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IT Focus: 5 investment trusts in the spotlight

We take a look at the latest analyst comment on Asia, global growth, European smaller companies and emerging markets investment trusts.

by Caelainn Barr on Nov 08, 2012 at 08:59

Edinburgh Dragon beats Asian markets

Edinburgh Dragon trust beat ailing Asian markets last year as its share price total return increased 15%, while the MSCI Asia ex-Japan index gave a total return of 8%.

The trust is managed by Andrew Gillan at Aberdeen and invests in Asian equities and convertible unsecured loan stock (CULS). Its biggest holdings are in Samsung Electronics and Jardine Strategic. The Bank of the Philippines and Ayala Land were its strongest performers in the past 12 months.

However, the trust is set to pay out lower dividends after a full year's interest was charged on its CULS and lower dividends were received. Its dividend this year will stand at 3.3p per share, compared with 4.3p per share last year.

Tom Tuite Dalton, analyst at Oriel Securities, said: ‘We retain our positive stance and view Edinburgh Dragon as the Asian fund of choice, offering decent liquidity, a strong track record and relatively attractive discount.’

The trust’s share price total return has risen 47% over the past five years, to outpace the benchmark's total return of 17%. It’s currently trading at 245p, a discount of 12.2% to its net asset value (NAV) of 279p.

Monks: Steady but unspectacular

Some investors are losing patience with the underperfoming Monks trust, managed by Gerald Smith at Baillie Gifford. Earlier this week Citywire columnist James Carthew said he was willing to hold on to the trust despite its disappointing total return, and analysts seem to be on the same page.

The trust has given a share price total return of -3% over the past five years, compared with the benchmark FTSE World ex-UK's total return of 21%.

However, analysts point to its longer-term performance as a reason to stick with the trust. The share price total return has grown 233% over the past 20 years, ahead of the FTSE World ex-UK's total return of 212%.

Analysts also point to the managers change in stance since the announcement of a third round of quantitative easing in the US, and moves by the European Central Bank to stabilise the eurozone crisis.

Simon Elliott, analyst at Winterflood Securities, added: ‘With Gerald Smith now taking a slightly more positive stance the fund should be expected to participate more fully in future market rallies than it has done this year. However, despite a more positive attitude, the manager remains cautious on the global economic outlook which is reflected in a well-diversified portfolio.

‘As we have highlighted before, the fund's unconstrained approach will inevitably lead to performance deviating from the benchmark at times. This has been clear in recent months, however, we continue to believe that over the longer‐term this fund is likely to outperform.’

The trust is currently trading at 306p, a 15% discount to its NAV of 362p.

Changes all round at Alliance Trust

Alliance Trust has been undergoing a major overhaul in an effort to improve performance and close the wide discount on the trust. Illario Di Bon has been introduced as head of equities at the trust and has reduced the trust’s four regional portfolios to one globally focused group of holdings. The trust’s holdings have also been reduced from 200 to 100.

Analyst at Numis Securities said: ‘There have been substantial changes at Alliance Trust since Katherine Garrett-Cox was appointed as CEO in August 2008, with the addition of the fixed income team, the managed wind-down of the property and private equity teams and, most recently, the move to an unconstrained global equity portfolio. The progress in restructuring the portfolio is nearly complete.

‘A continued improvement in NAV performance is needed to turnaround investor sentiment towards the stock. However, we believe that the drivers of performance are much clearer under the new strategy. In addition, we believe that the progress in the subsidiary businesses is encouraging.’

The trust has given a share price total return of 13% over the past year to beat the benchmark FTSE All Share's total return of 11%. It’s currently trading at a 374p, a 15% discount to its NAV of 439p.

Impressive yield on European Assets, but ‘it certainly won't suit all investors’

European trusts are trading at an average discount of 11% in the general, smaller-company and high-income sectors, and F&C's European Assets trust is no different.

It’s trading at 640p, a 9.6% discount to its NAV of 708p, as investors focus on their fears about indebted eurozone countries. However, the trust has a high yield of 6.4%, with dividends paid out of capital.

The trust’s biggest position is in Irish equities, with 21% of the portfolio invested there as manager, Sam Cosh, bought into the market in 2010 when share prices were depressed.

It has given a share price total return of 43% over the past three years, compared with the FTSE Europe ex-UK's total return of 6%. However, it lagged the benchmark over a five-year period, with total returns of -7%, behind the FTSE Europe ex-UK's total return of -5%.

Simon Elliott, analyst at Winterflood Securities, added: ‘Despite European Assets' dividend policy being unique, we are wary of paying dividends out of capital, and it certainly won't suit all investors.

‘However, European Assets' performance has been impressive in recent years, and for investors willing to take a contrarian view on Europe, we believe that European Assets has potential to add significant value.’

Warning over valuation of Genesis Emerging Markets

Global Emerging Market trusts are trading at an average discount of 8% as risk-averse investors are avoiding the sector on worries about the slowdown of the global economy. The Genesis Emerging Markets trust has one of the smallest discounts in the sector, and it’s currently trading at 535p, a 3% discount to its NAV of 551p.

However, some analysts view the trust as too expensive. Mick Gilligan, head of research at Killik & Co., says: ‘This fund aims to achieve long-term capital growth, primarily through investment in equity markets of developing countries. The management team is well regarded and the NAV performance has been consistently strong.

‘However, this is a volatile space, where performance can be changeable in the short term and discount ranges tend to be wide. Although long-term performance has been strong, this is more than reflected in the rating. We prefer the Aberdeen Emerging Markets OEIC for new money, particularly given the lower fee base (1% per annum versus 1.5% for Genesis).’

It has given a share price total return of 56% over the past three years as the benchmark MSCI Emerging Markets has given a total return of 14%.

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Look up the investment trusts

  • Edinburgh Dragon (Ordinary Share)
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  • Monks (Ordinary Share)
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  • Alliance Trust (Ordinary Share)
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  • Genesis Emerging Markets (Participating Pref Share)
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  • European Assets (Ordinary Share)
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