Asia is well-placed to deliver strong returns in 2021, with the investment trusts that operate in the region likely to be major beneficiaries.
The Asian markets made a strong recovery from the pandemic in the second half of last year without saddling the incumbent governments with the same cripplingly high levels of debt as here in the West. Economic activity in the region is strong and the broader global economy recovering, with the weak dollar providing further impetus.
Obviously, nowhere is without risk, with the main threat being a resurgence of the pandemic, especially as China is currently grappling with a new outbreak in Hebei province and cases are rising elsewhere in the region. Some of the large tech stocks may also prove to be expensive and susceptible to a pullback.
There are plenty of investment trusts that provide exposure to the region, but the two selected by the analysts at Winterflood for their model portfolio for 2021 are Schroder Asian Total Return (LON:ATR) and the Invesco Asia Trust (LON:IAT). Both should benefit from the strong tailwinds and they should appeal to capital and income investors respectively.
The £530m Schroder Asian Total Return has performed strongly since passing to Schroders in 2013. Its managers invest on an unconstrained basis with a focus on quality stocks, but can also use put options and index futures to hedge out unwanted country and market exposure to isolate the stock specific returns.
They have put together a concentrated portfolio that at the end of November consisted of just 63 stocks with the 10 largest positions accounting for 42% of the assets. Investment is heavily skewed in favour of China, Hong Kong and Taiwan with significant weightings in well-known companies such as Taiwan Semiconductor, Samsung Electronics, Tencent and Alibaba.
ATR is currently trading on a small premium to NAV, but the team at Winterflood believe that this is justified by its strong performance record with a 10-year market-beating share price return of 195%. They like the fact that the mandate gives the manager the scope to protect investors’ capital in difficult market conditions given the uncertainty surrounding the future path of the pandemic.
The £287m Invesco Asia Trust was launched in 1995 and aims to provide long-term capital growth by investing in a portfolio of Asian and Australasian companies. It offers a concentrated exposure that consists of 50 to 60 holdings with the top 10 at the end of November accounting for 47% of the assets.
Like ATR it is heavily skewed in favour of China and Taiwan with both trusts sharing large positions in stocks such as Samsung Electronics, Tencent, Taiwan Semiconductor and Alibaba. The manager has recently taken some profits from the technology and internet companies and reinvested the cash in economically sensitive businesses that are available at attractive valuations.
IAT has consistently traded at a wider discount than its Asian peer group despite the 10-year share price return of 178%. In order to tackle this the board has announced an enhanced dividend policy that will see the trust pay two dividends a year each equal to two percent of NAV. The analysts at Winterflood think that the resulting four percent yield will attract new retail investors and close the 10% discount.