Templeton Emerging Markets Investment Trust, JP Morgan Emerging Markets and Aberdeen Emerging Markets are broker Stifel’s three favourite investment trusts from the sector.
Emerging market trusts have performed well over the past couple of years against their peers in the much larger IT UK All Companies sector, particularly in the wake of the EU referendum.
Performance of sectors over 2yrs
Source: FE Analytics
As the chart above shows, the average IT Global Emerging Markets Equities trust is up by 49.04 per cent compared with an 18.7 per cent rise for the average UK equities fund.
Anthony Stern, analyst at Stifel, said there were several strong performers in the emerging market trust sector that are now trading at wide discounts.
He said: “Over the last two years, the emerging market trusts have delivered strong returns yet they continue to languish at double-digit discounts as investors continue to focus on developed markets.
“We continue to believe the region, which trades on unchallenging multiples, should continue to perform well.”
Stern added: “Whilst discounts have narrowed across the trust universe, the discounts on the emerging funds have generally stayed in double digits, despite the region significantly outperforming developed world markets over the last two years.
“Valuations across the emerging markets space do not look stretched and the collapse in the commodity prices combined with rise of the tech sector has meant the region is no longer just a commodity play.”
Stern said the double-digit discounts and solid performance had led Stifel’s analysts to conclude that there is good value in the sector.
Below, FE Trustnet considers the brokerage’s top three picks from the emerging markets trust sector.
Templeton Emerging Market Investment Trust
The Templeton Emerging Market Investment Trust (TEMIT) is one of two trusts singled out by the analyst for strong performance and double-digit discount.
The £2.1bn closed-end fund has been overseen by lead manager Carlos Hardenberg since 2015 alongside co-manager and emerging markets veteran Mark Mobius and supported by senior research analyst Chetan Sehgal.
One of the reasons for highlighting the fund, said Stern, was for its exposure to the technology sector, which has become an import part of the broad index.
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“Over the last three years the technology sector has gone from being the third largest sector in the MSCI Emerging Markets index to being the largest, accounting for 27 per cent of the index [at 31 August 2017],” the analyst said.
“Funds such as TEMIT, who have embraced the rise of the tech sector have been the strongest performers as the MSCI Tech sector outperformed the broader index by over 50 per cent over the last two years.”
He added: “Carlos Hardenberg, lead manager of TEMIT, believes the emerging markets technology story has further to go and that we are in the midst of a secular long-term tech growth story.”
Over three years, the trust has returned 27.55 per cent, compared with a 32.33 per cent rise in the benchmark and a 20.46 per cent gain for the average IT Global Emerging Markets Equities investment trust.
Performance of trust vs benchmark & sector over 3yrs
Source: FE Trustnet
According to the Association of Investment Companies (AIC), TEMIT is trading at a discount of 12.9 per cent and has an ongoing charge of 1.21 per cent.
JP Morgan Emerging Markets
Next on the list is the four FE Crown-rated JP Morgan Emerging Markets trust managed by long-term manager Austin Forey, who has run the fund since 1994.
Forey takes a long-term approach to investing in the emerging markets countries and sectors with the “most attractive opportunities for growth”.
“Over the last three and five years, the trust has been the best performing generalist emerging market fund of those we cover, delivering an NAV total return of 48 per cent and 71 per cent [to 4 September 2017] as the manager's approach of focusing on quality companies continues to deliver,” Stern noted.
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“The manager, Austin Forey, has over 20 years of experience managing the trust which has outperformed in eight of the last 12 calendar years. We remain positive about his well-defined investment philosophy and the fund’s double-digit discount.”
Discount/Premium over 5yrs
Source: FE Analytics
According to the AIC, the trust is trading at a discount of 12.8 per cent and has an ongoing charge of 1.16 per cent.
Aberdeen Emerging Markets
The final trust highlighted by Stifel’s Stern is Aberdeen Emerging Markets, which he said has undertaken “a number of positive structural changes”.
Although the fund faces a continuation vote next April, the analyst highlighted several measures management have taken to restructure the fund and reduce the discount.
In July, Aberdeen announced that it would cut the management fee from 1 per cent of NAV to 0.8 per cent and introduced a quarterly dividend to be paid out of capital and income – part of a growing trend among managers.
This year’s changes follow a change in management in the past three years and a restructuring of the investment process.
“Since Bernard Moody and Andrew Lister were appointed as lead managers, the fund has kept pace with the benchmark having previously underperformed for a number of years,” the analyst noted.
“Over the last three years the fund has delivered an NAV total return of 36 per cent compared with 32 per cent from the MSCI Emerging Markets index.
“The fund continues to trade at a 13 per cent discount, but the improved performance under the new managers, combined with the announced changes gives hope that the discount will narrow or more aggressive commitments will have to be made in order for the fund to pass its continuation vote.”
According to the AIC, the trust is trading at a discount of 12.2 per cent and has an ongoing charge of 1.1 per cent.