Manager change no threat to Edinburgh Dragon Trust

However, when a fund is run by a team with a defined approach, albeit with a named lead manager, investors have less cause for concern, and this is very much the case with Edinburgh Dragon's manager Aberdeen. The Asian team follows a defined process devised by leader Hugh Young, which over the long term has resulted in great success for a number of Aberdeen's Asian funds.

Edinburgh Dragon's board says: "[Edinburgh Dragon] is managed by Aberdeen's Asian equities team, whose practice has always been to cross cover research and portfolio responsibilities. With 41 full-time equity managers (10 of whom have over 10 years' experience with Aberdeen alone) it is led by Hugh Young and is otherwise unaffected by this change."

Some investment trust analysts agree. "Aberdeen has a team approach for the management of its Asian mandates and its Asian equities team is extremely well resourced," says Simon Elliott, head of investment trust research at Winterflood Securities. "Consequently we would not expect Andrew Gillan's departure to have any significant impact on the investment trust."

Analysts at Numis Securities say: "We do not believe that the management change should be of concern to shareholders of Edinburgh Dragon. Aberdeen's Asian equities team has a well defined investment process, seeking quality companies trading at reasonable valuations."

Perhaps of more concern is the investment trust's recent performance, which has not been so strong. The trust recently reported in its final results that over the year to 31 August 2013 its share price and net asset value (NAV) total returns had underperformed its benchmark, MSCI All Country Asia (ex Japan) Index.

Over three and five years its share price does beat the benchmark, though not the average for the Asia ex Japan investment trust sector.

The under performance is largely because the trust has a very underweight position in Chinese equities, and Taiwan equities, while it is overweight Singapore and India.

"It is worth remembering that our exposure to individual markets results from where we find the best companies," explained the trust's managers in its recently published annual report. "In China, we have long been apprehensive about the quality of domestic companies and, hence, remain underweight there. This position has hurt performance, as the Chinese stock market was one of the best performers, despite a slowing economy and banking sector worries, while the yuan was Asia's strongest performing currency rising by about 6 per cent against sterling over the period.

In seeking exposure to the Chinese economy we prefer to invest in well established Hong Kong domiciled companies, many of which operate in the mainland. Our overweight position in the territory contributed positively to performance, as the market rallied in tandem with its mainland Chinese counterpart."

Stock selection also contributed to underperformance, an example being Hong Kong property developer Hang Lung Group (10:HKG), which grappled with rising costs and lower residential sales as a result of fewer property launches. "But its core leasing business remained stable, while rental reviews were still positive in China, albeit slower than in the previous year," they add.

Another holding, Jardine Strategic (J37:SES), was weighed down by concerns over its Association of South East Asian Nations (ASEAN) exposure. ASEAN comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam.

Edinburgh Dragon's managers like companies with solid finances, proven management, sustainable business models and strong market positions.

The trust has an overweight position in India because its managers say the country has companies that rank among the best in the region in terms of return on equity and earnings growth. "Quality has always been evident at the company level in spite of the challenging macroeconomic and fiscal backdrop," they say. "This year, however, the performance of corporates was negated by a sliding rupee, which significantly diminished returns. Our holdings had a mixed showing."

Concerns about a potential quantitative unwinding unsettled markets and currencies, with India and Indonesia bearing the brunt.

The trust still has a good long-term track record, with a NAV return of 258 per cent over the past decade, versus 223 per cent for the MSCI Asia ex Japan Index. "During this period, the investment approach has been out of favour, and the performance of other management groups with a similar focus on quality growth stocks, such as First State and Schroders, have also suffered," say analysts at Numis Securities.

Winterflood points out that Edinburgh Dragon's emphasis on quality companies at reasonable values is likely to lead to periods of underperformance, particularly in momentum markets, as happened in 2007 and 2009, while the bottom up stock picking investment approach also creates significant active positions in terms of country and sector allocations.

"Aberdeen's Asian portfolios have struggled this year as a result of a bias to India and the ASEAN nations," adds Mr Elliott. "However, their long-term performance record is very strong due to the team's proven and tested value approach, with a preference for high quality companies that display good corporate governance."

Meanwhile, Tom Tuite Dalton, analyst at Oriel Securities, notes: "The estimated discount to NAV of 8 per cent continues to offer reasonable long-term value. We maintain our positive stance."

Mr Gillan is to join Henderson Global Investors as lead manager of Henderson Asia Pacific Capital Growth Fund (GB0007680183) and Luxembourg domiciled Henderson Horizon Asian Growth Fund (LU0011890851).

Source: Morningstar, *Aberdeen

Source: Morningstar as at 28 November 2013

Top 10 holdings as at 31 October 2013

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