2015 Investment Trust Awards: Best Regional Trusts
12th May 2015 13:40
by Fiona Hamilton from interactive investor
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Best Japan Trust: Baillie Gifford Japan
The two Baillie Gifford-managed trusts continue to dominate this sector and wins the award this year, thanks to better returns over the last 12 months.
Manager Sarah Whitley is head of BG's Japanese team, which visits the country regularly and conducts around 500 company meetings a year.
She says the big recovery in Japanese share prices has been largely matched by earnings growth, so there is still value on offer, especially as the outlook remains promising.
On the economic front, she says investors were initially over-optimistic about prime minister Shinzo Abe's reforms, then began to lose heart.
Recent economic figures have been disappointing, but there is mounting evidence that the economy is moving in the right direction. Unemployment is minimal and wages in some sectors have started to rise, which should boost consumption.
Reshoring (where offshore activities are repatriated) is continuing, land prices in the major cities are rising, and inward tourism is booming.
Lower energy prices are a boon for corporate Japan, and so is growth in the US, which has regained its position as Japan's biggest export market.
Just as importantly, Whitley expects much-needed improvements in corporate governance to release value for shareholders.
The changes have been vigorously encouraged by Abe, for instance through the launch of the JPX400 index which excludes companies that do not meet global investment standards.
Whitley remains largely focused on medium to smaller companies, because they tend to have superior growth prospects and less demanding ratings.
BGJ has benefited from being one of the most highly geared trusts in its sector, and Whitley is keen to keep it that way. Although it hedged the yen in the 1990s, it has not done so since, and Whitley says it is unlikely to do so now.
Highly Commended: Baillie Gifford Shin Nippon
BGJ's sister focuses predominantly on much smaller companies. However there is currently a 27% overlap in their portfolios, including a variety of companies capitalising on internet innovation, such as Start Today, Cookpad and CyberAgent.
As with BGJ, Shin Nippon's portfolio turnover is barely in double figures, returns have been boosted by relatively high gearing, and it does not hedge the yen.
Manager John MacDougall searches for "the most exciting up-and-coming growth businesses in Japan", and is pleased that "hungry young business founders with big ambitions" can now be found outside the internet and digital sectors, in areas such as robotics and biotechnology.
He reports a significant increase in IPOs of businesses that operate in innovative and expanding parts of the economy, and expects to continue to find opportunities to back companies which depend more on the quality of their management and their business strategies than on the macro-economic situation.
Best European Trust: European Assets
trust did well to retain this award despite a tough 12 months for European medium and small companies.
Its focus on quality companies helped it outperform during the autumn market setback, and a flurry of takeovers contributed to a strong showing as the market recovered its nerve. EA's exceptionally high exposure to the soaring Irish stock market has also boosted returns.
Manager Sam Cosh is strongly committed to the investment philosophy and process of F&C's 10-strong European investment team and says he and his fellow smaller company specialists gain much from working closely with all their colleagues.
"We research companies on a totally bottom-up basis, ignoring market noise and macroeconomics, and not worrying if we appear to be missing out," he says.
"We produce proprietary research for every company, which is vigorously debated by the whole team, and which includes insights from industry experts such as a company's suppliers, customers or former employees."
Up to a third of EA may be invested in deep value or transformation/recovery situations, but the majority is always in quality companies, on the grounds that these offer long-term upside and limited downside.
"We look for companies with high and sustainable returns on capital, strong balance sheets and healthy cash flows. In smaller companies it is particularly important they are run by strong managers who know how to allocate capital appropriately, and who are incentivised so that they benefit or suffer from their decisions."
The trust's gearing has been low recently, partly because Cosh has been busy investing inflows from newly issued shares. However he is guardedly optimistic. "The European economy is fuelled by bank lending, so the ECB's moves should be a powerful stimulus."
One of EA's attractions is its high and rising dividend, paid quarterly. Funded partly from capital, it can be taken in shares rather than cash.
Highly Commended: Henderson European Focus
Since John Bennett took charge in December 2010, has performed consistently well. It retains its highly commended position from last year.
Bennett runs a high-conviction portfolio, with 50 to 60 holdings mainly in larger companies. He likes to focus on a few big themes, and has done well over the last five years from a sizeable exposure to pharmaceuticals, and since 2013 from companies capitalising on the move to "smart cars".
He says HEFT's closed-ended structure allows him to invest in special situations that are too small and illiquid for inclusion in the open-ended funds he runs, but which can provide a useful boost to medium-term returns. Current examples include Tessenderlo Chemie and Veidekke.
Bennett believes his pharma and smart car themes both have further to run, but has recently complemented them with substantial positions in financials and consumer goods. He is braced for another volatile year in European stockmarkets.
Best Asia Pacific Trust: Pacific Assets
has been transformed since First State Stewart (FSS) won the mandate to manage the trust in 2010 and put David Gait in charge.
Under his management, annualised net asset value (NAV) total returns have been nearly twice as good as those of PA's benchmark, the MSCI Asia Free (ex Japan) index. Over three years, it has achieved much the best NAV returns in its sector and has been the only trust to fully qualify for our award in every year.
The whole FSS team is committed to investing in quality companies with high standards of corporate governance, but as head of the sustainability team Gait puts an extra emphasis on finding companies that are benefiting from and contributing to sustainable development.
He says most of his holdings are family controlled, as this means they tend to have 10 to 20-year time horizons. However, it is critical to know the families concerned, and to be confident they will look after minority shareholders.
PA benefited last year from its very high exposure to India, whereas its China/Hong Kong weighting was low. Gait says this is partly because he used to manage an India fund, so has a greater affinity with companies there.
However, it is also because more Indian than Chinese companies are addressing sustainable situations. He is also deeply mistrustful of China's efforts to reform corporate governance.
On the downside, he warns that most Indian companies are now very highly valued, and prime minister Modi's honeymoon must end soon.
It is not just in India where Gait thinks valuations are dangerously high, but across Asia and most of the rest of the developed world. "Stockmarkets have been pushed up by a wall of money and very low interest rates," he says. "Most quality companies in Asia are on price/earnings ratios of well over 40 and even poorly managed companies are often demandingly valued."
Gaits adds: "We have been finding some stock-specific opportunities, but have around 9% in cash waiting to be invested at more attractive valuations."
Highly Commended: Aberdeen Asian Smaller Companies
has bounced back well from its 2013 setback, which was far more pronounced at the share price level (shown in the graph below) than the net asset value level. As a result it is highly commended, just ahead of FSS's , with which it has often vied for the sector award.
Like PA, ASC has done well from its Indian holdings, but has been busy taking profits. Malaysia is its highest weighting at 18.4%, with Hong Kong plus China at a relatively modest 15.7%, followed by Thailand and India at 13.6%.
The Aberdeen team contends that cheaper oil and commodity prices are a good thing as they lower costs for consumers and businesses, but warns that elevated household debt might negate the benefits.
It expects asset prices to be supported over the medium term by continued quantitative easing, but warns that the eventual normalisation of Federal Reserve monetary policy and the US dollar's strength could prove a significant dampener for Asia.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.