Aberdeen Emerging Markets (AEMC) and Aberdeen New Thai (ANW) have announced a comprehensive set of proposals that, in the case of AEMC will see it change its investment policy from one of investing in emerging markets on a fund of funds basis to investing directly in the equities of Chinese companies, a merger between the two companies (ANW will be wound up and shareholders will be given the opportunity to roll over into AEMC) and a tender offer for up to 15% of AEMC’s shares.
Key benefits of the Proposals
Both boards have outlined the following key benefits to the proposals
- Move to investing directly in Chinese equities, which the Board sees as under-served despite China being the world’s second largest economy;
- Access to the highly successful Aberdeen Standard Investments’ equities team specialising in China, locally based in Shanghai and Hong Kong;
- The merger between AEMC and ANW will help improve liquidity and free float and, reduce fixed costs per share;
- Tender offer to provide an opportunity for shareholders seeking to realise all or part of their investment;
- And, for AEMC, a move away from a fund of funds structure to direct investment in equities, which the board expects to improve the attractiveness of the Company’s shares to its core investor base;
Exposure to an All China All Cap equity investment policy
AEMC’s proposed portfolio will be high conviction with an estimated 30 to 60 holdings, with exposure to small companies. The model portfolio has approximately 60% invested in the China A Shares market and will evolve over time. The same portfolio reflects ASI’s ESG strengths, with a higher rating and lower carbon profile than the MSCI China All Shares index (in Sterling terms), being the combined entity’s proposed benchmark (both as measured by MSCI).
With over £4 billion invested in Chinese equities as at 31 March 2021, ASI has a strong record of performance (both absolute and relative) witnessed in its Aberdeen Standard Luxembourg registered SICAV I China A and All China equity funds. ASI has been investing in China for almost 30 years, and has a large team based in Shanghai and Hong Kong, supported by team members in Singapore. ASI also brings a strong record of ESG integration into its investment processes and engagement with investment managers supported by on-desk ESG specialists, together with a very strong track record of investment in China. ASI’s Chinese equities team of thirteen is complemented by three on-desk ESG specialists and underpinned by ASI’s global footprint with its central ESG team of 20+ based in Edinburgh. ASI is acknowledged as industry leading with an A+ ESG rating from UN PRI.
ASI believes that several key themes are providing interesting opportunities in China:
- rising affluence is leading to fast growth in premium consumption in areas including education, travel, and food and beverage;
- growing integration amid the widespread adoption of technology means a bright future for plays on e-commerce, gaming, cybersecurity and data centres supporting cloud services;
- growing prosperity means structural growth for consumer finance, increasing investor participation on stock exchanges, and a need for financial protection – especially given the under-penetration of life insurance;
- rising disposable incomes are driving demand for healthcare products and services;
- policy makers globally are committing to a greener and lower carbon world and China, presently the world’s largest emitter of greenhouse gases, is expected to have a transformational role to play. Investments in renewable energy, batteries, electric vehicles, related infrastructure, and environmental management all have a bright future. ‘Grid parity’ will be game-changing.
ASI will manage the investment portfolio so that it does not include any company currently sanctioned under the Chinese Military-Industrial Complex Companies, or CMIC, list as per the United States Executive Order 14032. ASI will monitor the position for any future developments associated with this list of companies and any change to compliance with this approach would be communicated to the market.
Background to the Proposals – for AEMC
AEMC’s Board says that it has been actively considering changes to the Company and, whilst its investment performance has been very commendable over a long period of time, in the well-populated emerging markets investment funds sector, the attractiveness of the Company’s shares has been adversely affected by the current aversion to fund of fund structures and consequent look-through costs, particularly amongst wealth managers. This has resulted in an overly concentrated share register with limited free float, presently calculated at approximately 16%. One consequence of this has been the Board’s inability to undertake a determined buy back campaign to address the discount to net asset value at which the shares have traded in the stock market. In preparing these Proposals the Board has sought to address these issues comprehensively and so secure a sound long-term future for the Company.
