Aberdeen Asian Income could offer cheap income and growth

"Since Flavia Cheong was appointed as head of Aberdeen's Asian equities team around 18 months ago we are starting to see an evolving investment philosophy for Aberdeen Asian Income Fund," say analysts at broker Stifel. "[Its managers appear] to be taking a more active buy-and-hold approach, adding to or reducing investment positions according to market opportunities."

For example, following strong performance they reduced the trust's holding in Venture (V03:SES) at the end of 2017, but in May this year topped it up after its shares fell sharply.

And while the trust's managers used to avoid Chinese companies due to quality and corporate governance issues, they are now increasing exposure to them because they are maturing and starting to pay dividends. The trust's China exposure increased from 5 per cent at the beginning of 2017 to about 9 per cent at the end of May 2018.

Part of the reason for the trust's underperformance of MCSI AC Asia Pacific ex Japan index is because it doesn't hold companies that don't pay a dividend, and these include Chinese internet companies such as Tencent (700:HKG), which has recently helped to drive up the index.

The two other Asian equity income investment trusts – Henderson Far East Income (HFEL) and Schroder Oriental Income (SOI) – have also recently underperformed the regional benchmark for similar reasons. But Henderson Far East Income still trades on a premium to NAV and Schroder Oriental Income trades at around par. "So Aberdeen Asian Income Fund is clearly the value play in the Asian income sector," argue analysts at Stifel.

Aberdeen Asian Income has traded closer to par and at times at a premium, and if its performance returns to form the discount could tighten again. The trust's board also conducts regular share buybacks to try to contain the discount when it is wider than 5 per cent.

In the meantime the trust's shareholders are receiving attractive dividends. In its last financial year Aberdeen Asian Income paid a total dividend of 9p a share, which was fully covered by its income. This was up 2.86 per cent from 8.75p in the previous year, in line with its aim of growing its dividends over time. The trust's board also recently modified its investment policy to allow its managers to write put and call options on underlying holdings, which might be used to support future revenue generation.

Aberdeen Asian Income's ongoing charge of 1.09 per cent is much lower than the 1.95 per cent that Schroder Oriental Income's ongoing charge plus performance fee adds up to. Aberdeen Asian Income doesn't have a performance fee, and its ongoing charge could fall if the value of its assets increase.

It is too early to say whether the changes at Aberdeen Asian Income will improve performance over the long term. And even if they do, it could take some time for investors to recognise this, meaning that there would not be an improvement in its discount to NAV in the short term. And while increasing exposure to China could improve returns, it also increases the trust's risk and potentially volatility.

Because of these risks and uncertainty over whether its performance will improve, Aberdeen Asian Income Fund is not currently ideal as a reliable, core income holding.

But if you have a long-term investment horizon, high risk appetite and large portfolio, you could consider a small allocation to this trust. At some point markets might not be as driven by growth-focused companies, and this trust's managers have historically delivered strong performance in Asian markets via a quality and value approach. If this strong performance returns, Aberdeen Asian Income Fund could prove to be a profitable punt. Buy. LW

ABERDEEN ASIAN INCOME FUND (AAIF)

Source: Winterflood as at 9 July 2018, *Aberdeen, **Morningstar

Performance

Source: Winterflood as at 9 July 2018

TOP 10 HOLDINGS as at 31 May 2018 (%)

Source: Aberdeen Standard Investments

Geographic breakdown as at 31 May 2018 (%)

Source: Aberdeen Standard Investments