Abundance of earnings recovery

Invesco Asia Trust 2 June 2021 Review
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Invesco Asia Trust

Abundance of earnings recovery

Investment trusts
Asia ex-Japan equities

2 June 2021

Price

383.5p

Market cap

£256.4m

AUM

£281.3m

NAV*

408.4p

Discount to NAV

6.1%

NAV**

409.3p

Discount to NAV

6.3%

*Excluding income. **Including income. As at 28 May 2021.

Yield

3.9%

Ordinary shares in issue

66.9m

Code

IAT

Primary exchange

LSE

AIC sector

Asia Pacific ex-Japan

Benchmark

MSCI AC Asia ex-Japan

52-week high/low*

420.0p

255.0p

450.9p

293.0p

**Including income.

Gearing

Net cash at 31 May 2021

0.8%

Fund objective

Invesco Asia Trust’s objective is to provide long-term capital growth by investing in a diversified portfolio of Asian companies. On 1 May 2015, the trust adopted a new benchmark, MSCI AC Asia ex-Japan, in place of the former benchmark, MSCI AC Asia Pacific ex-Japan. While the new benchmark excludes Australasia, the trust may still invest in these markets.

Bull points

A total return approach with relatively high dividend income and enhanced dividend policy.

IAT is able to use revenue and capital reserves when necessary.

IAT has a tender offer (up to 25% of issued shares at a 2% discount to NAV) mechanism if the fund underperforms the benchmark by 0.5% pa over five years to 30 April 2025.

Bear points

IAT has yet to build a track record on covering dividend with revenue, on 4% yield.

While outperforming the benchmark, the fund has lagged some growth peers over 3–5 years.

The trust underperformed in H120 due to a risk on positioning during Q419.

Analysts

Victoria Chernykh

+44 (0)7776 956739

Sarah Godfrey

+44 (0)7976 154191

Invesco Asia Trust is a research client of Edison Investment Research Limited

Invesco Asia Trust (IAT) continues to generate double-digit annualised NAV total return (11.8% over the past 10 years), supported by consistent income. In August 2020, the board introduced a new dividend policy to pay a regular six-monthly dividend equivalent to 2% of NAV (4% pa), a sizeable dividend enhancement from the FY20 annual dividend of 7p per share, at c 2.5% of NAV. The fund manager, Ian Hargreaves, runs the portfolio, blending growth and value styles. He targets double-digit annualised returns from each portfolio holding for over three years.

IAT outperforms Asia equities, materially differentiating itself during 2021

Source: Refinitiv, Edison Investment Research

Why IAT now?

Hargreaves sees further scope for portfolio companies within the still undervalued sectors to outperform. He believes the economic recovery is driving their positive earnings revisions. The financial, materials, energy, real estate and industrials sectors were depressed by the 2020 downturn, but in 2021 have been catching up with growth stocks as earnings recover. Utilising gearing in a dynamic way, the manager took profits during Q121, practically eliminating gearing by end of the quarter, as market valuations reached highs (c 28x forward P/E for MSCI AC Asia ex-Japan) – in the top quartile of historical (10-year plus) P/E valuations. Hargreaves is on the watch for new opportunities to deploy gearing.

The analyst’s view

The portfolio performance (54 holdings at 31 March 2021) benefited considerably from repositioning in FY20 towards the pandemic ‘beneficiaries’ and away from banks and other financials. Technology hardware, semiconductors, e-commerce and healthcare stocks have driven the outperformance as the manager took profits from these stocks. The portfolio is now more balanced across sectors. Following the recovery in Asia, led by China, the manager tilted the portfolio towards a more defensive stance, adding a few producers of everyday staples. On the riskier side, he bought into the property sector, which is out of favour with the market, seeing uncertainty created by the pandemic as an opportunity.

We believe the dividend enhancement brings additional stability to the fund’s total return. A performance-related conditional tender offer, announced in August 2020 and approved by the shareholders in September 2020, also emphasises the board’s focus on total return.

