Aberdeen Emerging Markets (AEMC) has announced its annual results for the year ended 31 October 2020, during which fund selection contributed strongly to the outperformance during the year, allowing AEMC to provide NAV and share price total returns of 8.9% and 12.2% respectively. The chairman, Mark Hadsley-Chaplin, says that there were notable contributions from certain funds invested in China and South Korea, and that the same was also true in Eastern Europe. However, within these regions, the portfolio’s underweight exposure to China and Taiwan, and overweight exposure to Russia and Columbia, detracted from an asset allocation point of view. Whilst the portfolio remains less exposed to China than the benchmark, Mark emphasises that it still constitutes over a third of the portfolio in absolute terms. AEMC’s performance also benefited from discount narrowing within the closed end fund sector during the latter part of the year, as investor sentiment improved compared to the earlier part of the year.
Manager’s comments on Fund performance
“During the financial year, the Company’s net asset value (“NAV”) per share total return was 8.9% while the MSCI Emerging Markets Net total return index (the “Benchmark”) returned 8.2%. The ordinary share price total return was 12.2%, as the discount to NAV at which the Company’s ordinary shares trade narrowed to 13.4% from 15.4% at the start of the financial year.
The Company’s NAV total return for the year was 0.7% ahead of the Benchmark. Attribution analysis follows in Table 1 below and shows that underlying holdings, in general, outperformed their benchmarks. Discount narrowing on closed end funds also made a positive contribution while asset allocation by country was detrimental to relative performance.
In Asia, the Company’s investments in Korea performed strongly, with Weiss Korea Opportunity Fund (NAV +39.6%) and Korea Value Strategy Fund (+54.7%) both significantly outperforming the broader market (MSCI Korea +14.1%). The managers of both funds invest with a strong value bias, with Weiss expressing this through investments in deeply discounted preferred shares. In China, Fidelity China Special Situations performed exceptionally (NAV +61.3%), with strong stock selection combining with diligent use of gearing and selected exposure to private companies, as permitted by the fund’s closed end structure. Elsewhere in Asia, Thai specialist, Ton Poh Fund (-1.6%) had a strong year in relative terms with its portfolio of small to mid-sized growth stocks faring well in a challenging environment where the local index fell by close to 31%, while Schroder AsiaPacific Fund also outperformed (NAV +24.1% compared with MSCI Asia Pacific Ex Japan +11.8%) through good stock selection within communication services and financials. In Eastern Europe, the long-standing investment in Baring Vostok (private equity in Russian and former CIS states) enjoyed a burst of portfolio activity towards the year end with top holding Kaspi (which operates the largest payments, marketplace and financial technology ecosystem in Kazakhstan) listing in London and delivering a significant uplift to performance. The fund’s share price rose by 14.8% over the year (vs MSCI Russia -29.3%). Emerging Europe (ex Russia) specialist Avaron Emerging Europe Fund reinforced its long track record of low downside capture with NAV -21.4% compared to -34.8% for the MSCI Eastern Europe Ex Russia Index. Within the Company’s frontier market allocation, Romanian holding Fondul Proprietatea delivered another period of good absolute and relative returns (NAV +7.6%).
Relative detractors included dividend focused strategies in Asia (Schroder Oriental Income Fund Limited NAV +1.3%, and Aberdeen Asian Income Fund NAV -0.8%) as dividend payments were cut in the underlying portfolio companies (we estimate by around 15% over the year) and dominant growth companies in the region (which tend not to feature in these portfolios given their tendency to not pay dividends) powered ahead. The holding in Neuberger Berman – China Equity Fund (+21.1%) detracted from relative performance as its focus on quality growth at reasonable valuations led it to be underexposed to some of the largest contributors to the market’s gain. Schroder International Selection Taiwanese Equity Fund (+19.4%) failed to match its benchmark (MSCI Taiwan +26.4%) on account of a structural underweight in Taiwan Semiconductor Manufacturing Company, which rallied by close to 60% over the period and represented 45.1% of the Taiwanese Index at the end of the year.
