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3. Uncovering Trusts - Invesco Asia Trust (IAT)
32 Plays8 months ago
In this episode, Milosz dives into the bottom-up, unconstrained, contrarian approach of Invesco Asia Trust, which looks for ‘unloved’ investments across Asia with strong fundamentals that are trading at undemanding valuations. He discusses the trust’s current overweight position to China and South Korea, as well as its cyclical bias at present. He also elaborates on the trust’s dividend policy and performance-related conditional tender offer.
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About Uncovering Trusts:
Uncovering Trusts is a podcast run by Edison analysts, released every two weeks. Subscribe to hear analyst interviews on how investment trusts maximise returns while managing risks for investors.
About Edison:
Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: Engage and build bigger, better-informed investor audiences for our clients.
Edison covers 50+ investment trusts. Read about them here: https://www.edisongroup.com/equities/investment-companies/
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Transcript
Introduction to Uncovering Trusts Podcast
00:00:06
Speaker
Welcome to Uncovering Trusts, a podcast by Edison Group, a content-led IR business integrating analyst content, digital targeting, and investor engagement. Each episode will uncover the distinct features and latest developments of a selected listed investment company. So tune in and find interesting investment ideas and to stay on top of what is happening in the investment company sector.
Discussion on Invesco Asia Trust
00:00:28
Speaker
I'm Suki Thompson, Director of Marketing, and today I'm joined by Milos Paps, Director of Investment Trust Content at Edison Group. He will talk about Invesco Aged Trust. Milos, thanks for joining us today. Thanks for having me. Can you maybe start by giving our listeners a high-level introduction for those who are less familiar with the trust?
00:00:48
Speaker
Sure. I think the first thing every investor needs to know about Invesco Asia Trust is that its objective is to provide long term capital growth and income by investing in a diversified portfolio of Asian and Australian equities, normally around 50 to 70 stocks, which represent the manager's highest conviction ideas over the next three to five years. The trust is one of five investment trusts included in the Asia Pacific equity income sector. Three of them have a clear focus on income.
00:01:18
Speaker
In contrast, Invesco Asia Trust has a balanced approach to growth and income and distributes dividends partly out of capital. This is a similar approach to the strategy of JP Morgan Asia growth and income, default peer within the AAC group, which however seems to have a somewhat greater growth bias than Invesco Asia Trust. Thanks. And what do you consider are the unique characteristics of its investment approach?
00:01:44
Speaker
I believe that the key feature of the trust is that it follows a bottom-up contrarian approach, looking for unloved investments with strong fundamentals, but trading at undemanding valuations. Importantly, its unconstrained approach gives its investment managers the flexibility to pick the best ideas across Asia and respond to changing market conditions. Importantly, this strategy has worked in the past as the trust visibly outperformed both its benchmark and the AAC Asia Pacific Equity Income Peer Group average
00:02:14
Speaker
over the last 10 years.
Impact of Performance Conditional Tender Offer
00:02:15
Speaker
And I think that the board and investment manager's confidence in the strategies were illustrated by the introduction of a performance conditional tender offer in 2020, covering the subsequent five years, so to April 2025. This mechanism is structured in such a way that the trust will run a tender offer for up to one-fourth of its issued shares at close to enough, basically at 2% discount enough.
00:02:39
Speaker
In the event that trust fails to outperform its benchmark by half a percentage points per annum over that period. Interestingly, during the three years that already passed, the trust outperformed the benchmark by a considerable 3.3 percentage points per year.
Revised Dividend Policy by Invesco
00:02:54
Speaker
And I think that this superior track record is underpinned by the close to 30 year experience of Ian Hargreaves, the trust manager who's supported by the co-manager Fiona Yang, as well as an experienced team of Asia investment specialists.