The manager’s view and portfolio positioning

At end-March 2021 the portfolio had 54 holdings within its 50–60 range. Exhibits 1 and 2 show the fund’s exposures by country and sector at end-March 2021 and illustrate active management of the portfolio in the preceding 12 months. The largest underweight position is in Hong Kong & China, at 8.2pp lower than the index (compared to 6.4pp lower at end-March 2020). Given the strategy is to populate the portfolio with undervalued companies, IAT’s underweight stance is perhaps expected as China is the third strongest performing emerging market of 2020 and currently represents half of the benchmark. The three notable country overweight positions are Taiwan (3.5pp), South Korea (1.6pp) and India (2.5pp). The manager believes that India should in due course see a recovery, as the current COVID-19 rate subsides, aided by higher vaccination rates and the in-house ability to manufacture vaccines.

Exhibit 1: Portfolio geographic exposure vs benchmark (% unless stated)

Portfolio end- March 2021

Portfolio end- March 2020

Change
(pp)

Index weight

Active weight vs index (pp)

Trust weight/ index weight (x)

Hong Kong & China

42.1

48.2

(6.1)

50.3

(8.2)

0.8

Taiwan

19.1

16.1

3.0

15.6

3.5

N/A

South Korea

16.6

17.4

(0.8)

15.0

1.6

1.1

India

13.4

11.8

1.6

10.9

2.5

1.2

Singapore

2.9

2.5

0.4

2.5

0.4

1.2

Thailand

1.8

2.1

(0.3)

2.1

(0.3)

0.9

Australia

1.4

1.0

0.4

0.0

1.4

N/A

Indonesia

2.7

0.7

2.0

1.4

1.4

2.0

Malaysia

0.0

0.2

(0.2)

1.5

(1.5)

0.0

Philippines

0.0

0.0

0.0

0.7

(0.7)

0.0

Total:

100.0

100.0

100.0

Source: Invesco Asia Trust, Edison Investment Research

Over the 12 months to end-March the manager continued to trim financials (-2.3pp, see Exhibit 2), bringing the position to 21.5%. This 3.2pp overweight relative to the benchmark is a result of Hargreaves’ selective additions to the sector. The weight of the financials sector swung from 33.9% at July 2019 through to as low as 17.8% in July 2020.

Exhibit 2: Portfolio sector exposure vs benchmark (% unless stated)

Portfolio end- March 2021

Portfolio end- March 2020

Change (pp)

Index weight

Active weight vs index (pp)

Trust weight/ index weight (x)

Information technology

25.5

24.6

1.0

23.5

2.0

1.1

Financials

21.5

23.8

(2.3)

18.3

3.2

1.2

Consumer discretionary

18.7

16.8

2.0

18.2

0.5

1.0

Communications services

13.6

17.7

(4.1)

11.6

2.0

1.2

Industrials

9.0

7.1

1.9

5.5

3.6

1.7

Materials

3.1

3.0

0.1

4.5

(1.5)

0.7

Energy

1.1

2.1

(1.0)

2.5

(1.4)

0.4

Real estate

4.1

0.9

3.2

4.1

0.0

1.0

Healthcare

1.6

2.0

(0.5)

4.8

(3.2)

0.3

Consumer staples

1.1

1.7

(0.6)

4.8

(3.7)

0.2

Utilities

0.7

0.5

0.2

2.3

(1.6)

0.3

Total:

100.0

100.0

100.0

Source: Invesco Asia Trust, Edison Investment Research

Consumer discretionary sector exposure grew 2.0pp. Autohome, a consumer discretionary name held by IAT, is China’s largest online platform for automobile buyers and sellers. The company looks to shift monetisation away from advertising and dealer lead generation, toward data services acquisition in the tech sector. This highly cash generative business has net cash on its balance sheet.

Exposure to the real estate sector was up by 3.2pp from a very small position, bringing it in line with the index (4.1%). The manager initiated a position in China Overseas Land & Investments, a real estate company with the lowest financing costs among its peers. The team believes that this advantage will allow the company to benefit from the recovery in China’s property market and grow by acquiring land banks/projects from overleveraged developers should opportunities arise.

The team also bought CK Asset, a Hong Kong listed real estate business, amid uncertainty over the outlook for Hong Kong property and its UK pub business Greene King. Hargreaves points out that diversification of CK Asset’s income base outside Hong Kong should enhance earnings, particularly as the lockdown in the UK is being lifted. Management has been building a war chest balance sheet over the last few years and is now looking to grow the business either organically or through M&A.

