Matter of trust

Both reside in the investment trust sector, which is the unsung hero of the investment world. It isn’t heavily marketed, unlike unit trusts, but its best funds just get on with the job of making people richer. There are hundreds to choose from but these are in the top five performers of the last 20 years.

If you had invested each year’s maximum ISA limit in Aberdeen Asia Focus Investment Trust (LSE: AAS) from 1999 to 2018, you would have almost £1m at your disposal today. You would have pumped in £206,560 in total, and the trust would have turned that into a staggering £966,042.

That makes it the second best performing investment trust of all. You can find the very best one here. The region it targets may surprise you.

The other fund I’m looking at is the fifth best performer over the same period. If you had maxed out your annual stocks and shares ISA allowance with renowned global investment trust Scottish Mortgage Investment Trust (LSE: SMT) you would now have £932,615.

Glory days over?

Aberdeen Asia Focus is a £396m specialist fund that invests in Asia Pacific, excluding Japan. It is 15% invested in Thailand, with sizeable exposure to equities in India, Malaysia, Hong Kong, Singapore and Indonesia, as well as the Philippines and New Zealand. Top 10 holdings include stocks such as Bank OCBC Nisk, Hana Microelectronics, Oriental Holdings and Asian Terminals, which you are unlikely to track down on your own.

This fund is primarily for those wanting growth as it offers a low yield of just 1.24%. It trades at a discount of 10.2% to underlying net asset value, which is generally a good thing in an investment trust as it gives you a cushion against market falls or shifting investor sentiment.

However, I’m a little worried that its glory days may be over. It is up 39.9% measured over five years, but the benchmark Asia-Pacific index grew 77.2% over the same period, according to Trustnet.com. Rupert Hargreaves recently highlighted another investment trust in the same sector, Schroder Oriental Income Trust, and this grew 82.7% over five years. Past performance is no guide to the future, but it’s always worth taking into account.

Global play

Scottish Mortgage is a long-standing favourite of mine. There are no worries about its comparative performance, it is up 135% over five years, against 75% on its benchmark global investment trust index. It’s a growth fund, the yield is just 0.63%.

It gives you a genuine global spread of equities, although I should include a note of caution here: roughly half the fund is invested in the US and a quarter in China, with outsize exposure to tech giants Amazon and Netflix, and Tencent and Alibaba. This is a call that could start to unravel, and in fact the fund is down 11.8% in the last six months, double the 5.2% drop across its sector. Yet it remains expensive trading at a 3.2% premium to net asset value, above its long-term average of 1.6.

This underlines the importance of always looking under the lid although I wouldn’t write off Scottish Mortgage as management has repeatedly proved its skills over the long term.

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Even now, with the share price around 1044p, the trust trades at a discount to diluted net asset value (NAV) running around 11% or so, suggesting that good value could be on offer to those taking the plunge. Trusts, and other types of investment fund, can trade either below, over, or at their net asset values, depending on their popularity with investors, which in turn often depends on what investors think about the outlook.

Rising net asset value

Of course, such value could prove to be elusive if the underlying investments held by the trust go on to perform badly, and that could happen if macroeconomic conditions deteriorate. Maybe that’s what investors are worried about. But there’s little sign of pessimism in the outlook within today’s annual financial report.

It reveals that the diluted NAV added 15.4% during 2017, indicating that the trust’s investee companies performed well. The great thing about closed-ended investment trusts is that they trade as companies on the stock market in their own right. That means we can buy and sell their shares with ease, without all the faffing about necessary to participate in open-ended funds. So, if we see good value, we can pounce quickly.

Renewed interest in smaller companies

UK-based investors holding AAS benefited because the weakness in sterling following the UK’s referendum to leave the European Union boosted investment returns. But the directors also think recent good share price performance has been driven by “investors’ renewed interest in smaller companies”. Indeed, many firms perceived as being cyclical saw a big dip in their share prices during the last couple of years when the economic outlook came into question. We’ve seen a lot of that unwinding reversed since then though.

Chairman Nigel Cayzer reckons the year was characterised by strong global economic news and an improved outlook for earnings driving asset prices across all markets. I think that’s an interesting view that should help to dispel any lingering doubts we might harbour about potential weaknesses in the macroeconomic environment. Cayzor says in the report: “The Company’s focus on smaller companies in Asia benefited the portfolio as many of these domestically-focused businesses are rooted within the region’s higher-growth economies.”

Ongoing opportunities

The trust sees good opportunities to invest in India, which is seeing an acceleration in economic growth and reforms that should simplify the tax regime, boost tax revenues and make it easier to do business in the country. Meanwhile, consumption in Asia is “another bright spot” seen as a long-term structural driver. Cayzer added: “The portfolio is well positioned in this aspect.”

Overall, the outlook sounds promising, and I’m encouraged by the discount to NAV to think about tucking away a few shares away in Aberdeen Asian Smaller Companies Investment Trust.  

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