Tag Archives: emerging markets

Stocks in Focus: Aberforth Smaller Companies Trust

This week I am looking at Aberforth Smaller Companies Trust, a FTSE 250-listed investment trust that invests predominantly in smaller UK companies. Aberforth released its results to 31 December 2018 this week, which reported a 15.4% decrease in net asset value per share compared to the previous year, although it performed in line with its benchmark – the Numis Smaller Companies Index. Chairman, Paul Trickett, attributed the negative return to weakness in the UK stock market last year, particularly within the smaller companies segment. Brexit, trade wars, politics and slowing economic activity all weighed heavily on markets and ultimately on the performance of the fund.

Aberforth’s portfolio is weighted approximately 60% towards domestic earners and there was a notable split in the fund’s performance between firms that derive the majority of their revenue from the UK economy and those more dependent on overseas income. The investment trust attributed this to the “overhang” of Brexit. Companies that generate revenue domestically underperformed their overseas earner peers by 24%, reflecting the effect of sterling weakness.

After a challenging 2018, Aberforth looks forward with a degree of optimism. The fund is run by a team of six experienced investment managers, each specialising in a group of sectors, and picks stocks based on the Trust’s value style of investing. This approach focuses on quality companies that are undervalued and often out of favour with investors, offering the opportunity for greater returns when the company returns to favour. This management style has remained consistent and the strategy has proven successful over the long term. Political and economic uncertainty will create buying opportunities as good quality smaller companies become cheaper. It can be difficult for investors to identify small companies with good prospects and the use of collective funds for diversified exposure to this part of the market may be a good solution.



Emerging Markets

This week I take a look at Emerging Markets. Having enjoyed a strong 2017, Emerging Market equities have been firmly out of favour this year on the back of persistently negative news flows relating to economic, political and market developments.  In particular, crises in Turkey and Argentina have prompted concerns of contagion risk. More broadly, Emerging Markets have come under pressure from rising trade tensions and a strengthening US dollar, which is being supported by the fact that the US Federal Reserve is raising interest rates relatively quickly compared to other major central banks.

The reason that US dollar strength is seen as a negative for Emerging Markets is that their economies typically borrow in dollars whilst paying the interest out of local currency profits, leading to a potential funding mismatch in the event of dollar strength. In the late 1990s, this situation led to defaults by Brazil and Russia, followed by a crash in the Asian “tiger” markets. Since then lessons have been learnt and central banks in these countries have kept better controls over borrowing in US dollars. However, it is worth noting that overall borrowing across all Emerging Markets ballooned from $21 trillion in 2007 to $63 trillion in 2017.

Intriguingly, this negative sentiment has left Emerging Market equities looking cheap both in absolute and relative terms. In aggregate, they now trade at a historically large discount to Developed Market equities, despite having a superior long-term growth outlook. In 2018 and 2019, for example, Emerging Markets are expected to grow roughly twice as fast as Developed Markets. This looks attractive for investors with a long-term focus that will be able to ride out further short-term weakness in the event that US/China trade frictions escalate and/or the dollar strengthens further.


Points of View: Schroder Asia Pacific

This week I am looking at Schroder Asia Pacific, an investment trust which invests in equities listed in the Asia Pacific region excluding Japan. The fund has been managed by Matthew Dobbs since inception in 1995 and has become the largest trust in the sector.

Performance of the fund has been very strong over the last 3 years, 51% vs 29% for the MSCI Asia ex Japan benchmark, which has been driven by large weightings to Chinese and technology based stocks.

Chinese equities make up around half of the portfolio (this is c3.7% overweight compared to the benchmark) and this has been steadily increasing over the last couple of years. Mr Dobbs gains exposure to these stocks through the Chinese and Hong Kong stock exchanges, traditionally preferring the Hong Kong listed companies due to tougher listing requirements and better corporate governance. Mr Dobbs feels that this weighting is justified due to favourable economic conditions and a shift towards services and the consumer.

Technology is the largest sector weighting in this fund at 34%. Over the last 18 months the technology sector has seen strong performance and those listed in Asia have been no different. Despite the strong rise in the share price of companies like Alibaba and Tencent (the Chinese equivalent of Amazon and Facebook respectively), Mr Dobbs feels that these companies will continue to be the key beneficiaries of the technological disruption going on in the region. Tencent already has around 320m users who spend more than 4 hours a day on the platform.

Arguably, the large weightings to China and technology increase the risk of the fund. However, over the 23 years since inception, Mr Dobbs and his team have established a great track-record of identifying drivers of growth for the fund to benefit from.


Emerging markets – Is the return to favour sustainable?

For the last several years the emerging markets story has been one of frustration and disappointment, with the sector under-performing its counterparts in the developed world by a wide margin. In January all of that changed and the sector has been one of the best performers so far this year. To put some numbers on this, the broad EMG sector has delivered a total return of around 8%, against which the developed markets have struggled to produce returns of 2-4%.

The main driving force behind this has been the sharp upward spike in oil and commodities prices. No surprise there but it is interesting to note the very high degree of correlation – around 92% – that has prevailed. Much of the fortunes of the emerging markets are also tied up in currency movements, with the strength or weakness of their currencies relative to the US$ having a huge influence on their ability to make progress. A third influence, but one that varies from country to country, is the political climate. This is underlined by the turmoil presently occurring in Brazil which is attracting nervous sellers and opportunistic buyers in equal measure

It remains to be seen whether the rally will continue and the dramatic upturn in emerging markets suggests that investors may be taking much on trust. For markets to progress from here it will take continuing currency strength, lower inflation and a sustained improvement in company earnings.

For more information, contact Alastair MacDougall on 01223 720255 or visit http://www.nwbrown.co.uk/investment-management/