Invesco Asia 04 October 2023
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 (IAT) is co-managed by Ian Hargreaves and Fiona Yang, who aim to generate attractive total returns through a concentrated portfolio of c. 60 holdings. They take a contrarian approach, using bottom-up stock selection that focusses on fundamental analysis to identify companies that are out of favour and therefore undervalued, and holding them as sentiment changes (see Portfolio). This strategy has delivered substantial NAV total return outperformance of the benchmark over five years (see Performance). IAT is also ahead over one year.
To complement the capital growth potential, the trust also has an enhanced Dividend policy which pays out 2% of NAV semi-annually. This is generated from a combination of the natural income of the underlying holdings, as well as a contribution from capital, which allows the managers to focus purely on the total return opportunity of each stock without having to focus on the contribution to yield.
Ian and Fiona had been reducing their underweight to China coming into the year, viewing the market as cheap in the light of an expected reopening boost. So far, this reopening trade hasn’t played out as many investors had expected. Looking forward, the managers believe this is a temporary setback, and there are plenty of opportunities. In China, valuations are deeply discounted and back to pre-reopening levels in some cases, despite a better backdrop. This provides the potential for positive earnings surprises and elsewhere in the region, they are finding plenty of other opportunities due to their value-centric approach.
IAT trades on a Discount of 13.1%, compared to its own five-year average of 10.7% and the five-year sector average discount of 7.2%.
We believe the case for IAT has two key elements, the first being the trust; it offers a contrarian approach to investing in the region, which helps it stand out amongst its peers, with a Portfolio that is unlikely to be held elsewhere. This is best demonstrated by the underweight allocation to the expensive Indian market. The contrarian, valuation-sensitive approach has proven to be an effective way to invest in a region with complicated macroeconomics and market dynamics. There is also the enhanced Dividend policy, which adds an extra element of attraction to a region that isn’t renowned for yield generation. As such, we believe IAT can work as a good income diversifier for investors.
The second element is ‘why now?’. The managers have highlighted that valuations for the broader region are very compelling, with many areas in China, in particular, having returned to levels not seen since before the reopening announcement (see Performance). We believe this effectively prices in no gain from the reopening of the Chinese economy post-lockdown, which, whilst we appreciate hasn’t followed the example set in developed markets, is unlikely to be so minimal. As such, we believe there is plenty of scope for upside surprises to come from earnings and that Ian and Fiona will be very well placed to capture these, considering their contrarian approach. Furthermore, the shares are currently trading at an attractive Discount, despite the strong performance record.
- Contrarian approach with valuation focus that differentiates the trust from peers
- Valuations are very compelling, with the potential for positive earnings surprises
- Enhanced dividend policy provides a good level of income from a diversified source
- China is largest country weight and is facing a number of headwinds
- Dividend is based on NAV, meaning it is unpredictable
- Discount has remained stubbornly wide