Investment trust bargain hunter: new fund manager and double-digit discount

investor-trying-to-catch-flying-pound-signs

Fidelity Asian Values' double-digit discount is a 'buying opportunity', according to stockbroker Stifel.

The trust's discount has stubbornly traded at 12 per cent over the past year. Usually, it would not catch the eye of our investment trust bargain hunter as its current discount is the same as its one-year average, but in this case an exception has been made because Stifel expects the discount to narrow over time.

Due to the slowdown of the Chinese economy, Asian trusts have fallen out of favour with investors in recent years.

But with investor sentiment beginning to change towards these regions, discounts are expected to narrow. Over the past three months emerging markets have come back into favour, which in turn has stoked higher levels of interest from investors for Asian and emerging market investment trusts.

SMALL-CAP FOCUS

Fidelity Asian Values, managed by Nitin Bajaj, who was appointed in April 2015, has been the strongest Asian investment trust by some margin over the past year.

It has outperformed its next closest peer, Pacific Assets, by over 6 per cent since July 2015, according to research from Stifel. The trust has delivered a net asset value return over the period of 8.8 per cent.

The trust, which currently favours Indian, Taiwanese and Chinese equities, has returned 9.4 per cent over the last six months.

Since Bajaj took over he has been adjusting the trust's strategy. First, he decided to move its focus from large to small caps. Second, he began to utilise derivatives, but only sparingly to generate extra income.

The manager is also making use of small short positions, to make money when certain shares fall.

Anthony Stern, analyst at Stifel, says the trust's performance since Bajaj took over will catch the eye of investors returning to the region, and should over time cause the discount to narrow.

Commenting on Bajaj's performance since he took over the trust, Stern says: 'Not only does this illustrate the manager's ability to outperform but also his ability to generate positive returns in falling markets.

'We reiterate our positive recommendation and think long-term investors should benefit from good relative returns and eventually a contraction in the discount.'

ABOUT INVESTMENT TRUST BARGAIN HUNTER

Each month Money Observer highlights a couple of investment trust bargains, both online and in our monthly magazine.

We will also occasionally draw attention to investment trusts that are 'too hot to handle' - those that are trading on big premiums.

Our ideas come from regular conversations with investment trust analysts, and we will try to provide a mixture of bargains, from 'hidden gem' trusts with less than £200 million in assets to the more established names that typically trade on a smaller discount or premium.

HOW WE FIND INVESTMENT TRUST BARGAINS

For the sake of simplicity, rather than using technical measures such as the 'Z score', in this column we will identify bargains by comparing current discounts with their 12-month averages.

Only those trusts with a wider discount than their average are considered. We will also look at the overall sector and the quality of the trust, and then take a view on whether the discount looks a good opportunity.


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