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Investment trusts: three areas where we see value

| Fund Analyst | 9 February 2017 | A A A
Investment trusts: three areas where we see value

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Investing in unloved sectors or regions takes courage. After all, it usually means ignoring negative news flow and going against market sentiment.

However, investing when markets are depressed is one half of the ‘buy low, sell high’ holy grail. History tells us that buying when valuations are low can lead to exceptional long-term returns, although there are no guarantees.

Patience is required, however. It can take time for the inherent value of an investment to be recognised in its price. A market that is undervalued can stay this way for some time, and even get cheaper still. Nevertheless, buying when valuations are low can stack the odds in the investor’s favour.

After highlighting three of our favourite open-ended funds investing in areas that offer exceptional value, below we uncover three investment trusts that our research also shows offer long-term potential.

This article is not personal advice. If you are at all unsure of the suitability of an investment for your circumstances please seek advice. The value of investments can fall as well as rise, so investors could get back less than they invest.Please note investment trusts have the ability to use gearing (borrowing to invest) which, if used, increases risk.

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

So, where do we currently see value?

Asia Pacific & China

Asian stock markets looked exceptional value to us at the end of 2015 after a period in the doldrums. We have previously highlighted this to our clients and the region’s stock markets have since rebounded strongly. That said, we believe these markets still look good value, particularly China, and we still see an opportunity for patient investors.

The region continues to face a number of challenges amid ongoing political turmoil in some countries, while the full ramifications of Donald Trump’s presidency remain unclear. In our view, the longer-term growth prospects remain intact. Asian economies should continue to benefit from increasingly youthful and well-educated populations, rising domestic consumption and an increasingly wealthy middle class.

Investment trust idea – Aberdeen Asian Smaller Companies Investment Trust

This trust combines exposure to innovative smaller companies with the long-term growth potential of Asia Pacific markets. Smaller businesses have the potential to transform into tomorrow’s industry leaders; however, not all will succeed and they are higher risk than their larger counterparts.

We have long held Aberdeen's Asian equities team in high regard for their meticulous research and disciplined investment approach. We like their focus on high-quality companies, which they can purchase at sensible valuations, and believe this approach will serve investors well over the long term. Over the past ten years the trust has grown 271.3%* compared with 155.2% for the FTSE AW Asia Pacific Japan Index, although this is not a guide to how the trust will perform in the future.

Jan 12 to Jan 13 Jan 13 to Jan 14 Jan 14 to Jan 15 Jan 15 to Jan 16 Jan 16 to Jan 17
Aberdeen Asian Smaller Companies 59.9% -17.3% 18.6% -18.8% 35.4%
FTSE AW Asia Pacific ex Japan 13.9% -8.0% 21.4% -12.4% 39.2%

Past performance is not a guide to the future. Source: Lipper IM *to 31/01/2017

View the Aberdeen Asian Smaller Companies Investment Trust factsheet

Investment trust idea – Fidelity China Special Situations plc

China is likely to experience lower levels of growth as it transitions from being an export- and investment-led economy to one focused on domestic consumption. However, this also presents opportunity as the Chinese middle class continues to grow in wealth and in number. Dale Nicholls has therefore focused the trust on businesses providing goods and services to the growing Chinese consumer market.

We feel this trust represents an interesting way to access the ‘new China’ growth story. It should be noted its bias towards small and medium-sized companies, as well as significant use of gearing (currently 26%), makes the trust a higher risk and volatile proposition. It currently trades on a discount to NAV of 14.8%* compared with a 12 month average of 15.8%. Please note the trust is able to use derivatives which can increase risk.

Jan 12 to Jan 13 Jan 13 to Jan 14 Jan 14 to Jan 15 Jan 15 to Jan 16 Jan 16 to Jan 17
Fidelity China Special Situations PLC 20% 9.3% 31.9% -9.4% 49.2%
MSCI China TR GBP 15.1% -10.1% 29.8% -16.5% 39.5%

Past performance is not a guide to the future. Source: Lipper IM *to 31/01/2017

View the Fidelity China Special Situations plc factsheet

Europe

Europe has certainly had its fair share of problems in recent years as investors have continued to grapple with economic and political uncertainties. Much of Europe continues to be plagued with debt and economic growth remains stagnant. Ongoing reform will be needed across the continent in order for Europe to return to full economic health.

It is not surprising that many investors have overlooked the region as an investment destination in recent years. In our view it is important to distinguish between the prospects for economies and the prospects for companies. Europe is home to some of the world’s leading businesses, which have prospered despite the economic malaise. We believe European stock markets remain some of the cheapest in the world.

Investment trust idea – Jupiter European Opportunities Trust

Alexander Darwall favours market-leading companies with superior and differentiated products or services. A bias towards high-quality companies with sustainable earnings growth has recently fallen out of investors’ favour and affected short-term performance. However, we believe the manager’s strong stock-picking ability will reward long-term investors. Over the past ten years the trust has grown 211.8%* compared with 76.9% for the FTSE World Europe ex UK, although this is not a guide to future performance.

As investor sentiment towards Europe has weakened, the trust’s discount to NAV has widened to 5.3% at the time of writing, which could offer opportunity for patient investors. Underneath Europe’s wider economic problems, the continent will have its success stories and Alexander Darwall is a manager we trust to identify these opportunities.

Jan 12 to Jan 13 Jan 13 to Jan 14 Jan 14 to Jan 15 Jan 15 to Jan 16 Jan 16 to Jan 17
Jupiter European Opportunities Trust PLC 53.5% 15.5% 16.6% 14.1% 0.1%
FTSE World Europe ex UK TR GBP 23.6% 11.1% 7.5% -2.1% 24.4%

Past performance is not a guide to the future. Source: Lipper IM *to 31/01/2017

View the Jupiter European Opportunities Trust factsheet

Mining

Following years of excessive debt, poor investment decisions, and falling commodity prices, the mining sector experienced a torrid few years until 2016. Many mining companies embarked upon strict cost-cutting initiatives and employed more shareholder-friendly management. These efforts started to come to fruition last year and, alongside a boost from rising commodity prices, the sector performed exceptionally well. Our analysis suggests shares in the mining sector continue to look good value and could have further to run. This remains a higher-risk, adventurous area in which to invest, however, and the profits of these companies will remain closely tied to any fluctuation in commodity prices.

Investment trust idea – BlackRock World Mining Trust

Evy Hambro, a highly-experienced investor in the resources sector, sits at the helm of this specialist investment trust. He also has the support of a well-resourced team at BlackRock. The team have focused on those companies they believe have made progress in paying off debt and delivering credible plans for future growth.

Given this trust invests in a niche and higher-risk area, we feel it should only comprise a relatively small part of a well-diversified portfolio. The trust currently sits on a discount to NAV of 8.8%*, although this compares with a 12 month average of 14.1%.

Jan 12 to Jan 13 Jan 13 to Jan 14 Jan 14 to Jan 15 Jan 15 to Jan 16 Jan 16 to Jan 17
BlackRock World Mining Trust PLC -11.2% -19.6% -33.1% -38.6% 141%
FTSE World/Mining TR -13.5% -25.9% -14.4% -41.4% 130.8%

Past performance is not a guide to the future. Source: Lipper IM *to 31/01/2017

View the BlackRock World Mining Trust PLC factsheet

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