00:03:09
Speaker
Thanks, and I understand that the trust has revised its dividend policy in recent years. Can you tell me about that? Yes, that's right. The trust revised its dividend policy in 2020, which resulted in much higher dividend payments, which, as I've already mentioned, are now partly covered by capital gains. For instance, in the last financial year, 57% of the dividend payment was covered by income, and the rest was paid out of capital gains. It now aims to pay dividends twice a year,
00:03:39
Speaker
each payment equivalent to 2% of NAV. So basically it pays around 4% of average NAV per year in dividends. The current discount on NAV means that the dividend yield in reference to the share price is even higher. In the last calendar year, this was 4.4% of opening NAV. And how about ESG? Is there anything worth liking?
Active ESG Approach and Value Creation
00:03:59
Speaker
I guess it is worth mentioning that the Trust's managers prefer an active approach to ESG considerations over simply following an exclusion list. Therefore, the managers are equally interested in buying top ESG performance and active engagement and stewardship with companies which are well positioned to improve their ESG credentials and in turn create additional value.
00:04:23
Speaker
The trust managers look at the ESG profile of an investment through evaluation lens, seeking to quantify the impact of material ESG factors on earnings growth, valuation multiples, re-rating potential, as well as dividend payouts. This in turn feeds into the return expectations and positioning of the respective stock within the trust portfolio.
GDP Growth and Strategy Focus
00:04:43
Speaker
Under what prospective market scenario should the trust perform well?
00:04:49
Speaker
First, I would highlight that GDP growth across emerging Asia may continue to outpace growth in other parts of the world, as the region benefits from several secular tailwinds. The IMF recently forecasted mid-single digit percentage average GDP growth across the region in the coming years, so maybe somewhat below historical growth, but still quite healthy. There are several important themes worth keeping in mind in this context.
00:05:14
Speaker
First, the growing consumer spending driven by the rising income of large Asian populations and expansion of the middle class and urbanization. Secondly, the role of countries such as South Korea and Taiwan in the global tech value chain. Then there is the reconfiguration of supply chains. And finally, green transition, including renewable energy and electric vehicles. For instance, China is expanding its global market share in EVs, thanks to its strong production footprint of batteries for EVs.
00:05:42
Speaker
So do you think that the trust is a good way to bet on these trends?
00:05:47
Speaker
Yes, I would say that Invesco Asia Trust should be a good trust to explore these secular themes, but I want to stress that it is not just a plain vanilla passive play on the region. Its active valuation-aware strategy makes it well positioned to capitalize on valuation discrepancies across Asian markets, seizing on opportunities to buy businesses for less than they are worth. In our research note published in December 2023, we concluded that good stock picking has been an important contributor to the Trust's long-term performance.
00:06:16
Speaker
In this research note, we also highlight that valuations across Asia are now somewhat below historical averages, because corporate earnings start rebounding, but local equity markets remain muted. Asia X Japan markets can't hit rates based on the 1 year forward PE ratio at the 24% discount to global equities, compared to a 10 year average of 16%. Investors should also know that the trust portfolio is designed to have a lower balance sheet risk than the benchmark, and many of its portfolio holdings have net cash.
00:06:46
Speaker
This means that the trust has a quality bias, which, together with the balanced approach to growth and income, help the trust limit its capital losses during market weaknesses.
Adjustments in China and Growth Expectations
00:06:56
Speaker
During a strong bull run, it may not necessarily perform ahead of some of the growth-focused trusts, but it historically delivered attractive competitive returns through the cycle, as I already mentioned, and the trust cyclical exposures may assist returns during a bull market.
00:07:12
Speaker
And what has been happening recently in terms of the trust performance and portfolio positioning? For instance, how has the trust been affected by the performance of Chinese equities? In 2021, the trust managers started gradually closing the portfolios underway to China and Hong Kong.
00:07:30
Speaker
moving to an over-rate position in 2022 to benefit from Chinese reopening story. Well, obviously, investors who expected a quick, strong post-reopening rebound in China are disappointed, but we understand that this was not the base scenario assumed by Invesco Asia Trust managers.
00:07:47
Speaker
China's growth has been impacted by weak consumer demands, affected by the deteriorating local property markets and high youth unemployment, among others. Declining foreign demand and geopolitical uncertainty were additional negative factors last year. That said, it is worth keeping in mind that the IMF still expects China's GDP to grow by a solid 4.6% in 2024, after 5.2% in 2023, so ahead of most Western economies.
