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.
At the beginning of the 18th century, Asian economies made up close to 60% of global gross domestic product (GDP), with the then-Chinese and Indian empires between them having the two largest economies in the world.
By 1950 that figure had dropped to 15% as, over the preceding 250 years, European countries became the focal point of the industrial revolution and America slowly emerged as the world’s largest economy.
The post-World War II era has seen this dynamic shift once more. By the end of the 20th century Asia made up a third of global GDP, and consultancy group McKinsey estimates it will hit the 50% mark by 2040.
This growth has been spearheaded by companies across the continent, many of which are leaders in their respective fields. In 2020, 43% of the world’s 5,000 largest companies were based in Asia and, in the same year, there were more Fortune 500 companies based in Hong Kong and China than in the US for the first time.
Investing in Asian economic growth
Such growth has resulted in several bursts of investor interest over the past 40 years. Japan’s rise in the 1980s saw huge sums of cash flowing into the country. A stock market and housing crash in the latter half of that decade and early 1990s, along with a subsequent period of economic stagnation, has tampered that enthusiasm to a large degree.
A similar phenomenon took place in the 1990s as a brief period of overexuberance saw massive investor interest in emerging markets in Southeast Asia, including Indonesia, Malaysia, and Thailand.
A market crash in 1997 led many investors to pull out of those countries. Those that continued to focus on Asia tended to devote most of their energy to China. From 1990 to 2020, the country’s economy increased 41-fold in size, averaging annual GDP growth of 13.2%.
It’s for this reason that most people think of investing in Asia as being largely a Chinese phenomenon. That’s understandable given the country’s impressive growth over the past three decades and the gradual opening of its markets to foreign investors.
Having said that, other countries in the region continue to attract investment, including South Korea, Taiwan, and Japan and the countries that stung investors back in the 1990s. India has also become an increasingly attractive place to invest, with the country’s GDP more than doubling from 2009 to 2019.
What do Asian stock markets look like?
Before describing Asian equities markets, it’s worth defining what we actually mean by ‘Asia’ in the context of investing.
This may sound like an odd point to make but when fund managers or individual investors talk about ‘investing in Asia’, they’re usually referring to the Asia Pacific region, which is East and South-East Asia, as well as Oceania.
In more concrete terms, that means places like Australia, China, Hong Kong, Japan, South Korea, India, Taiwan, Malaysia, Indonesia, Thailand, Singapore, Vietnam, and the Philippines.
Funds will have different mandates that may preclude them from investing in certain countries. For example, an Asia Pacific ex Japan mandate would mean the manager can invest in Asian companies, except for Japanese ones. Some investors will also allocate funds to companies listed outside of the continent, in the US or UK for example, if those firms generate the bulk of their revenues from countries in Asia.
Despite these exclusions, the countries that investors do look at are still hugely varied, both in terms of their economies and the companies listed in them.
For instance, Malaysia’s largest listed companies look a bit like their UK counterparts, with heavy weightings to financial and commodities companies. In contrast, China and South Korea’s stock markets have much larger weightings to technology firms.
Why it’s hard to invest in Asian stocks directly
As much as some individual investors might want to put money directly into companies in Asia, it’s a difficult thing to do.
Even developed markets in the region, like Japan and South Korea, are often inaccessible to private investors in the UK, as investment platforms don’t offer access to their stock markets. Those that do tend to charge high fees for access and impose large minimum order sizes – plus they’ll usually only offer access to larger companies, not the whole stock market.
Countries that fall into the emerging market category are unlikely to be available at all, with the exception of depository receipts (ADRs, GDRs) which are listings of such companies on US or UK exchanges. For instance, there are no investment platforms in the UK offering retail customers direct access to the Malaysian, Thai, or Indonesian stock markets.
This simple problem aside, the other difficulty individual investors may face is actually finding the best Asian companies to invest in.
It’s not uncommon for companies across the region to issue financial reports that are only partially translated into English or not translated at all. This is, for example, a common feature of companies listed in Mainland China and Vietnam. Given these are perhaps the most important documents you’ll need to weigh up whether you want to invest, that’s likely to be a problem.
Third-party sources of information can also be hard to find, at least in English.
In short, it’s both practically difficult to invest in Asia as most platforms don’t have connections to exchanges in the continent and, from an analytical perspective, evaluating prospective investments is much harder than it would be for investors in UK or US companies.
Using investment trusts to invest in Asia
Investment trusts can help solve these problems and are a useful tool for anyone looking to get exposure to Asia in their portfolio.
As they’re listed in the UK, they’re easily accessible to investors and as a rule don’t carry the same high fees that investing directly in Asian stocks does. They also tend to hold a diverse range of companies, meaning you can easily get exposure to a mix of companies in the region via one investment.