Asset allocation detracted from relative performance. This was largely a consequence of the Company’s underweight positioning in China and Taiwan, which outperformed the broad emerging markets index by 26.9% and 18.2% respectively. Despite the Company having more than 40% of NAV invested in these two markets, this reflects an underweight position relative to a Benchmark in which a combination of China and Taiwan now represents close to 56%. Elsewhere, overweight positions in Russia and Colombia detracted while major underweights in South Africa, Brazil, Mexico, India and Malaysia contributed positively.
Closed End Fund discounts contributed to the Company’s outperformance with discount narrowing in the latter stages of the year reflecting a general improvement in investor sentiment from the depths of the COVID-19 crisis. The largest contributors were Fidelity China Special Situations and Gulf Investment Fund; the former saw its discount narrow by over 10% over the year to trade at parity by the end of period while the latter saw its discount narrow to 4.5% ahead of the publication of details of a full exit opportunity. For the period as a whole, the weighted average discount to NAV of the Company’s closed end holdings narrowed from 10.3% to 8.5%.”
Manager’s comments on Portfolio Positioning
“The composition of the portfolio by vehicle type is shown below. The most significant change over the period was that the Company moved from being 107.8% invested at the start of the year to just 101.2% of net assets by the end of the financial year. Gearing was reduced towards the end of April 2020 following discussions with the Company’s Directors and an agreement that it was prudent to adopt a slightly more cautious stance given the wide range of possible pandemic outcomes at that time. The allocation of net assets to open ended funds declined by around 5% during the year, while closed end fund exposure fell by just over 1%.
The Company’s geographic allocation is shown below. On a regional basis the most notable change was an 8.2% increase in exposure to Asia which resulted from a combination of market performance and investment activity. Active changes reflected the belief that the pandemic likely delayed the recovery in economic performance and thus sentiment towards non-Asian markets for which the Company had been positioned coming into 2020.
China’s weight increased to 38.2%, reflecting the country’s resilient performance during the period and the initiation of a 5.0% position in the Neuberger Berman China Bond Fund at the end of June 2020. From a top down perspective, we view China favourably but are mindful of the risks associated with having such a large proportion of the Company’s portfolio invested in a single country. We believe that the China Bond Fund allows us to add to the long term opportunity presented by China’s capital markets but in a more risk-aware manner than adding to the fund’s already substantial equity exposure. In the second half of the year, we trimmed sizeable positions in the Aberdeen Standard China A Share Equity Fund and Fidelity China Special Situations, both of which had performed admirably since the market lows in March 2020.
Exposure to South Korea increased to 13.7%, reflecting strong market returns and significant outperformance from the Company’s dedicated investments in that market. Taiwan’s weighting declined to 8.1% despite the market’s outperformance as a result of an exit from a small holding in Taiwan Fund in late 2019 and a scaling back of the position in Schroder’s Taiwanese Equity Fund. India saw a reduction in its allocation to 4.8%, reflecting a tender offer and subsequent exit from JPMorgan Indian Investment Trust. Indonesia fell to just 0.8% as redemption proceeds were received from Komodo Fund, which decided to liquidate during the year.
The increase in Asia’s allocation was, in large part, at the expense of Latin America, where the Company moved from an overweight to an underweight position over the year. Besides market performance, the decline was driven by the redemption of the Company’s position in Brown Advisory Latin American Fund which was completed in August 2020. This was driven by a combination of asset allocation and manager selection considerations, with Latin American markets remaining challenged on a number of fronts (currency weakness, unsettling politics, relatively poor response to COVID-19) while the underlying strategy (which has a focus on consumer companies) had failed to deliver on a relative basis for several years.