The technology sector increased by 1.0pp over the 12 months and the manager is 2.0% overweight the index. Additions to the less COVID-19 pandemic sensitive tech hardware sector included Largan Precision, a Taiwanese smartphone cameras lens maker and market leader, as flagship phones continue to adopt higher-spec cameras.

As Asia began to navigate the crisis in the spring and summer of 2020, Hargreaves increased exposure to selective cyclical economically sensitive businesses, given their undemanding valuations and strong balance sheets. One example is Pacific Basin, a bulk shipping company (small cap). In the smaller ships market, where the company operates, freight rates are at the highest point since 2010, as demand exceeds supply. The team reckons that earnings will be more than double the level predicted by analysts, even after recent consensus forecast upgrades.

Hargreaves also added companies with a more defensive stance, on favourable valuations. These include Uni-President Enterprises, a conglomerate in Taiwan and owner of Uni-President China, a food and beverage company that also owns a franchise in the Philippines (noodles). Other new introductions to the portfolio included ENN Energy, as the team took the view that strong growth in gas volumes and new residential connections over the medium term were not reflected in the company’s market valuation.

The team has been steadily taking profits from outperformers, particularly within the communications services sector (down 4.1pp), taking profits in Tencent and Baidu, as well as selling Indian software services company Infosys and trimming Jiangsu Yanghe, JD.com and MediaTek. MediaTek was bought in Q117 as an out-of-favour stock, and the share price has appreciated some 500% over the holding period. Following such a run, Hargreaves is wary about sustainability of earnings, and has gradually reduced the position to c 20% of the maximum IAT held in the stock. The holding in Woodside Petroleum was sold, reducing the energy sector exposure by 1.0pp.

Performance

Following the challenging first six months of 2020, IAT is back to consistent outperformance of the benchmark over all periods longer than three months, shown in Exhibit 3. Following the timely portfolio restructuring in Q220, in response to the pandemic-hit markets, the manager picked the right stocks to drive the outperformance. Over the past six months (to end May), a number of the top 10 holdings were among the best contributors. These included Samsung Electronics (the largest holding of 7.6% at 31 March 2021), Alibaba (4.8%) and ICICI bank (3.1%).

COVID-19 sensitive cyclicals were among the biggest drivers of relative performance since November 2020, following positive vaccine news in November 2020 and the approval of further stimulus packages. These included Indian and ASEAN (Association of Southeast Asian Nations) financials, selected real estate holdings and other cyclical names such as Pacific Basin Shipping. Their share prices responded positively to faster than expected recovery in earnings. Stock selection in the technology sector also continued to be a positive driver, including contributions from technology giants Baidu and Tencent Music Entertainment, as well as holdings in technology hardware companies, such as Asustek.

Exhibit 3: Investment company performance to 31 May 2021

Price, NAV and benchmark total return performance, one-year rebased

Price, NAV and benchmark total return performance (%)

Source: Refinitiv, Edison Investment Research. Note: Three- and five-year performance figures annualised. Data to end-May 2021.

Five-year discrete performance data in Exhibit 4 illustrate the visible relative performance recovery over 12 months to end May 2021.

Exhibit 4: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

Benchmark (%)

MSCI World
(%)

CBOE UK All Companies (%)

MSCI AC Asia ex-Japan (%)

31/05/17

49.8

45.7

44.8

32.0

24.4

44.8

31/05/18

9.9

9.8

14.1

8.8

6.6

14.1

31/05/19

(2.6)

(3.7)

(5.9)

5.9

(3.4)

(5.9)

31/05/20

(4.6)

(3.0)

2.3

9.5

(12.0)

2.3

31/05/21

60.6

50.8

32.2

22.9

23.4

32.2

Source: Refinitiv. Note: All % on a total return basis in pounds sterling.

In Exhibits 5 and 6 we present performance and a few other metrics relative to peers.

