Invesco Asia 25 August 2022

Invesco Asia Trust (IAT) aims to generate attractive total returns from equities listed in Asia by using a disciplined, valuations-focussed strategy to add alpha on a stock-specific basis. The trust is designed to suit investors who either prioritise capital or income returns, paying out 2% of NAV in a dividend each six months (see Dividend).

IAT is managed by Ian Hargreaves, and since January this year by Fiona Yang. The managers aim to identify mis-priced growth opportunities, that is companies which are trading below their estimate of fair value when considering their potential earnings growth. This brings a contrarian element to the strategy, with the managers buying and selling companies based on valuation signals rather than being influenced by macro-economic views or consensus views on any factors.

As we discuss under Performance, this strategy has been highly successful in recent years, the trust outperforming the index in 2020, 2021 and in 2022 (as of the time of writing). In our view, this is attributable to the disciplined investment process which has seen the trust shift allocations ahead of unpredictable turns in the market. Key sources of alpha in recent years have included many technology and internet companies, where Asia often leads the global industry. More traditional industries, such as banking and automotives, have also been key contributors at times, with IAT’s strategy seeing it prosper in multiple market environments.

Over 2022, discounts have widened globally, including Asia, and IAT trades on a 13.2% discount at the time of writing, wider than its sector average and its own long-term average. Asia itself looks cheap versus global markets, with inflation lower than in the West and public finances in stronger shape than during past crises.

IAT is an excellent candidate for core long-term exposure to Asia for an investor who wants to take a fire and forget approach. As we discuss under Portfolio, the trust may relinquish some of the last gains in strong market rallies when share prices become detached from fundamentals, but the strategy puts it in a strong position to make steady gains versus the index in multiple market environments, the valuation discipline hopefully saving it from the sharp sell-offs which often end the sharpest rallies. IAT should be able to benefit from secular growth trends in Asia while moderating the cyclical course these trends are likely to take in the short term, be that semiconductor production or urbanisation in India and Indonesia.

IAT pays a fixed percentage of NAV, from the capital account if necessary, and this dividend policy gives Ian and Fiona full freedom to implement this strategy. It removes the pressure for them to remain invested in high-yielding stocks at unattractive valuations, while also allowing shareholders to benefit from low-yielders like Ming Yang Smart Energy, the Chinese wind turbine manufacturer, when their earnings potential is undervalued by the market. On the other hand, investors do give up some certainty over future distributions given that the dividend level depends on the growth or decline in NAV.

While the economic outlook is undoubtedly troubled, we note that IAT is trading on a wide discount versus its history and peer group, which provides some cushion against further falls in NAV. In addition, there is outperformance potential when risk appetite improves.