The allocation to the Europe, Middle East and Africa region also fell over the year. Partial redemptions from a number of regional vehicles (Avaron Emerging Europe Fund, QIC GCC Equity Fund and Laurium Limpopo in Africa) were utilised to pay down gearing in April 2020, while we also trimmed exposure to Russia through exiting a small holding in JP Morgan Russian Securities and via a tender offer from Baring Vostok. We took profits on Fondul Proprietatea while the company also continued to distribute capital back to shareholders by way of dividends and tender offers. In the latter months of the year, Turkey began to screen attractively, justifying increased exposure through an exchange traded fund. South Africa remained a very significant underweight throughout the period with an already challenging macroeconomic backdrop being compounded by the impact of COVID-19.
We continue to believe that many frontier markets, whilst increasingly marginalised and thus overlooked by most investors, are attractively valued and likely to deliver attractive returns for patient allocators of capital. At the end of the year, 12.5% of the Company’s portfolio was allocated to frontier markets equities and fixed income. Towards the end of the period, we initiated a holding in BlackRock Frontiers Investment Trust, acquiring shares at a discount to NAV in excess of 6%, an attractive entry point given the low valuation of the portfolio (including a dividend yield of over 5%) and the company’s tendency to trade around net asset value. Investors are given the opportunity to exit all or part of their investment at NAV less cost every five years, with the next such opportunity in early 2021. Around a third of the Company’s frontier allocation remains in the in-house managed Aberdeen Standard Frontier Markets Bond Fund, which offers the potential for good absolute returns from a portfolio of predominantly US dollar denominated sovereign bonds issued by a wide range of frontier countries. At the end of October 2020, this portfolio had a yield to maturity of 9.9%, representing a 5.0% spread over mainstream emerging market hard currency debt, a pricing differential that, in our view, is unjustified by fundamentals. Underlying exposure is to countries as diverse as Ukraine, Ivory Coast and Kenya, bringing further diversification to the Company’s portfolio.
The Company participated in several accretive corporate actions during the year. JP Morgan Indian Investment Trust completed a tender offer for 25% of shares in issue in February 2020. With a surprisingly low participation rate, there was substantial scaling-up and we exited 60% of the Company’s position at a significant premium to the prevailing market price. The Company also benefitted from several modest tender offers in Romanian holding Fondul Proprietatea, selling stock at a premium to prevailing market levels each time. In late 2019, we also took advantage of a liquidity window provided by a share buyback by Russian private equity specialist Baring Vostok that was conducted at a price materially higher than it had traded at over prior months. The Company retains exposure to a number of closed end funds with the potential for future corporate activity through full exit opportunities (Gulf Investment Fund, BlackRock Frontiers Investment Trust, Weiss Korea Opportunity Fund), ongoing regular tenders (Fondul Proprietatea) or conditional tenders (BlackRock Latin American Investment Trust, Genesis Emerging Markets Fund).
The allocation to funds managed by Aberdeen Standard Investments increased from 11.9% to 17.5% of net assets during the year. A significant element of that is accounted for by positions in open ended funds investing in China A Shares (5.2%) and Frontier Market Bonds (4.2%) with the remainder spread across several closed end funds focussed on Asian equities. The use of in-house managed funds, on which there is no double charging of fees, is a valuable tool in making the Company as cost-effective as possible in an environment where this is increasingly a concern for investors. All investments in “in-house” products are subject to the same in-depth diligence as external funds and a rigorous conflicts of interest procedure.
We have discussed in past reports our desire to invest in a focused list of actively managed holdings run by talented investment teams across emerging and frontier markets, thus offering investors an attractive “one stop shop” in a complex and sprawling asset class. In addition, the payment of quarterly dividends from a combination of capital and income and use of gearing, all capture the benefits of the closed end fund structure. To these collective points, at the end of the year the portfolio was invested in 30 funds, with 92.0% of net assets being exposed to equities, 9.2% to fixed income, cash and other net assets of -1.2% and the Company’s dividend yield was 3.6% per annum. We believe this is an attractive profile in the circumstances and one that should hold broad appeal.”