The Establishment Investment Trust has released its interim report for the six months ended 30 September 2015. During the period, the company’s NAV fell by 11.0% in total return terms with the share price falling by 13.8%. By comparison, the FTSE WMA Stock Market Balanced Index declined 5.7%. However, the managers point out that the bulk of the company’s assets are invested in Asia, where markets sold off sharply (the MSCI Asia ex Japan Index dropping by 18.2%) and they say that the investments in UK stocks have provided useful balance to the portfolio. Unfortunately, the release announcing the report does not provide much detail in terms of the performance of individual stocks but does say that the revenue return has improved relative to the first half of last year and an interim dividend of 1.9p has been declared. The Board say that the discount to NAV is too wide but consider this should be addressed by better performance highlighting value in the shares.
In terms of outlook, the managers say that they expect China’s economic growth over the next decade to be considerably slower than it has been and driven by rising consumption and expansion in the service sector. Growth will be considerably less energy and commodity intensive and commodity prices will remain weak. Second, since the Chinese authorities retain control over the major financial institutions, it is likely that there will be a “brokered” solution of the debt problem under the guise of SOE reform. Third, dividend declarations by Chinese financials over the next few years will disappoint investors. Indeed, funds might need to flow in the other direction.
However, the managers say that the good news is that the service sector continues to thrive. Employment trends remain reasonably stable although these need to be monitored. It remains a difficult and competitive operating environment for consumer companies but the managers continue to believe in their long term growth prospects. Approximately 10% of the Company’s assets are deployed in China. The managers say that the stocks held in the portfolio are prodigious cash generators and have solid balance sheets.
Elsewhere the Japanese equity market has performed well. The managers comment that a weaker Yen has assisted profitability and, more importantly, they say they are seeing real evidence that corporate Japan is increasingly focussed upon shareholder returns. The investments in the United Kingdom have produced reasonably steady returns and contributed significantly to the income account.
The managers report that the company retains a liquidity (held in US Dollars) but the focus of the portfolio remains domestic Asia where the managers believe powerful demographic trends are likely to see the region grow strongly over the next decade. Valuations seem to be reasonable from both a relative and historic perspective in their view, which they consider improves the likelihood of decent capital appreciation in the years ahead.
Establishment Investment Trust suffers from Asian exposure : ET.