UK Edition
A positive correlation between risk and reward is a key tenet of investing. Indeed, no investor can reasonably expect to make large gains without taking a commensurate amount of risk.
For example, investors currently opting for a 4pc annual return from cash must accept that their capital is gradually becoming worth less due to elevated inflation. Similarly, investors who hold equities must be comfortable with the potential for exceptional volatility over the short run that may at times include substantial paper losses.
Since Questor always takes a long-term view, it is not particularly concerned about the prospect of heightened near-term volatility from investments such as the Invesco Asia Trust. Over the coming years, this column believes the company offers significant capital growth and income potential.
Its track record is particularly encouraging. It has easily outperformed its benchmark, the MSCI AC Asia ex Japan index, over the past three, five and 10 years. Over the past decade, its share price has risen by 168pc versus a 73pc gain for the index. The FTSE 100, by comparison, is up by a measly 23pc over the same period.
Similarly impressive relative gains are likely to be produced by the trust over the coming years. The economic growth rates of the emerging economies across Asia in which it invests are widely forecast to be materially greater than those of advanced economies such as the UK, Europe and the US.
The International Monetary Fund, for instance, expects China, which accounts for 48pc of the fund’s holdings including Hong Kong, to post an annualised economic growth rate of 4.8pc over the next two years. South Korea and Taiwan, which contribute 17pc and 13pc of the company’s net assets, respectively, are due to generate economic growth of 2.4pc and 2.6pc next year. India, in which 10pc of the trust’s assets are invested, is forecast to grow by over 6pc next year. By comparison, the economies of the UK, Europe and USA are expected to grow by just 1pc-1.4pc in 2024.
The trust’s major holdings include well-known companies such as Taiwan Semiconductor Manufacturing, Tencent and Samsung Electronics. It relies on a bottom-up approach to identify companies with clear competitive advantages and seeks to purchase them when they trade at fair value. This process influences sector allocation, although the trust also relies to some extent on top-down macroeconomic views.
As well as capital growth potential, the trust also offers worthwhile income prospects. It currently yields around 4.6pc and aims to pay out 4pc of its net asset value (NAV) as a dividend per annum. Although this means its payouts are unlikely to offer a smooth rate of growth, the potential for NAV to increase substantially over the long run is likely to equate to a relatively fast pace of dividend growth that should be considerably higher than inflation.
And with gearing currently standing at around 4pc, the company is set to benefit from a rise in equity markets over the coming years, as strong economic growth translates into higher corporate profits and rising company valuations.
The trust currently trades at a 13pc discount to NAV, which is two percentage points below its average discount over the past three years. This highlights its ongoing unpopularity among investors.
In the short run, it would be unsurprising for its discount to remain relatively wide. Geopolitical risks in the region, notably regarding Taiwan’s future, are likely to remain elevated. Alongside ongoing tension between the US and China, this could be reflected in weaker investor sentiment towards Asian-listed equities. Regulatory risks in China also pose a threat to the future prospects of numerous sectors, while the country’s recovery from the end of its zero-Covid policy may prove to be somewhat uneven.
However, in Questor’s view, investors are adequately compensated for ongoing risks in the region via the trust’s wide discount to NAV. Moreover, its attractive long-term reward potential means it offers notable investment appeal in spite of elevated threats to the performance of its holdings.
With a track record of consistent outperformance of its benchmark and upbeat economic growth forecasts across Asia, the trust’s future outlook is highly encouraging. Its relatively high yield and dividend growth potential further enhance its appeal. Overall, it is a worthwhile long-term purchase for investors who can accept above-average risks in exchange for high return prospects.
Questor says: buy
Ticker: IAT
Share price at close: 321p
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