Invesco Asia 21 January 2021
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.
Invesco Asia Trust (IAT) aims to outperform Asian markets using a contrarian stock-picking strategy with a mixture of growth and value elements. Manager Ian Hargreaves has generated significant outperformance of the benchmark in his first five years in charge, as we discuss in the Performance section. Since the start of this 2021 financial year IAT also offers a yield of 2% of NAV every half-year (4% p.a. on a stable NAV). This is paid out of capital if necessary, meaning Ian’s stock selection approach is unchanged.
IAT’s outperformance has been built on Ian’s stock selection process, with some IT and ecommerce names being particularly important to returns over the full five-year period. While IAT retains large positions in those companies which Ian believes justify their valuations, he has increasingly been tilting the portfolio back towards companies which were left behind post-pandemic. In his view, these offer good earnings prospects that aren’t reflected in their valuations. His approach has helped IAT to perform strongly as economic optimism increased in the last months of 2020.
Ian actively uses modest levels of gearing depending on how he sees market valuations. Towards the end of 2020 gearing has been reduced as market level valuations rose above long-term averages. Ian is cautiously optimistic for an economic recovery in 2021, but believes that stock selection will be critical.
IAT’s discount narrowed significantly after the new dividend policy was brought in. However, it has recently widened out to 10.7%, much wider than the 3.2% average of both the AIC Asia Pacific Sector (within which it sits) and of the AIC Asia Pacific Income sector.
IAT offers a powerful combination of total return potential and a yield of 4% of NAV each year. Ian’s first five years as manager have been successful, despite his valuation-sensitive and stylistically balanced approach being unfavourable in the past few years in which high growth and momentum strategies have outperformed. However, as we face what we hope is a year of normalisation, we believe IAT’s more balanced approach will be attractive.
IAT has significant weights to what Ian believes are the best opportunities in the IT, consumer discretionary and ecommerce sectors, but also exposure to areas which have lagged, such as financials and India as well as other stock specific stories. Indeed, IAT’s more valuation-sensitive approach has really helped in the second half of 2020 and is a key reason returns have been ahead of the benchmark for the year despite the trust falling more than the market in the February/March crash.
We think the wide discount offers a real opportunity, with the other Asia trust offering a total return approach and a 4% dividend from capital trading on a small premium. We note the new dividend policy initially helped the discount narrow, although over the last month shares have failed to keep up with a sharp rally in NAV.
|New dividend policy offers substantial yield on top of capital growth potential
|Dividend will not be predictable as it will depend on NAV
|A track record of long-term outperformance under this manager
|High degree of macro uncertainty means world and Asian markets could struggle in 2021
|Balanced factor exposure should help limit volatility to market rotations
|Gearing, although generally modest, does increase exposure to down markets as well as up markets