Despite a good historic performance record, more recently Edinburgh Dragon Trust (EFM) had been underperforming other Asian funds and Asian indices. This was partly because its managers focus on what they consider to be quality companies, which resulted in lack of exposure to Chinese technology. Not many Chinese investments met their strict requirements due to this market’s speculative nature, concerns over state intervention and generally low standards of corporate governance. And although internet companies Tencent (700:HKG) and Alibaba (BABA:NYQ) have become increasingly prominent in MSCI AC Asia ex Japan index, the trust’s managers were cautious about their corporate structures and the sustainability of their business models.
Performance improvement
Discount to NAV
Focus on quality
Strong historic performance
Experienced managers
Discount has been wider
But they have recently refined their investment process and review stocks more often, make decisions on them faster and place a greater emphasis on portfolio construction. “Four investment managers were tasked with analysing Alibaba, Baidu (BIDU:NSQ), Tencent and JD.com (JD:NSQ) to re-investigate the investment case,” add analysts at Numis Securities. “As a result, exposure to Chinese stocks has increased significantly, and technology names such as Tencent and Samsung Electronics (SMSD) are now the [trust’s] largest positions.”
This approach seems to be working, as last year and so far this year the trust’s performance has bounced back. Over one and three years, its net asset value (NAV) cumulative total returns are ahead of its benchmark, MSCI AC Asia ex Japan index. Its share price has not done so well over five years, so the trust trades at a discount to NAV of over 10 per cent. But over shorter-term periods the trust’s share price total returns are closer to its NAV returns, so the discount could tighten further if the good performance continues.
The trust’s managers have not otherwise changed their investment process and continue to look for quality companies that appear to offer good value. When assessing quality they consider a company’s management, business focus, balance sheet and corporate governance record. And this has also been helpful recently: over the first half of the trust’s financial year, to 28 February 2019, its NAV total return was a fall of 1.1 per cent – less than its benchmark’s 3.5 per cent fall. The trust’s chairman said that performance “benefited from the more conservative approach, focusing on quality companies with solid fundamentals and robust balance sheets. These characteristics served the [trust] well as defensive stocks returned to favour amid the market turbulence from the autumn”.
James Carthew, head of investment companies research at QuotedData, adds: “The more uncertain world that we find ourselves in is favouring Aberdeen’s style of focusing on quality. This is [being manifested] in improved performance for Edinburgh Dragon.”
During July, the trust’s managers topped up holdings that continued to demonstrate quality and resilience. “We topped up Tencent, given encouraging trends from its fintech and cloud segments,” they said. “We also upped our holding in Ping An Insurance (601318:SHH), which has leveraged on technology to build a robust financial supermarket, underpinned by a robust life insurance franchise. And we raised our exposure to India’s Ultratech Cement (ULTRACEMCO:NSI). Integration of its acquired assets has largely been completed, while its management expects demand growth to remain healthy.”
Edinburgh Dragon is one of the larger and more liquid Asian investment trusts, with a market cap of over £500m. And its ongoing charge of 0.8 per cent is the lowest in the Association of Investment Companies (AIC) Asia Pacific sector and cheaper than that of most Asia ex-Japan active open-ended funds.
There is no guarantee that the trust will continue to perform well or that its discount to NAV will tighten further. And this is not the widest discount at which it has traded in recent years. For example, it has widened out to a discount of over 14 per cent during the past three years.
However, the trust has traded at tighter discounts and if it continues to perform well investors should benefit from share price appreciation – even if the discount doesn’t tighten. And Edinburgh Dragon’s asset allocation, experienced management team, rigorous investment process and relatively low charge suggest it is well positioned to make good returns over the long term. Buy.
Edinburgh Dragon Trust (EFM)
PRICE | 411p | GEARING | 103% |
AIC SECTOR | Asia Pacific | NAV | 458.1p |
FUND TYPE | Investment trust | PRICE DISCOUNT TO NAV | 10.30% |
MARKET CAP | £528m | YIELD | 1.00% |
No OF HOLDINGS | 66* | ONGOING CHARGE | 0.8%* |
SET UP DATE | 07/09/1987** | MORE DETAILS | www.edinburghdragon.co.uk |
Source: Winterflood as at 17 September 2019, *Aberdeen Standard Investments, **Morningstar
Performance
Fund/benchmark | 1 year total return (%) | 3 year cumulative total return (%) | 5 year cumulative total return (%) |
Edinburgh Dragon NAV | 16 | 39 | 58 |
Edinburgh Dragon share price | 16 | 41 | 52 |
Asia Pacific investment trust average NAV | 9 | 38 | 68 |
Asia Pacific investment trust average share price | 9 | 42 | 69 |
MSCI AC Asia ex Japan index | 5 | 32 | 59 |
Source: Winterflood as at 17 September 2019
Top 10 holdings (%)
Tencent | 7 |
Samsung Electronics Pref | 5.2 |
Taiwan Semiconductor Manufacturing | 4.3 |
Ping An Insurance | 3.5 |
AIA | 3.2 |
Housing Development Finance | 3.1 |
China International Travel Services | 2.9 |
Oversea-Chinese Banking | 2.9 |
Bank Central Asia | 2.8 |
Tata Consultancy | 2.5 |
Source: Aberdeen Standard Investments as at 31 July 2019
Geographic breakdown (%)
China | 29 |
India | 16.3 |
Hong Kong | 11.9 |
Singapore | 10.2 |
Korea | 7.4 |
Indonesia | 6.4 |
Taiwan | 5.1 |
Thailand | 3.1 |
Philippines | 3 |
Vietnam | 1.7 |
Sri Lanka | 1.7 |
UK | 0.8 |
Malaysia | 0.7 |
Myanmar | 0.4 |
Cash | 2.3 |
Source: Aberdeen Standard Investments as at 31 July 2019