FE Alpha Manager Angus Tulloch’s Scottish Oriental Smaller Companies trust has slipped on to a 6.5 per cent discount following weakness in Asian markets, while Aberdeen Asian Smaller Companies, managed by a team led by Hugh Young, has gone on to a 4.7 per cent discount.
Tulloch’s trust has generated NAV gains of 18.1 per cent a year over the past decade, and Young’s portfolio 18.3 per cent, more than any other closed-ended fund on the UK market.
Iain Scouller, analyst at Oriel Securities, says that the widening discounts are the result of investors selling down their emerging markets holdings at a time when NAV growth has been more secure in the developed world.
“I think it’s a good opportunity to pick up some good managers on a discount,” he said. “The big question is always, however, when the sector will recover.”
Data from FE Analytics shows that Tulloch’s £233m trust has seen its discount widen since the turn of the year. It traded on a slight premium for much of 2013 despite the struggles in its sector.
Price and NAV of trust over 1yr
Source: FE Analytics
A similar pattern is visible in the discount history of Aberdeen Asian Smaller Companies. Both discounts have started to close in the past couple of days, suggesting investors may have to be quick to take advantage.
Price and NAV of trust over 1yr
Source: FE Analytics
Both trusts have also suffered in NAV terms over the past year as emerging markets have sold off, although their losses have been within the norm for the sector.
Scottish Oriental has lost just 1.9 per cent, the third-best result in the sector, which saw average losses of 7.2 per cent. The Aberdeen fund was down 8.9 per cent over the period.
The two funds have the best NAV returns in the sector over three years, however: Aberdeen Asian Smaller Companies has made 40.7 per cent and Scottish Oriental Smaller Companies 32.1 per cent.
The same is true over five years, while the two trusts are ahead of the pack over each period in terms of share price performance as well.
Over five years the First State portfolio is up 266 per cent in share price terms and the Aberdeen fund 259.87 per cent.
Performance of trusts vs sector and benchmark over 5yrs
Source: FE Analytics
The discount movements are indicative of the extra volatility that investing in these trusts brings, however, with their smaller companies focus largely to blame.
Scottish Oriental Smaller Companies has the 12th-highest volatility score in the sector over five years at 21.26 per cent, while the Aberdeen trust has the highest volatility score of 23.06 per cent.
The funds are highly correlated, with a score of 0.83 over the past three years, making it hard to see why investors need to buy more than one.
Under the hood they also have some country weightings in common. Both have underweight positions in China and overweight positions in India.
India makes up 12.4 per cent of the Aberdeen fund compared with 6.1 per cent for its MSCI Asia ex Japan benchmark. Stocks in the country make up 17.3 per cent of the First State fund.
The Aberdeen fund has just 16.8 per cent in greater China while the First State fund has 44 per cent. First State’s index has 53.1 per cent.
They also share huge underweights in Korea. Many fund managers complain that corporate governance is poor in the country, with shareholders often getting the short end of the stick.
Both funds favour Singapore, with large overweights there, while Aberdeen also has significant overweights in the Philippines, Indonesia and Thailand.
Devan Kaloo (pictured), Aberdeen’s head of emerging market equities, says that the fund house is very positive towards the latter market despite its political problems of recent months.
Aberdeen portfolios remain underweight China due to concerns about the state of the banking system, he explains. Although he doesn’t expect the banking crisis feared by many commentators, he says that bad loans made by those banks could come back to hurt them in the coming years.
In their most recent note to investors, the managers of Scottish Oriental noted that they were finding it increasingly difficult to find companies at attractive valuations.
They also see potential asset bubbles in smaller companies in certain sectors and countries, and warn that the strength of the pound is harming their portfolio.
Last April Martin Lau, director of greater China equities at First State, joined Tulloch at the head of the trust. Tulloch took over management from Susie Rippinghall, who retired.
Scottish Oriental has ongoing charges of 1.04 per cent before the application of a performance fee. Last year total charges were 1.73 per cent.
Aberdeen Asian Smaller Companies has ongoing charges of 1.22 per cent and no performance fee.
