UK Edition
Questor: buy emerging markets trust Genesis while its conservative approach is out of favour
The way to succeed as an investor, Questor was told by a veteran of the industry many years ago, is to find out what everyone else is buying and do the opposite.
Among the least fashionable areas today are the emerging markets, so today we recommend an investment trust with a long and successful record in this sector that nevertheless trades at a double-digit discount.
Genesis, which listed in 1989, is among the more conservatively managed emerging markets trusts. It has ignored the vogue for “concentrated” portfolios, which take big bets on a small number of stocks or, in the case of emerging market funds, individual countries. Instead it has 126 holdings, spread across 35 countries.
“This trust takes quite a traditional approach, so it is well diversified,” said Andrew Lister, who holds it in his Halifax Fund of Investment Trusts, run, rather confusingly, by Aberdeen Standard Investments. “It is not heavily into hot areas such as Chinese technology stocks. The managers are ‘value’ stock pickers and, thanks to their avoidance of big blockbuster bets on sectors and countries, we see their strategy as relatively low-risk.”
The largest exposure is to China, with accounts for 18.6pc of assets, followed by India (12pc), South Korea (10.6pc), South Africa (9.1pc), Brazil (5.9pc) and Russia (5pc). However, many nations normally absent from emerging markets funds also feature, albeit with small sums at stake.
Examples include Nigeria, with 2.2pc of the fund’s assets, as well as Egypt, Jordan, Kenya, Morocco, Mauritius, Ghana and Lebanon, all accounting for less than 1pc. Such states are often regarded as “frontier” markets – those at an earlier stage of development than emerging economies.
So Genesis could be regarded as a hybrid of an emerging markets and a frontier markets fund, although Lister pointed out that total exposure to the latter was less than 10pc.
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“The boundaries between emerging and frontier are shifting, so why wouldn’t you hold some of the frontier nations if you buy into the idea of investing in up-and-coming economies,” he added.
The fund’s conservative approach has led to recent underperformance relative to rivals that have ridden the China tech boom, and the 11.3pc discount reflects that. The trust is taking bold action to address the discount: it has offered to buy back 10pc of the shares at net asset value minus 3.5pc – in effect, a guaranteed better deal than selling in the market.
It will offer to buy back a further 25pc of the shares in three years’ time if it continues to underperform. “That should put a floor under the discount,” Lister said.
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He concluded: “I think this trust’s managers are perfectly sound; they are well resourced and have operated in this area for a long time. They are grappling with rapidly changing circumstances in the emerging markets and the way they invest has not been fashionable over the past few years. But you don’t always want the raciest stocks in the world – this is a fund that shouldn’t give you any unpleasant surprises.
“We hold the trust for long-term managerial ‘alpha’ [the potential to outperform]. It’s one to buy now while it’s down in the dumps.”
Questor says: buy
Ticker: GSS
Share price at close: 707p
Update: Troy Income & Growth and Edinburgh investment trust
We also spoke to Andrew Lister about Troy Income & Growth, which has gone nowhere since our tip last year.
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“These ‘equity income’ trusts have been out of fashion too, even though they have proved to be one of the best ways to get rich slowly,” he said. “But sometimes people get bored of getting rich slowly and want to do it quickly.” He pointed to investors who were still chasing stocks at price-to-earnings ratios of 50 or 100.
“Things are getting very stretched,” Lister said. “But value, income and ‘growth at a reasonable price’ are still core components of what we do. Hence we are happy to hold Troy and similar trusts such as Edinburgh [tipped by Questor in November 2016].”
Questor maintains its hold ratings.