Background to the Proposals – ANW
ANW’s board says that it has kept the investment performance of the Company under constant review, and in the period from 1 March 2020 to 30 June 2021 the Stock Exchange of Thailand Index (the “Benchmark”) delivered total returns of 12.8% on a Sterling adjusted basis. By comparison, the Company’s net asset value (“NAV”) total return was -0.5%. Given the continued relative underperformance and mindful of the commitment to undertake a full review of the Company’s investment management arrangements if performance over the three years to 28 February 2023 has not shown outperformance of the Benchmark, the Board has decided to bring forward alternative proposals to Shareholders now. The Proposals seek to provide Shareholders with the ability to gain exposure to investment in Chinese equities, managed by a highly successful Aberdeen Standard Investments (“ASI”) equities team with a proven track record of outperformance, all through a larger more liquid vehicle.
Management arrangements
Aberdeen Standard Fund Managers Limited (ASFML) has agreed to make a contribution to the costs of implementing the Proposals by means of a waiver of the management fee otherwise payable by AEMC to ASFML for the first six months following the completion of the section 110 scheme, which will be for the benefit of all remaining shareholders of the enlarged company. In addition, in future the fee for the management of the enlarged AEMC will be calculated with regards to the market capitalisation of the enlarged company, rather than net assets. This aligns ASFML with shareholder aims such that it is better incentivised to ensure that the share price discount to net asset value is kept close to zero. The annual management fee will be structured on a tiered basis, with the first £150 million of market capitalisation being charged at 0.80%, 0.75% on the next £150 million and 0.65% thereafter.
AEMC’s Continuation vote reset, but future performance linked to tender
AEMC is currently required to hold a continuation vote every five years with the last vote held at the AGM in April 2018. If the Proposals put to AEMC’s shareholders are approved, it is the intention that the requirement for this vote will be reset with the next continuation vote put to shareholders at AEMC’s AGM to be held in 2027.
In addition, the AEMC board intends that, if the company’s NAV total return over five years ending December 2026 does not exceed the total return of the MSCI China All Shares Index (in Sterling terms) the company will undertake a tender offer for up to 25 per cent. of the company’s issued share capital (excluding any shares held in treasury) at a 2 per cent. discount to the then prevailing FAV.
Tender offer
Given the proposed changes of investment policy, shareholders in AEMC will be offered a tender for up to 15 per cent. of the shares in issue (excluding shares held in treasury) at a two per cent. discount to FAV per ordinary share. Similarly, as part of its section 110 scheme, New Thai will offer a cash exit for up to 15% of its shares in issue at a two per cent. discount to formula net asset value (“FAV”) per ordinary share. Those New Thai shareholders making no election will default to the rollover option.
Board structure
Anne Gilding and Sarah MacAulay, two current New Thai directors, have been invited to join AEMC’s Board from the date of completion of the transaction. At the annual general meeting of the Company expected to be held in April 2022, William Collins, who has completed nine years of service on the board, will step down. Mark Hadsley-Chaplin, who has also completed nine years of service, has been requested by the Board to stay on as Chairman to oversee the transition and initial period of the Company following the implementation of the Proposals. Accordingly, Mark will stay until the annual general meeting in 2023, at which point he also will step down.
Continuation vote and future performance linked tender
AEMC is currently required to hold a continuation vote every five years with the last vote held at the Company’s AGM in April 2018. If the Proposals put to shareholders are approved, it is the intention that the requirement for this vote will be reset with the next continuation vote put to shareholders at the Company’s AGM to be held in 2027.
In addition, the Board intends that, if the Company’s NAV total return over five years ending December 2026 does not exceed the total return of the MSCI China All Shares Index (in Sterling terms), the Company will undertake a tender offer for up to 25 per cent. of the Company’s issued share capital (excluding any shares held in treasury), any such tender offer will be at a price equal to the then prevailing FAV less two per cent.
