The beauty of investment trusts is that you can occasionally buy £1 of assets for 90p or less.

Some trusts trade on a discount for a good reason such as investing in illiquid assets, namely companies where it would be difficult for the trust to sell its holdings quickly.

But a few trusts trade below the value of their assets for no obvious reason, which creates a good place for bargain hunters to search. That’s certainly the case with quite a few trusts focused on Asia Pacific (excluding Japan) and one stands out from crowd.

Asia Dragon Trust (DGN) trades on an 11.3% discount to net asset value, wider than its 10.4% average discount over the past 12 months, according to Winterflood data. That’s also the widest discount of all the six Asia Pacific ex-Japan trusts on the UK stock market with the group trading on an average 5.5% below net asset value.

OUTPERFORMANCE TRACK RECORD

Managed by Aberdeen Standard Investments, Asia Dragon Trust has had a decent performance over the years, beating its MSCI AC Asia ex-Japan benchmark on a one, three, five and 10-year basis. Its ongoing charges are 0.89%.

Its investment style of focusing on quality companies is not in vogue at present, perhaps offering one explanation why the trust’s shares are trading on a wider than normal discount. Many investors are currently chasing value-style investments.

Shares believes now is an ideal time to load up on world-class companies and the trusts and funds that invest in them, as valuations could be cheaper. Asia Dragon Trust looks like an ideal investment to tuck away for the long term.

There are plenty of reasons to have exposure to Asia Pacific in your portfolio, including strong economic growth potential which should create a positive environment for companies to grow earnings. In turn, earnings growth will drive share price growth.

HOW THE TRUST DIFFERS

Admittedly, the trust’s top holdings feature in many Asia-focused funds, including semiconductor group TSMC, Chinese internet giants Tencent and Alibaba, and Indian housing finance group HDFC.

You may therefore wonder what separates Asia Dragon Trust from other funds in its space. Co-manager Pruksa Iamthongthong says the distinction can be found in holdings beyond the top 10 and the weightings for the biggest positions.

‘Yes, our top holdings are similar to other Asia-focused funds, but the biggest positions are quite concentrated. In the next layer you’ll find some differences to other funds, such as quite a few onshore domestic names in China.’

One example is China Tourism Group Duty Free which Iamthongthong says has done very well for the investment trust. The company is one of the biggest duty-free operators in the world, its shares are up 120% in the past 12 months and it was the eleventh biggest position in Asia Dragon Trust’s portfolio as of 28 February 2021.

‘International travel stopped last year due to Covid. As a result, the Chinese government tried to boost domestic consumption,’ explains Iamthongthong. ‘If you look at the duty-free industry globally, lots of it is driven by Chinese spending, so the Chinese government lifted the cap on duty free goods and widened the variety of products that you could buy. China Tourism Group Duty Free is a simple story, and a company that will benefit from economies of scale.’

Asia Dragon Trust recently took a position in Tongcheng-Elong to play the growth in domestic travel. This is the biggest online travel agency by monthly active users in China, offering air, train and bus tickets as well as hotel bookings.

GROWTH OPPORTUNITIES

Another Chinese domestic stock owned by Asia Dragon Trust is Nari Technology which makes power grid automation and industrial control products. Iamthongthong says the power grid in China needs to be upgraded as the percentage of renewable energy goes up, creating a positive backdrop for Nari.

Adrian Lim, fellow co-manager of the investment trust, points to Indian company Info Edge as an example of a stock which has significant opportunities to grow earnings. ‘India’s internet market is years behind, with slower adoption rates. But the opportunity for scaling up means there is a longer lifespan for successful businesses. Info Edge is a nice company with a leading position in multiple segments.’

Info Edge describes itself as India’s ‘premier online classifieds company’ in recruitment, matrimony, real estate, education and related services, and says it is one of the few profitable pure play internet companies in the country.

MARKET LEADERS

Asia Dragon Trust is focused on investing in market leading businesses, making this investment trust an ideal addition to a diversified investment portfolio.

You’ve got two fund managers, supported by significant resources within Aberdeen Standard, making informed decisions about which are the best companies to own across Asia and whether it’s worth having greater exposure to certain ones.

‘Strong balance sheets are key for the investment team, as they bring resilience in tough economic times and give companies options for investment,’ says Thomas McMahon, an analyst at research group Kepler.

‘The team look for resilient, repeatable earnings streams and companies which can consistently grow their revenues at an above-average rate and with limited variability through the cycle, at least compared to other companies in their industry.’

Lim says he is cautious about the market outlook near-term. However, he is confident that stocks in the trust’s portfolio should deliver attractive earnings growth and do well in an inflationary environment.

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