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Stifel: Aberdeen Emerging Markets needs to offer shareholders more

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Stifel: Aberdeen Emerging Markets needs to offer shareholders more

Although Aberdeen Emerging Markets (AEMC) has staged a turnaround in performance over the past three years, Stifel analyst Anthony Stern suggests the trust’s future still hangs in the balance.

Since managers Bernard Moody and Andrew Lister took over the fund in 2014, formerly known as Advance Developing Markets, performance has recovered. The duo invest in emerging markets-focused investment trusts and open-ended funds.

The trust’s net asset value (NAV) is up 36.8% over the past three years, making it the second best performing trust in the emerging market sector, according to Stifel. The MSCI Emerging Markets benchmark is up by 35.1% over the three-year period. Over the same period, shareholders have enjoyed a 36% return.

Aberdeen Emerging Markets currently trades on a 13.2% discount to NAV, which is higher than an average discount of 10.7% in the Association of Investment Companies’ global emerging markets sector.

In spite of the improvement in performance, Stern is concerned that Aberdeen has the potential to fail its continuation vote in April 2018 unless concessions are made.

‘We think this [the continuation vote] will only pass with significant restructuring concessions, given that two active institutional shareholders control circa 56% of the shares,’ Stern noted.

At the end of February, City of London Investment Group (CLIG) was the largest shareholder in the trust with a 29.1% stake, followed by Lazard Asset Management with 27%. They are both well-known value investors, who like to buy trusts on steep discounts and wait for them to narrow.

Stifel suspects the two shareholders may push for similar changes to those agreed by JPMorgan Russian Securities (JRS), where Lazard and City of London also hold stakes.

‘JRS agreed to undertake a tender offer for 20% of the outstanding shares at its next continuation vote in 2022, should the trust fail to outperform its benchmark,’ Stern said.

Another option is to introduce a dividend paid out of capital to help narrow the discount as has happened in other trusts, although Stifel is not in favour of this option.

Stern believes the trust looks attractive right now, given that it is trading on a double-digit discount, has seen its performance improve and change may be afoot that benefit shareholders.

Schroder Taiwan Equity fund is the largest position in the portfolio, followed by Schroder AsiaPacific (SDP) investment trust and Weiss Korea Opportunity (WKOF) investment company.

Aberdeen currently charges a management fee of 1% of the investment company's market cap, with a 10% performance fee if the portfolio outperforms the MSCI Emerging Markets index by 10% subject to a high watermark.

Moody and Lister took over as managers on the Advance Developing Markets fund in July 2014. Their firm Advance Emerging Capital was bought by Aberdeen Asset Management in September 2015.

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