Edinburgh Dragon (EFM) aims to generate long-term capital returns by investing in Asia Pacific ex-Japan equities, with a focus on quality growth characteristics and a secondary focus on starting valuations. The management team, headed by Adrian Lim, aims to select world-class Asian companies with strong balance sheets that are transforming their sector and setting governance standards.
The trust’s net asset value of £583m is the second largest in the AIC Asia Pacific peer group and makes it one of only two trusts over £500m. Aberdeen Standard’s 50 fund managers based in the region give it a broad research base and good access to companies.
The trust has performed very strongly over the past year following a series of refinements to the process and portfolio. NAV total returns of 12.9% compare to just 7.1% from the average trust in the Morningstar IT Asia Pacific ex-Japan sector and 3.8% from the MSCI AC Asia ex-Japan index. This is the second-best return in the 13-trust sector over the period, narrowly behind its stablemate Aberdeen New Dawn.
The refinements to the process have centred on making the team quicker to spot problems in portfolio companies, but the intention is to continue to be long-term in outlook and Morningstar data show a turnover consistent with a five-year holding period. The trust has increased its weighting to technology, however, and narrowed its underweight to China. It maintains strong overweights to India and Indonesia, and a focus on quality characteristics that served it well in the 2018 global sell-off.
Despite the improved recent performance, the portfolio continues to trade on a wider discount than the sector average: 10.8% compared to the 6.1% peer group average. A tender offer in January was oversubscribed and the board continues to be active in employing buybacks.
Dividends have grown steadily over the past five years, with compound growth of 16%. The dividends are fully covered and reserves are over three times the payout, although the focus is on total returns and so the yield is only 1%.
We believe EFM’s improved NAV performance has yet to be fully reflected in the discount, which looks attractive at almost twice the peer group average. The refinements to the process have clearly borne fruit and produced a more balanced portfolio with an interesting spread of exposures across ‘old’ and ‘new’ economy sectors. The limited exposure to companies affected by the trade war between the US and China could be particularly attractive at the current time given the ongoing tensions between those two countries.
|Exposure to the fast-growing middle classes in China and India||A highly active approach means that periods of significant underperformance are possible as well as outperformance|
|A strategy that has proven its ability to outperform over the longer run||The discount has been stubborn with a tender offer fully subscribed last year|
|Balanced exposure to old and new economy sectors||The yield is unlikely to attract income-seekers|