00:08:15
Speaker
Moreover, the trust managers believe that after the temporary rarely in late 2022 and early 2023, Chinese valuations returned to deeply discounted levels, offering a good entry point into quality growth names.
Investment Focus: South Korean Tech and Vietnam
00:08:28
Speaker
Therefore, the managers uphold their conviction in their Chinese stock picks. And what other Asian countries do the managers put emphasis on?
00:08:37
Speaker
Yeah, so the trust has also overrated South Korea, as its managers consider South Korean equities, relatively cheap and believe that investors mispriced the issues such as corporate governance concerns, geopolitical risk and the economist's cyclicality. I think it is worth noting that exposure to South Korea is on one hand a play on the tech sector to benefit from the rise of AI, but on the other hand also simply on the Chinese recovery as roughly 50% of the country's experts go to China.
00:09:05
Speaker
Some of the thrust's major South Korean holdings here are Samsung Electronics, Unsurprising I guess, SKY-Hynix, a memory semiconductor producer, and LG Chemical.
00:09:16
Speaker
The managers have also decided to exploit the less demanding valuations in Vietnam to tap into the country's growth story, which I think is quite appealing. We have outlined the secular growth story for Vietnam in the thematic note in early 2023, as well as now recent research notes on Vienna Capital Vietnam Opportunity Fund and Vietnam Holding.
Sector Focus: Tech, E-commerce, and Real Estate
00:09:37
Speaker
And would you say that the trust is more positioned to cyclical or defensive names?
00:09:43
Speaker
While the trust stock selection process is bottom-up, it does have a cyclical bias at present and its portfolio is positioned to benefit from several themes. First, its managers maintain a focus on technology, most notably exposure to semiconductors, for instance through TSMC.
00:10:00
Speaker
Secondly, they consider consumer and internet an interesting area, especially e-commerce. For instance, the trust has now overrated Alibaba. They also like gaming, as they believe it has proved relatively defensive. And the managers recently added a gaming and e-commerce business C limited to the portfolio. That said, they shy away from unprofitable tech and internet companies.
00:10:22
Speaker
Furthermore, the managers also like the automotive sector, as they expect volumes to recover as shortages are resolved and also they seek exposure to the increasing EV penetration, for example through LG Chemical as the largest producer of EV batteries outside of China. That said, they avoid pure EV plays, which they consider expensive at the moment.
00:10:42
Speaker
The trust exposure to the sector and its value chain includes names such as Hyundai Motor Corporation, Astra International, which is an automotive supplier in Indonesia, China Maidong Auto Holding, which is an auto dealership in China, and Mint Group, an automotive supplier in Taiwan. This aligns well with the secular themes I discussed previously.
00:11:03
Speaker
Now, when talking about the trust cyclical tilt, it is also worth mentioning that it has an overrated position in real estate. For instance, it holds a stake in link read, which offers exposure to retail properties, car parks, and related businesses, and also has some exposure to office properties across Hong Kong, mainland China, Australia, Singapore, and the UK.
00:11:24
Speaker
The managers think it should benefit from a decline in interest rates or at least peaking expectations and is traded at an unjustified discount of fair value. I think this shows that the trust does also look for opportunities to benefit from a turn in the rate cycle.
00:11:40
Speaker
Now, in terms of real estate, it also holds a stake in China overseas land and investment, a residential and commercial property developer and commercial property operator, which the managers perceive as a business with relative balance sheet strength versus peers that is well positioned to take market share as overly developers retreat. Finally, the trust invested in the property developer and investor CK asset holding
00:12:05
Speaker
The trust portfolio also includes controlling growth opportunities arising from long duration, Darlington, Fallen Angel assets. For instance, Brap, a Singaporean business that offers a mobile app comprising right hailing, food delivery and financial services. Fantastic. That's been very insightful, Milosh. Thank you. Thank you.
00:12:27
Speaker
You've been listening to Uncovering Trust, a podcast by Edison Group. If you want to find out more about Invesco Asia Trust and other investment trusts with cover, see our show notes or visit www.edisongroup.com.