Exhibit 5: Country specialist – Asia Pacific Equity Income peer group

% unless stated

Market
cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Discount (cum-fair)

Ongoing charge

Perf. fee

Gearing

Dividend yield (%)

Invesco Asia

256.4

50.4

40.5

124.7

189.9

(7.0)

1.0

No

99

3.9

Aberdeen Asian Income

399.8

32.5

21.6

76.4

123.2

(9.9)

1.0

No

108

4.0

Henderson Far East Income

483.2

12.3

6.7

52.6

90.5

1.9

1.1

No

105

7.1

JPMorgan Asia Growth & Income

490.7

37.0

33.8

143.3

141.3

2.3

0.7

No

100

3.1

Schroder Oriental Income

751.1

35.8

25.6

82.3

171.7

(3.0)

0.9

Yes

104

3.7

Sector average (5 funds)

476.2

33.6

25.7

95.9

143.3

(3.2)

0.9

103

4.4

MSCI AC Asia Pacific ex Japan HDY

17.6

8.8

62.6

85.3

4.4

Rank in sector

5

1

1

2

1

4

3

5

3

Source: Morningstar, Edison Investment Research, Bloomberg. Note: *Performance data to 31 May 2021 based on cum-fair NAV. TR=total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

IAT ranks top over one-, three- and 10-year periods within its Asia Pacific equity income peer group of five funds, and second over five years, on a net asset value (NAV) total return basis. This strong relative performance is complemented by a competitive yield of c 4%.

Exhibit 6: Country specialist – Asia Pacific peer group

% unless stated

Market
cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Discount (cum-fair)

Ongoing charge

Perf. fee

Gearing

Dividend yield (%)

Invesco Asia

256.4

50.4

40.5

124.7

189.9

(7.0)

1.0

No

99

3.9

Aberdeen New Dawn

356.7

41.4

40.2

125.4

138.0

(11.5)

0.8

No

107

1.3

Asia Dragon

667.8

40.2

38.8

117.2

145.5

(9.5)

0.9

No

108

0.9

Pacific Assets

404.0

36.4

32.7

88.5

197.5

(5.6)

1.1

No

98

0.7

Pacific Horizon

700.6

81.8

100.3

287.2

330.0

5.9

0.9

No

107

0.0

Schroder Asian Total Return

531.4

44.1

42.5

141.9

167.0

1.3

0.9

Yes

107

1.4

Schroder Asia Pacific

1,048.4

41.5

33.4

137.9

208.3

(7.0)

0.9

No

99

1.3

Sector average (7 funds)

566.5

48.0

46.9

146.1

196.6

(4.8)

0.9

104

1.4

MSCI AC Asia Ex Japan

31.8

26.1

107.2

123.5

1.9

Rank in sector

7

2

3

5

4

5

2

5

1

Source: Morningstar, Edison Investment Research, Bloomberg. Note: *Performance data to 31 May 2021 based on cum-fair NAV. TR=total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

Within the Asia Pacific group IAT ranks well as well: it is among the top 50% of the seven funds over one and three years (Exhibit 6).

The Association of Investment Companies moved IAT from the Asia Pacific sector into the Asia Pacific equity income sector. Considering the board’s August 2020 initiative introducing a regular six-monthly dividend equivalent to 2% of NAV, we believe, the reclassification is justified.

Dividend policy and record

In August 2020, the board announced a dividend enhancement initiative to pay a regular six-monthly dividend equal to 2% of NAV on the last business day of September and February. In 2020 the board approved the use of revenue and capital reserves when necessary to smooth dividend payments in years when they are not fully covered by revenue income.

On 23 October 2020 the company announced a first interim dividend of 6.7p per ordinary share in respect of the year ending 30 April 2021. 6.7p is equivalent to 2% of the company’s NAV on the last business day of September 2020. A second interim dividend of 8.40p per ordinary share in respect of the year ending 30 April 2021 was announced on 25 March 2021 and paid on 27 April 2021. This gives a total distribution of approximately 4% of NAV over the year.

Exhibit 7: Dividend history

Source: Bloomberg, Edison Investment Research

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This report has been commissioned by Invesco Asia Trust and prepared and issued by Edison, in consideration of a fee payable by Invesco Asia Trust. Edison Investment Research standard fees are £16,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

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General disclaimer and copyright

This report has been commissioned by Invesco Asia Trust and prepared and issued by Edison, in consideration of a fee payable by Invesco Asia Trust. Edison Investment Research standard fees are £16,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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