Advance Developing Markets has announced its annual results for the year ended 31 October 2015. During the year, the Company’s NAV declined by 8.1% compared thereby outperforming its MSCI Emerging Markets Index benchmark, which fell 11.4%. The share price fell by 9.5%, which reflects a modest widening in the discount. The average discount during the year was 11.0%. In terms of performance attribution, the managers say that fund selection was the major contributor, with strong relative returns from the Company’s holdings in China (Neuberger Berman – China Equity Fund, Fidelity China Special Situations PLC), India (Goldman Sachs India Equity Portfolio), Korea (KIM Korea Navigator Fund, Weiss Korea Opportunity Fund Limited) and Thailand (Ton Poh Thailand Fund – Class C). They also say that a positive contribution was achieved through asset allocation with underweight positions in Brazil, Colombia, Malaysia and Poland aiding to relative performance. Discount movements detracted from performance as, in their view, poor sentiment led to widening across a number of portfolio holdings, including Aberdeen Asian Smaller Companies Investment Trust PLC, Edinburgh Dragon Trust PLC, Korea Fund Inc and Weiss Korea Opportunity Fund Limited.
On 15 September 2015 it was announced that the Company’s Investment Manager was to be acquired by Aberdeen Asset Management PLC. The transaction received regulatory approval and was completed in December 2015. Reflecting this, the board considers that there are merits in changing the company’s name to reflect the Aberdeen brand. They believe that the company will benefit from Aberdeen’s high profile and good reputation and expect to help attract additional retail demand for the Company’s shares. As such they are proposing a resolution at the forthcoming AGM to change the Company’s name to Aberdeen Emerging Markets Investment Company Limited.
In terms of portfolio, the managers say in the second half that they made several significant changes to the portfolio. The Coronation Top 20 South Africa Fund was exited in full following a period of rapid growth in assets and disappointing relative returns. The manager say that, following a period of extensive due diligence on a number of managers, they initiated a position in Steyn Capital SA Equity Fund SP. This vehicle is managed by Cape Town based boutique Steyn Capital Management, with a focus on identifying companies with high earnings quality and strong fundamental tailwinds while avoiding those that are suspected of hiding structural weaknesses. The managers say that the firm is well resourced, a seasoned investor in South Africa, manages a reasonable level of assets and they were able to secure attractive terms for the Company’s investment. Another major new investment during the period was made into the Korea Value Strategy Fund Ltd – Class B. The managers say that the fund is managed by an experienced team at Petra Capital in Seoul. In the latter part of the year, the managers say that they added significantly to Weiss Korea Opportunity Fund Limited as its discount widened beyond 5%, a level at which the fund’s board and management has indicated they would step in and use their 40% buyback authority. The managers say that there are several reasons to remain optimistic that the underlying discount can narrow from that level, including gradual improvements in corporate governance, tax and legislative changes and the higher dividend yields offered by preferred shares.
The managers say that, over the course of the year, there was a significant rotation within the Company’s closed end fund holdings. New investments or additions were made in Aberdeen Asian Smaller Companies Investment Trust PLC, JPMorgan Chinese Investment Trust PLC, JPMorgan Global Emerging Markets Income Trust PLC, The Mexico Fund Inc, Morgan Stanley China A Share Fund Inc, BlackRock Emerging Europe PLC, JPMorgan Asian Investment Trust PLC and Fidelity China Special Situations PLC on the basis of attractive discounts and/or positive asset allocation views. As a result, the percentage of the fund invested in closed end funds increased to 57.7% over the year. Counterbalancing these were sales of a handful of closed end funds which were largely made on asset allocation or underlying valuation grounds including The India Fund Inc, India Capital Growth Fund Limited, BlackRock World Mining Trust PLC and JPMorgan Russian Securities PLC. Exposure to market access products was stable, with these products used for asset allocation purposes and to manage portfolio liquidity.
In terms of outlook, the managers have previously said that, “positive surprises in terms of growth, reform or political change” would be required to prompt a turnaround in the performance of emerging market assets. However, in their view, 2015 saw a continued deterioration in most of these factors, with the trend for weaker currencies, energy and commodity prices prevailing and further political and governance issues generating volatility and weighing negatively on sentiment. With emerging markets experiencing a third successive year of both absolute declines and underperformance of developed markets, the managers point out that some commentators have called into question the traditional aggregation of such a diverse group of markets into a single asset class. The managers say that they disagree with this approach and see reasons for selective optimism in 2016.
They say that, in their view, sentiment towards emerging markets is as negative as they can recall and they view this as a strong contrary indicator, particularly as they also consider that valuations are very reasonable, both compared to history, developed markets and in absolute terms. They say that in China they believe a soft landing is being managed and that the authorities have significant levers they can pull to avert a crisis. They say that this cannot be said of other emerging markets including Brazil and South Africa, where a turnaround seems dependent on reform or a strong pick-up in global demand and thus export prices. In markets such as India and Mexico, the macroeconomic outlook is robust in their opinion, although they say that valuations in these markets are commensurately higher. In Eastern Europe, they believe that highly attractive valuations, moderate growth and the potential for further stimulus point to better times ahead for investors. At a bottom up level, the managers say that discount widening and market volatility have thrown up opportunities for nimble investors in the short term, as well as for the patient ones over the longer term.
Advance Developing Markets outperformance driven by fund selection : ADMF