Buy Aberdeen Asian Smaller's top returns at a rare discount

However, windows of opportunity occasionally present themselves when the trust moves back to a discount for reasons including the area it invests in is out of favour, rather than because there is a problem with the trust. Opportunities are currently presenting themselves in emerging markets and Asian investment trusts as investors are not keen on these areas. For this reason, last week we tipped IC Top 100 Fund Utilico Emerging Markets (UEM) (read the tip)

But another IC Top 100 Fund which has experienced a wide move is Aberdeen Asian Smaller Companies Investment Trust (AAS). It had been trading on a premium but has moved to a discount of 1.69 per cent in contrast to its 12 month average premium of 3.66 per cent.

This is despite a strong performance record, with the trust beating its benchmarks, MSCI AC Asia Pacific ex Japan index and MSCI AC Asia Pacific ex Japan Small Cap index by a considerable amount over one, three and five years.

Aberdeen Asian Smaller Companies has also beaten the average Association of Investment Companies Asia ex Japan sector investment trust over this period.

This is in line with the trust's objective of maximising long-term total return to shareholders from a portfolio of smaller quoted companies with a market cap of up to about $1bn. We included it in the IC Top 100 Funds because of its outstanding performance but noted that it often trades at a premium, so this could be an opportune moment to get into this trust.

Aberdeen Asian Smaller Companies is run by Aberdeen Asset Management's Asian equities investment team led by Hugh Young, considered to be one of the best.

The team selects shares by estimating a company's worth in two stages, quality and then price. They define quality in reference to:

■ management of the company

■ business focus

■ balance sheet; and

■ corporate governance record.

They interview the management of every company before they invest, as they believe the smallest details can make the biggest differences. Calculating the price is a more technical process, which includes key financial ratios, market peer group and business prospects.

Managing risk is also key to the investment process and an independent performance and risk team ensures that portfolios behave as Aberdeen says they will. But they say that risk is controlled most effectively by having a thorough knowledge of every company they invest in, so focus on ones they understand well and offer good value.

Aberdeen Asian Smaller Companies avoids investment in China as its managers prefer to get exposure to this area via Hong Kong listings. It also does not invest in Taiwan as its managers say they cannot find any companies there that meet their quality criteria. But otherwise holdings are largely selected according to individual company merits rather than sector considerations.

Due to the trust's focus on smaller companies its returns from year to year can be volatile, while over very short-term periods performance isn't always as strong. But if you have a long-term investment horizon and high risk appetite, now is a rare opportunity to invest in one of the best Asian equities funds at a discount. BUY.

Source: Morningstar, *Aberdeen

Morningstar as at 12 August 2013

TOP TEN HOLDINGS as at 30 June 2013

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