The now 13.92 per cent discount on Hugh Young’s Aberdeen New Dawn investment trust represents a significant buying opportunity given the manager’s approach to the market and long-term track record of outperformance, according to Cantor Fitzgerald’s Charles Tan.
China’s plummeting equity market and slowing growth has been the major catalyst for the recent downturn in global stock markets, with many expecting the volatility to continue given the fears of a ‘hard landing’ in the country’s economy.
According to FE Analytics, the MSCI AC Asia Pacific ex Japan index is down some 25 per cent since its peak in April this year, compared to a 13.60 per cent fall in the wider MSCI AC World index.
Performance of indices since April 2015
Source: FE Analytics
Those losses have led to a huge fall in sentiment towards the region, which has been felt the most in the closed-ended sector thanks to the nature of investment trusts’ structures.
Data from the AIC shows that more than 85 per cent of trusts in the IT Asia Pacific ex Japan sector are now trading on wider discounts than their three-year average, while more than 90 per cent are now trading on wider discounts than their one-year average.
Source: The AIC
One portfolio which has been caught up in this trend is Young’s Aberdeen New Dawn trust, which has long track record of outperformance.
Its discount has been widening for a number of years now owing to some relatively lacklustre NAV performance, but Tan – who is an analyst at the broker – says its current double-digit discount (which is some 5 percentage points wider than its three-year average) is very attractive given the way in which Young has positioned his portfolio. 
While he says investors will need to be able to stomach short-term volatility if they were to buy now, he expects Aberdeen New Dawn to replicate its strong long-term returns in the future.
“Aberdeen New Dawn is one of the longest running Asian equity trusts, with a history spanning over 25 years,” Tan said.
“Aberdeen’s unconstrained approach and quality focus has historically delivered strong returns for the long-term investor and, in our view, should continue to do so in spite of short-term market volatility. Aberdeen New Dawn has outperformed the average open-ended fund in the Asia Pacific ex. Japan sector, including its sister OEIC, and also has the highest dividend yield in its respective sub-sector.”
He added: “As the world enters a new economic phase – one characterised by higher benchmark rates and slower global GDP growth – we believe Aberdeen’s quality bias could result in a better risk-reward profile going forward.”
While Young (pictured) and his team at Aberdeen are seen as some of the leading lights in the Asia Pacific region, their quality growth approach to the market (along with regional allocations) have hindered returns over recent years.
FE data shows, for example, that Aberdeen New Dawn – thanks to its performance so far this year, in 2013 and 2011 – is now underperforming against its sector average and MSCI AC Asia Pacific ex Japan benchmark over one, three and five years.
Performance of trust versus sector and index
Source: FE Analytics
It is a similar story with many of Aberdeen Asia Pacific and Global Emerging Markets portfolios as well.
Not only did many of Young’s favoured high quality companies become expensive due to their prolonged period of outperformance, but the manager has also remained severely underweight mainland China which, although has helped performance over recent months, has hurt the trust over the last three years or so.
Nevertheless, while many experts believe a value approach will be the best suited to emerging markets over the coming years due to slowing economic growth, Tan says investors can expect the Aberdeen strategy to bounce back.
“While this strategy can give rise to periods of underperformance when the style falls out of favour with investors, we believe [Aberdeen’s] willingness to deviate meaningfully from the benchmark will be a key factor in driving outperformance in the future,” Tan explained.
FE Data shows that has certainly been the case in the past.
Our data on the sector average dates back to January 1995 and over that time Aberdeen New Dawn has beaten its peers by 150 percentage points with its gains of 413.99 per cent. While not the most consistent, it has also outperformed in nine out of the last 15 calendar.
Performance of trust versus sector since Jan 1995
Source: FE Analytics
Given the recent falls, Tan thinks that not only will the trust’s current discount begin to narrow but that decent NAV performance is on the cards thanks to the lower valuations on offer.
“[Young] has taken advantage of the sharp declines to initiate new positions in stocks that he has been watching closely where valuations have reached attractive levels, and added to positions where they have been indiscriminately sold by the market (e.g. Singaporean banks and property companies),” Tan said.
“The manager also points out that while the outlook for sectors such as basic materials may be tricky, the manager of the trust’s investee companies have reacted well and done their best to maintain profitability, even in the face of challenging circumstances.”
“In many cases, Asian stocks seem to be pricing in another 2008-type crisis, when, in the manager’s view, the probability of such a precipitous collapse is highly unlikely, and stocks are therefore inexpensive.”
Young is currently overweight India, Hong Kong and Singapore in his trust and is underweight China, Australia and Korea. His largest sector bets are towards more consumer orientated industries. Aberdeen New Dawn yields 2.6 per cent and has ongoing charges of 1.09 per cent.
