Eastern promise at a reasonable price

You can achieve this using an Asia-including-Japan vehicle - and if that vehicle is an investment trust, you'll get the added benefit of a fat discount to net asset value. There is less choice - just three trusts live in the Association of Investment Companies' (AIC) Asia including Japan sector, as opposed to 15 in Asia ex Japan. But analysts at Oriel Securities think the sector offers great value.

Of the three, Aberdeen All Asia is the best performer. The trust has outperformed sector peers Martin Currie Pacific and Witan Pacific over three and five years, both in terms of NAV and share price performance. It's also beaten its benchmark, the MSCI All Countries Asia Pacific index, and has made far more than Japan-only trusts or indices over these periods (although Japan has pulled ahead over one year).

It has a strong management team under Hugh Young and currently trades on a discount to net asset value (NAV) of nearly 15 per cent.

The fund aims for capital growth and has been run by Aberdeen Asset Management since 2006. Aberdeen, along with First State, is one of the best Asian equity managers.

The trust's managers select shares on their own merits rather than by sector or geography. No stock is bought without the investment team meeting the company management and conducting a substantial amount of due diligence. The team judges company quality by reference to management, business focus, the balance sheet and corporate governance. An ideal entry price is calculated by reference to key financial ratios, the market, the peer group and business prospects.

The trust has a long-term investment approach but takes opportunities offered by anomalous price movements to add to positions. Examples include Japan earlier this year, when the stock market fell after the earthquake, and other Asian positions more recently following market falls.

Macroeconomic or sector factors are secondary in the portfolio's construction, with diversification, rather than formal controls, guiding stock and sector weights. Aberdeen's performance and investment risk unit monitors portfolio positions and reports monthly to Aberdeen All Asia's managers.

The investment trust currently has a high ratio of debt relative to its assets, known as gearing. While this gives returns an extra boost if the shares it invests in do well, it can also magnify losses when investments don't suffer and so raises the potential for volatility.

Aberdeen All Asia levies a performance fee of 15 per cent of the out performance against its benchmark. This is capped at 0.25 per cent and is only payable if final NAV exceeds the NAV on which any performance fee was paid in the previous three years (a practice known as high-watermarking). Because of good performance, the performance fee is frequently invoked, but the total expense ratio is still reasonable at 1.3 per cent, helped by the fact that the annual management fee is only 0.75 per cent.

Japan's stock market has endured two lost decades, and this has inevitably dragged on performance when compared to Asia ex-Japan funds, which have benefited from a substantial re-rating of Asian markets. However, if you believe things are changing in the land of the rising sun, this is unlikely to be a concern. What might be is that this is a small fund, with a value of just £41.4m, so its shares may not be as easy to buy and sell as those of larger brethren. Still, a strong management team, a fine track record and a deep discount to net assets should be ample reward for the risks. Buy.

Source: Morningstar, *Aberdeen Asset Management.

Performance data as at 24 October 2011.

TOP TEN HOLDINGS as at 30 September 2011

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