He highlights Edinburgh Dragon Trust, run by Hugh Young's Aberdeen Asian equities team, and Schroder Asia Pacific as both looking particularly cheap.
“For people who are comfortable with the risk of emerging markets or Asian markets, there’s scope for a re-rating,” he said.
“When markets perform badly, these things tend to widen out, although it’s difficult to know when the turn is going to come.”
“[The discounts] reflect the sector being out of favour in a year in which the All Share has made 20 per cent.”
Data from FE Analytics shows that the average Asia Pacific ex Japan trust has made just 0.07 per cent since the start of 2013, while the FTSE All Share has made 20.69 per cent.
Performance of indices since Jan 2013
Source: FE Analytics
Edinburgh Dragon has lost 9.45 per cent in share price terms while the MSCI AC Asia Pacific ex Japan index has been flat.
Performance of trust vs sector and benchmark since Jan 2013
Source: FE Analytics
The trust has lost 8.4 per cent in NAV terms over that time and the discount has widened.
It is now on an 11 per cent discount compared with a six-month range of 11 to 4 per cent, according to Scouller’s figures.
Last year was a poor one for Aberdeen’s flagship emerging markets funds, as FE Trustnet reported earlier this week; its investment trusts, which are managed to the same style, have also suffered.
The poor performance in recent months means Edinburgh Dragon Trust is now in the fourth quartile in its sector over three years, having lost 5.07 per cent. The average fund in the sector has made 3.5 per cent over that time while the benchmark lost 1.93 per cent.
The fund is still ahead of its benchmark and sector over five and 10 years, however.
Scouller also highlights Matthew Dobbs' Schroder Asia Pacific trust, which is on a 12 per cent discount, at the limit of its six month range of 12 to 7 per cent. It has lost 6.05 per cent in share price terms since January last year.
The trust has made 3.02 per cent over three years, but 105.99 per cent over five; over five years the benchmark is up just 81.66 per cent.
FE Trustnet has recently warned that the 2008 crash has fallen off the five-year performance tables, radically changing the make-up of the top-performers lists.
Aberdeen has been one of the fund houses to suffer the most from this shift, and while Edinburgh Dragon is ahead of its benchmark over that timeframe, its performance is significantly below that of the Schroders fund.
Performance of trusts vs sector and benchmark over 5yrs
Source: FE Analytics
Monica Tepes, analyst at Cantor Fitzgerald, says that the market conditions of the past year or so haven’t been suitable for Aberdeen’s style.
However, she says investors would do better to look at the long-term case for holding a trust rather than attempting to play the discount, warning that the current levels aren’t far from recent averages.
“They are the sort of managers who unless you anticipate a strong rally, you would be happy to hold for the longer term,” she said.
“There are times when quality companies underperform and that was the case last year.”
“If I look at the performance of Edinburgh Dragon and New Dawn, which has the same management team, the 10-year track record shows that for the first five years from 2003 to 2008, they outperformed, but not by a huge margin.”
“That was a period when risk was rewarded and cyclical companies were the ones people wanted. That was a period that wasn’t conducive to their style.”
“However, you would have still made good absolute returns of 150 per cent or so.”
“In the second period, after the financial crisis, it was a period of fear and everybody wanted stable cash-flow and security. This is where most of the outperformance has come from.”
Tepes says that she rates the management team highly, and thinks investors would do well to hold the trusts for the longer term.
“Investors who like to time markets and move into and out of companies even if they think they are only going to do well temporarily – that’s not their style.”
“If you think from here in there will be a strong market rally and there will be a good run for markets, they are probably not the funds to buy.”
“But if you are not sure, these are the managers to hold. If you are able to buy a manager like Aberdeen on a 10 per cent discount when you can buy the open-ended fund at par, I think there’s value in that.”
Tepes says the real bargain trust in the sector is Schroder Asian Total Return, run by Robin Parbrook and King Fuei Lee.
The managers took over the trust in March of last year, and it shot on to a premium thanks to their long-term record of running money in a similar style on the open-ended Schroder ISF Asian Total Return fund.
The trust has slipped on to a 4 per cent discount, and Tepes says this is an opportunity to get in. The portfolio is likely to trade on a constant premium in the future once it returns to form, she claims.
“Unless you are the type of investor who likes to time the market, this one is a fund that should outperform over the longer term.”
The Schroder ISF Asian Total Return fund has significantly outperformed the MSCI AC Asia Pacific ex Japan benchmark over the longer run, with significantly lower volatility.
Performance of fund vs benchmark over 5yrs
Source: FE Analytics
The managers select stocks on a bottom-up basis and then use derivative overlays to hedge out the risk on markets their macro team thinks will struggle.
These overlays haven’t worked in their favour in recent months, which has led to the trust having a slight wobble, but the long-term record means it is a bargain on its current discount.
FE Trustnet looked at the trust in more detail in a previous article last year.
