A two-year emerging market equity rally has failed to push up share prices on investment trusts in the space, with brokers highlighting a possible buying opportunity as many vehicles “continue to languish” on double-digit discounts.
In a recent note, broker Stifel said strong returns from the region were yet to lift share prices for closed-ended products focusing on this space.
Anthony Stern, an analyst at the firm, said: “Over the last two years, the emerging market trusts have delivered strong returns yet they continue to languish at double-digit discounts as investors continue to focus on developed markets.
“We continue to believe the region, which trades on unchallenging multiples, should continue to perform well.”
The comments, made in a report, ‘Double digit discounts in a discount starved world’, might be good news for investors who have seen valuations rise on emerging market stocks as the region returns to favour.
The MSCI Emerging Markets index has delivered 67.1 per cent for a sterling investor in the past two years, outstripping the 47.7 per cent gain from MSCI World.
Trusts focusing on the space have performed well on an aggregate basis, if not as strongly as the index. The average member of the AIC’s Global Emerging Markets Equities peer group has delivered a net asset value return of 48.5 per cent during the same period, according to FE Analytics.
Yet discounts remain large. According to Winterflood, the weighted average discount for the AIC’s Global Emerging Markets peer group hovered above 10 per cent as of September 11.
Charles Cade, head of investment companies research at Numis, said there was “potential for share price returns to be enhanced by a narrowing of discounts over time if investors increase their allocation to emerging market equities”.
Institutional investors could be holding back investment trust share prices and creating a buying opportunity on certain vehicles, he suggested.
He said: “Discounts remain wide partly because their shareholder registers are dominated by value-sensitive investors such as City of London, Lazard, Well Capital and 1607 Capital. There is a good opportunity in emerging market funds.”
Even the highest profile trusts in the space have fallen victim to the trend. Mr Cade noted that Schroders manager Matthew Dobbs’ 20-year-plus track record had not prevented his Asia Pacific trust from trading at a double-digit discount, with other vehicles such as Templeton Emerging Markets in a similar situation.
He said: “There are a number of well-managed single country funds on wide discounts, including JPMorgan Indian, Fidelity China Special Situations and VinaCapital Vietnam Opportunity.”
Emerging markets have become a popular focus for many investors this year. In its latest global fund manager survey, Bank of America Merrill Lynch identified the region as one of the “consensus overweights” among respondents.
Allocation to emerging market equities rose to a net 47 per cent overweight, up from 39 per cent a month before, according to the research.
It is not the first time analysts have pointed to discounts that appear out of step with returns. Last year, specialists highlighted the fact that discounts “hadn’t really moved” on vehicles such as the Templeton trust, despite a bout of strong performance.
A history of false dawns for the asset class might play a role in the lack of share price improvement. Last year Canaccord Genuity’s Alan Brierley said he would favour a “nibble” at emerging market investment trusts, but only on a five or 10-year view.
KEY NUMBERS
67.1%
Two-year gains on the MSCI Emerging Markets index
47%
Net overweight to emerging markets among global fund managers
Share prices languish in AIC’s GEM sector
| Trust | NAV premium/discount at September 11 2017 |
| Aberdeen Emerging Markets | -11.90% |
| Aberdeen Frontier Markets | -3.20% |
| BlackRock Frontiers | 7.10% |
| Fundsmith Emerging Equities | -1.40% |
| Genesis Emerging Markets | -13.40% |
| JPM Emerging Markets | -11.50% |
| Templeton Emerging Markets | -11.40% |
| Utilico Emerging Markets | -11.70% |
| Source: Winterflood |
