Best choice for Asian growth

A good example is IC Top 100 Fund Edinburgh Dragon Trust (ticker: EFM), which has massively outperformed its benchmark, MSCI AC Asia ex Japan Index, both in terms of share price and net asset value (NAV) over one, three and five years. It has also beaten most of the trusts in the Asia Pacific ex-Japan investment trust sector over these periods.

Fund research company Morningstar gives the fund its top ratings - gold and five stars.

"We think Edinburgh Dragon ranks among the best choices for Asian equity exposure," says Szymon Idzikowski, analyst at Morningstar. "The (investment) process is one of the attractions here. The management team follows a firm-wide process that emphasises quality, growing companies that have the right management to deal effectively with that growth. They consider quality companies to have sustainable, competitive business models; strong balance sheets; and high returns on assets and capital. They look for management that carry the right skills to grow a company for the benefit of shareholders and are prepared to be patient and wait for the growth. Overall, we think there's much to like here: an experienced and well-resourced team with a tried-and-tested process and a strong risk/return profile."

The lead manager is Andrew Gillan, but Aberdeen runs its Asian funds using a team approach, led by highly regarded manager Hugh Young. The same team runs a number of Asian funds, which have performed well over the years.

Buying at the right price is also important. The investment team calculates this by assessing key financial ratios, market, peer group and business prospects. Aberdeen says that by taking advantage of the inefficiencies that arise in Asian markets they often invest at a price well below fair value. They avoid investing at excessively high valuations.

The team also has an eye to risk, so meeting and getting to know companies is an important part of the investment process.

The trust is unconstrained so can vary widely from its fund peers and the index. For example, it is very underweight China as its managers have not found many companies they consider to be sufficiently high quality (7.4 per cent of assets in contrast to 23.2 per cent for the index), while it is very overweight Hong Kong and Singapore.

The trust has a very low turnover rate of holdings at less than 10 per cent in most years, which helps to keep trading costs low. The trust's managers aim to back companies for the long term which can deliver earnings growth well into the future, although regularly take advantage of share price movements to top-slice and take profits, or use share price weakness to get more exposure to shares they like.

The trust, on a discount of 10.57 per cent is trading wider than its 12-month average of 9.18 per cent, so it could be a good time to get in.

Because of the trust's emphasis on investing in quality shares it could get left behind when poorer quality names rally, but this means it falls far less when things are going down, leading to strong returns in the long term. No one knows where China is going, but Aberdeen's Asian equity team has proved it knows where to find the right companies. Buy.

Source: Morningstar, *Aberdeen.

Performance

Performance data as at 26 October 2012

*Cumulative share price return.

Top 10 holdings (%)

Geographic breakdown (%)