was spurred on by macroeconomic predictions or about a ‘story’. Instead, it reflects the IAT team’s disciplined approach whereby every company has an intrinsic value and as far as they are concerned this should guide their buy and sell decisions.
Nor were there any strong biases toward a particular investment style. Ian Hargreaves is a valuation-conscious investor, but that does not mean it is a pure value trust. There are a mix of growth and value stocks in the portfolio, but all are considered undervalued according to the team’s framework.
This is important because value and growth are deemed contrasting strategies to achieve excess returns. On the one hand, growth investors believe in their ability to pick future winners which will grow into their optically high valuations.
On the other, value investors believe that companies trading on a low valuation relative to their earnings or assets, based on fundamental analysis, have greater scope to outperform as prices revert to what is considered fair.
With the debate resolutely focused on the preference between one style over the other, the IAT managers strike a balance to those who think there is merit in both. They do not see the world in such binary terms: some companies with strong growth prospects deserve a high valuation while others don’t, and cheap companies can be cheap for a reason while others are only temporarily out of favour. Finding opportunities in both means less time worrying about style factors.
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