Beyond that, trusts give you access to a team of regional specialists, who can identify good opportunities in local markets. This is particularly important for emerging markets and smaller companies in both emerging and developed markets, which tend to be harder to perform due diligence on, due to a lack of information.
These sorts of companies are often out of the reach of large funds too, as their size means they can’t buy their shares without taking a huge stake in the company. Trusts are typically smaller and can be nimbler with their investments, meaning they can invest in smaller companies.
Finally, trust managers can take an active approach to the region. This means they can take a broad or more refined approach to the market and don’t have to stick to tracking a benchmark, which may not take the sort of positions an investor wants.
The Asian investment trust sector
There are currently 14 investment trusts focused on Asian markets. This doesn’t include other trusts which take a country-specific approach to individual Asian countries, the majority of which invest in either China or Japan.
Those 14 trusts take divergent approaches to the market. The Association of Investment Companies (AIC) breaks them down into three categories – Asia Pacific, Asia Pacific Equity Income, and Asia Pacific Smaller Companies.
Asia Pacific trusts tend to invest in large cap stocks across the region, whereas the other two, as their names suggest, tend to focus on providing dividends to shareholders or generating higher total returns by investing in small caps.
At the time of writing, fees for the trusts range from 0.74% to 1.13%. It’s also worth keeping in mind that some trusts will have a performance fee for beating a certain metric and this will result in paying more than the trust’s stated ongoing costs. There is also some level of currency risk given that the trust’s underlying investments aren’t likely to be denominated in sterling.
Asian investment trusts vs open-ended funds
Comparing trusts to their open-ended counterparts in this area isn’t easy because the latter are not segmented in the same way that trusts are by the AIC. The most reasonable comparison to make is between trusts in the AIC’s Asia Pacific sector and open-ended funds in the Investment Association’s Asia Pacific Including Japan segment.
Looking at those two groups over the 20 years to 23/05/2023, we find the trusts averaged annualised total share price returns, in sterling terms, of 10.8%. Open-ended funds produced equivalent returns over the same time period of 9.8%. Over the 20 year period that would have meant total returns for investment trusts were 673.1% versus 552.2% for closed-ended funds.1
That disparity may be down to structural differences between the two different sets of funds. Trusts are closed-ended, meaning they do not have to carry any sizeable holdings in liquid assets in order to meet redemptions. Open-ended funds usually do and that means they are hit by cash drag.
Redemptions also mean that open-ended funds often have to contend with lots of redemptions when the market hits a rough patch, which can easily put more downward pressure on performance. This is not something that trusts have to deal with and it means they’re often better able to ride out any periods of poor performance in the market.
Lastly, trusts can borrow money to enhance returns – a practice known as gearing – which means they can boost their performance if they make good investment decisions. However, the reverse is also true and gearing can exacerbate poor performance as well. Nonetheless, open-ended funds cannot use gearing, which means any positive returns won’t be enhanced in the same way that they would for an investment trust.
Case study: Invesco Asia Trust plc (IAT)
Company: Invesco Fund Managers Limited
Managers: Ian Hargreaves and Fiona Yang
Ongoing charges: 1.00% incl. annual management fee, as at 31/01/23 (Source: Invesco factsheet)
Dividend policy: 2% of NAV paid bi-annually.
Benchmark: MSCI AC Asia ex Japan Index
One of the most prominent investment trusts focused on Asian stocks is Invesco Asia Trust (IAT). The trust is managed by Ian Hargreaves and Fiona Yang.
The investment trust’s management style is best described as ‘valuation-focused’ rather than ‘value’, meaning the managers look to buy companies for less than they are worth. In other words, companies which are considered significantly undervalued relative to their growth prospects and/or the value of their assets. Holdings are then sold when the team believes the company has hit its ‘true’ value.
The volatility of Asian markets and the valuation dispersion between countries, sectors and stocks provide a good hunting ground for active managers. The managers have a contrarian approach at the point of purchase as that is where the probability of generating the greatest returns is stacked in their favour. Purchasing ‘value’ stocks which turn into ‘growth’ stocks as they beat the markets’ low expectations adds value.
The team’s fundamental knowledge of the businesses they invest in allows them to ride the transition from a contrarian investment to a popular one, maintaining a position so long as it is deemed undervalued. This means that the investment trust can hold on to high growth companies trading at a reasonable price and take positions in areas deeply out of favour.
For example, the investment trust has holdings in more growth-oriented stocks, like WeChat owner Tencent and the Taiwan Semiconductor Manufacturing Company – the largest and most advanced computer chip manufacturer in the world.2
But those firms sit alongside large holdings in more traditional value stocks. That includes Korean auto manufacturer Hyundai Motor and Indian consumer finance services provider Shriram Finance.