Comments from Mark Hadsley-Chaplin, Chairman of AEMC
“The headwinds referred to above, which have strengthened over recent years, have led the Board to this proposal which we recommend to shareholders. After a very thorough selection process we concluded that Aberdeen Standard Investments (ASI) is extremely well-equipped to deliver highly competitive performance with this exciting new mandate. As we have seen this week, China’s equity market can be volatile, but over the medium and long term, we believe it will generate tremendous opportunities for an expert investment team with feet on the ground. I would also note that the closed-ended structure is well-placed to withstand short term market volatility and to capitalise on longer term opportunities that arise from it. We expect that the combination with Aberdeen New Thai will enhance the liquidity of the Company’s shares, with fees set at competitive levels. This should help to attract retail and wealth management investors, thereby diversifying the shareholding base. I would like to pay tribute to Andy Lister and Bernard Moody who, in spite of those headwinds, have been first class managers of AEMC during their time at ASI (and before) and I wish them every success in the future ”
Comments from Nicholas Smith, Chairman ANW
“Despite providing shareholders with a strong absolute total return since launch in December 1989, relative performance against the benchmark index has disappointed. The Board has engaged with the Manager over the past three years to seek to improve this but relative results have not improved.
I mentioned in my two most recent Chairman’s Statements the Board’s continuing commitment to providing shareholders with an investment proposition of producing relative outperformance over the long term. I also noted that should the performance over the three years to 28 February 2023 not show outperformance of the SET Index (‘three year test’) the Board would undertake a full review of the Company’s investment management arrangements.
Recently, the Board received a proposal to join with AEMC to support its new investment objective of investing in Chinese equities. With the continuing lacklustre performance in the portfolio since 1 March 2021, the likelihood of the three year test not being met, and the lack of investor interest in small country funds, the Board believes this proposal will offer our shareholders the opportunity to be invested in one of the fastest growing countries in the world with rising affluence and disposable incomes. The Chinese economy continues to innovate and prosper with policy objectives such as digital innovation, green technology and access to better healthcare and we believe shareholders will benefit over the longer term from a larger, more liquid vehicle investing in China.
I, and the Board, would like to extend our thanks to Orsen Karnburisudthi and Adrian Lim at ASI for their time and dedication as investment managers of the Company and we should like to take this opportunity to wish them both all the best for the future.”
Comments from Andrew Lister, Senior Investment Manager at Aberdeen Standard Investments (responsible for AEMC, along with Bernard Moody)
“It has been a privilege to be involved with the management of the Company for over 20 years. The only constant in emerging markets over this period has been change, and the emergence of China as a global engine of growth and an attractive investment destination has epitomised this. Bernard and I are optimistic that the change of strategy being proposed puts the company in a strong position to thrive in the future, as in the past, and to remain relevant in a constantly changing investment landscape.”
[It is fair to say that this came as a surprise to us. While we were conscious of the need to fix the problem of the concentration of Aberdeen Emerging’s share register, its performance numbers have been good for a while now – third in its sector over five years – and its discount has been narrowing. Aberdeen New Thai, by contrast, is subscale, too niche and has long failed to beat its benchmark. We have argued for some time that there is room for additional investment companies focused on the Chinese market. China’s economy may overtake that of the US within a decade. Abrdn’s China A share fund, which AEMC holds, does a good job. However, sentiment towards the Chinese market is not good at present. The new trust has to cope with a capricious government, worsening relations between China and its neighbours, tension between China and the US and China’s poor human rights record in the west of the country. After a strong run last year, China’s stocks were also reckoned to be less attractively valued than those of many other emerging markets. Although this is less true today after the recent market falls.
The loss of Aberdeen Emerging removes another significant fund of funds investor from the market, cutting off access to many exciting and interesting strategies for ordinary investors. That is a shame. We are also sad to see Andrew and Bernard leave the sector.]