Investors looking for anomalies in the investment trust space should cast an eye on one name in the Asian equity income space.

In recent years, Aberdeen Asian Income (AAIF) has generally been the most unpopular of the five trusts in this sector based on how it has typically traded on the biggest discount to net asset value.

However, what’s interesting is the fact it is now the best performing stock in the Asian equity income investment trust space over the past 12 months, helped by having low exposure to China which has been a trouble spot this year.

It has returned 21.3% including dividends versus 16.5% from Invesco Asia Trust (IAT) and 15.9% from Schroder Oriental Income (SOI), according to data from FE Fundinfo.

Aberdeen Asian Income currently trades on a 10.1% discount to the value of its net assets, in line with the level of discount seen a year earlier despite improvement in performance on an absolute basis and relative to its peers.

The trust’s net asset value has increased by 16.3% over the past 12 months – the biggest gain among its peer group – and it offers a 4.1% yield.

WHAT ABOUT THE OTHERS?

Schroder Oriental currently trades on a 2.3% discount whereas Henderson Far East (HFEL) trades on a 2.1% premium, albeit a smaller one than its 12-month average of 2.7%, based on figures from Winterflood.

Invesco Asia is losing appeal with investors with the shares now on the biggest discount in the sector at 10.6%, significantly wider than the 7.2% discount seen five months ago. JPMorgan Asia Growth & Income Trust (JAGI) currently trades on an 8% discount versus a 1.2% premium 12- month average.

TWO TRUSTS HURT BY CHINESE EXPOSURE

Both the Invesco and JPMorgan products have suffered of late because of their exposure to China. A regulatory clampdown on companies operating across the internet and education sectors has spooked the market and led to a general sell-off in Chinese stocks.

Fears that heavy indebted property developer Evergrande could go bust and disrupt the banking, real estate, construction and property sectors has also soured sentiment towards Chinese equities.

The Invesco product has nearly 30% of its portfolio in China-listed companies, with Tencent and Alibaba key holdings, both of which have suffered considerable share prices losses this year (22% and 40% respectively).

The JPMorgan trust has even greater exposure to the country at 34.5%, holding those two internet stocks as well as names such as Yum China and China Resources Land. That weighting is almost in line with the proportion of China in the MSCI AC Asia ex Japan index (38.9%, as of 30 September 2021).

THIS IS WHERE ABERDEEN DIFFERS

Aberdeen Asian Income has benefited this year from having low exposure to China at just 10%. Rather than being spooked by the regulatory pressures and reducing its weighting to the country this year, the low 10% exposure reflects its long-running investment process which does not favour many of the Chinese stocks found in Asian equity trusts and funds.

‘We’ve always been underweight China in this trust,’ says Aberdeen investment director Yoojeong Oh. ‘We don’t own the Chinese internet stocks because they don’t pay dividends. We also don’t buy the Chinese state-owned banks even though they are the highest yielding stocks in the China market – that’s for reasons linked to transparency, governance and regulations.’

Oh says that three years ago, having low exposure to China was ‘painful’ as it caused the Aberdeen trust to lag its peer group as Chinese stocks were in vogue. This performance history, together with very low dividend growth levels of approximately 1% in the past few years, are potential reasons why the trust continues to trade at a wide discount to net asset value.

LACKLUSTRE DIVIDEND GROWTH

Investors who buy income products typically expect to see dividends grow at least in line with inflation, so a mere 1% growth level is unattractive. Oh explains that dividend growth has historically been higher but she has been using some of the income from the portfolio to build up a greater revenue reserves, which can be used to smooth dividends during tougher times in the future.

Aberdeen Asian Income invests in quality companies and has large exposure to Taiwan, Singapore and Australia, being three of the highest yielding markets in Asia Pacific.

It has diversified exposure including Samsung and Infosys in the technology space; Taiwan’s KMC which is a beneficiary of growing demand for e-bikes; and Power Grid of India which is a play on India’s commitment to increase renewables in the country’s energy mix.

Other holdings include Singapore’s Venture which makes widgets for expensive machines. ‘It’s a high margin business, has embedded customer relationships and pays good dividends,’ says Oh. She also invests in various Singapore banks and Australian property companies, both seen as important sources of income.

ASIA FOR INCOME

It’s a good time for investors to be looking at Asia as a source of income. Japan’s efforts to be more shareholder-friendly have been well publicised in recent years, but less appreciated by Western investors are similar efforts by other Asian countries to pay more dividends.

‘Someone investing in a China, India or Southeast Asian fund might be looking for growth rather than income,’ explains Oh.

‘But we are seeing more focus on shareholder returns and that comes in tandem with Asian companies wanting to attract more foreign capital, so they are improving their governance standards, their ESG disclosures and their shareholder returns.’

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