The result is a neatly diversified portfolio, spread across a range of industries and countries that has, as at 31/03/2023, delivered total share price returns of 37.7% over the past five years and 163.2% over the past ten years, compared to the 6.9% and 66.1% total return of its benchmark index over five and ten years.
Invesco Asia Trust maintains an attractive dividend policy. In 2020 the investment trust’s board approved a decision to start paying out a dividend, totalling 2% of NAV, at the end of every half year period. Investors should be aware this is only a target and not a guarantee the dividend will be paid.
1) What is the investment trust’s goal?
The investment trust aims to provide long-term capital growth for investors by investing in a diversified portfolio of companies from across Asia and Australasia.
2) What kind of stocks do the managers like?
The investment trust is managed with a total return rather than a style mindset. The investment trust managers try to provide a balanced portfolio of undervalued companies, which they believe will deliver returns of 10% p.a. There is no guarantee they’ll achieve those returns and the investment process may change in the future.
3) Are investment decisions driven by a particular investment style?
The investment trust team describe their style as ‘valuation, not value’. Although the company invests in growth stocks, they will not overpay and make unreasonable estimates about the future to justify a place in the portfolio. All stocks are purchased on the basis that they’re undervalued relative to their growth prospects.
4) How many stocks does the investment trust typically hold?
The investment trust tends to hold around 60 stocks.
5) What is the investment trust’s dividend policy?
The investment trust aims to pay a dividend equal to 2% of NAV on a bi-annual basis, with the goal of paying out approximately 4% per annum. These dividend payments will be made from income or capital as required. Investors should keep in mind that dividend targets are not a guarantee that a dividend will be paid.
6) What are the investment trust’s ongoing charges?
The investment trust’s ongoing charges including annual management fee are 1.00% at the time of publication. Note that this can change over time.
7) Does the investment trust have performance fees?
The investment trust does not have performance fees. The portfolio managers are also invested in the company, so their interests are aligned to shareholders.
8) How much attention do the managers pay to their benchmark, and to what extent are absolute returns important?
The investment trust places a heavy emphasis on delivering total returns to shareholders. Although the benchmark is useful for gauging performance, it is not a driver of investment decisions for the investment trust’s management team.
9) How much does the investment trust deviate from its benchmark?
The investment trust typically differs markedly from its benchmark, both in terms of country and sector allocations.
10) Does the investment trust use gearing and if so is it structural or opportunity led?
The investment trust has the ability to use up to 25% of NAV. It accesses gearing through a short-term revolving credit facility. Gearing is opportunity led and is used when the investment trust managers believe there is a likelihood that returns will be enhanced by doing so.
STANDARDISED ROLLING 12-MONTH PERFORMANCE
|standardised 12-month performance||% growth|
|31/03/2018 - 31/03/2019||31/03/2019 - 31/03/2020||31/03/2020 - 31/03/2021||31/03/2021 - 31/03/2022||31/03/2022 - 31/03/2023|
|Ordinary share price||5.0||-15.4||73.4||-6.1||2.6|
|Net asset value||3.9||-16.8||67.1||-6.3||6.7|
|MSCI AC Asia Ex Japan Index||2.0||-9.0||41.4||-10.6||-3.0|
Past performance is not a guide to future returns. Ordinary share price performance figures have been calculated using daily closing prices with dividends reinvested. NAV performance figures have been calculated using daily NAV with dividends reinvested. The NAV used includes current period revenue and debt at fair values. The MSCI AC Asia ex Japan Index performance shown is total return. All performance figures are in sterling as at 31/03/2023 except where otherwise stated. Standardised past performance figures are updated on a quarterly basis.
1 Past performance is not a reliable indicator of future returns. Source: FE Analytics. Basis: bid-bid in GBP share price terms.
2 Correct as of 23rd May 2023. Be aware that a trust’s holdings can change over time.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
The Invesco Asia Trust plc invests in emerging and developing markets, where difficulties in relation to market liquidity, dealing, settlement and custody problems could arise.
The use of borrowings may increase the volatility of the NAV and may reduce returns when asset values fall.
The product uses derivatives for efficient portfolio management which may result in increased volatility in the NAV. In addition, some companies are suspending, lowering or postponing their dividend payments, which may affect the income received by the product during this period and in the future.
For more information on Invesco Asia Trust plc, please refer to the relevant Key Information Document (KID), Alternative Investment Fund Managers Directive document (AIFMD), and the latest Annual or Half-Yearly Financial Reports. Further details of the Company’s Investment Policy and Risk and Investment Limits can be found in the Report of the Directors contained within the Company’s Annual Financial Report.
Invesco Fund Managers Limited.