19.4.218 1 Invesco Perpetual is a client of Kepler Trust Intelligence. Material produced by Kepler Trust Intelligence should be considered a marketing communication, and is not independent research. Please see the important information at the bottom of the page. Summary is a relatively concentrated portfolio of Asian equities. It is loosely benchmarked to the MSCI AC Asia ex Japan index, but has the freedom to go off-benchmark into Japan and Australasia and to buy ADRs and US-listed securities when appropriate. The manager, Ian Hargreaves, is a member of the Invesco Global Smaller Companies Group, and his expertise in this area is utilised on the trust, which is consistently overweight small and mid-caps (c 2 of NAV). The focus of the manager is on stock picking. While macroeconomic analysis is employed, this is not intended to be the key source of alpha and the fund tends not to be highly active relative to sector and geography, but focuses on generating excess returns through selecting the right 5 to 6 stocks. Valuation is a key element to the stock-selection process, in keeping with the philosophy and expertise of Invesco as a group. Ian looks for companies trading at a discount to intrinsic value with characteristics he likes, chiefly strong balance sheets and cash flow, and high barriers to entry. This focus on valuation is a relative rarity in emerging markets investment. The fund is the second-best performer in the AIC sector over five years, and one of the top performers over three years too; it has outperformed the index substantially over both time frames. The manager has achieved this despite underweights in some of the top-performing stocks during the rally. to inform his view. Each member of the investment team acts as an analyst, divvying up the region on a country-by-country basis. They are looking for companies, large or small, which have strong balance sheets and cash flow, with high barriers to entry, and they aim to identify those that are trading at a significant discount to their fair value. They invest with a minimum threeyear investment horizon and make an assessment based on their view of future earnings growth and profitability, using a fair value multiple. The manager places a high emphasis on company meetings and each member of the team visits Asia three to four times a year, as well as meeting investee companies via conference calls from the Henley office, covering a total of around 7 companies. Valuation is the most important factor in determining whether a company is investable and the trust s ability to roam among the smaller market caps where companies are often less well researched, particularly in Asia adds a valuable hunting ground in this respect. This focus on valuation has been a major driver behind recent portfolio activity and positioning. For example, following the 217 rally driven by tech stocks, Ian and the team have been taking profits from the technology sector and recycling that cash into other areas. One example is Samsung Electronics: although it is still the trust s largest holding, the team have effectively halved their weighting following its stellar gains and expect their overall position in the company to fall further over time. At 12, the discount is wider than the board s stated objective of 1. Portfolio The trust is managed with a benchmark aware approach, but the manager has a high degree of flexibility, and is able to take positions up to 1 away from the index by sector or by country, although 4-5 is more common. In particular, the fund has used its discretion to invest off-benchmark in Australia and Japan, as well as in US-listed Baidu. In addition, the team take an all-cap approach, and can at times invest across the market capitalisation spectrum. Ian and the team are bottom-up stock pickers by nature, but the macro is also taken into consideration when building the portfolio. A number of screens are employed to narrow down the initial universe, and Ian uses sell-side research from trusted sources Technology remains the trust s largest absolute sector weighting at 29, it is actually underweight relative to the MSCI AC Asia ex Japan index, and has come down from 32 when we last reviewed the trust in November. One factor in this underweight is the trust having no exposure to Alibaba (which accounts for 4.67 of the index) and being considerably underweight the likes of Tencent and TSMC. Instead, much of the trust s exposure to the sector has come via small- and mid-caps (such as Yageo Corporation, which made more than 3 last year before the managers sold it on valuation grounds). The proceeds of the portfolio s technology gains have been redistributed into various areas of the market, though one sector in particular that has benefited is energy, now one of the fund s largest sector overweights. Ian says that though he cannot forecast short-term oil price movements, he believes the supply/demand balance is improving, meaning the current
19.4.218 2 price is well supported. One addition has been CNOOC, China s largest producer of offshore crude oil and natural gas, while the manager has also added a Japanese stock, INPEX (another offbenchmark position, in this case highlighting the lack of pure oil exposure in the region). The trust is now overweight energy, with 5.3 in the sector versus 4.2 for the index. Ian and the team have also recycled capital into certain deep value areas such as stocks residing in heavy industries in China, which have come under pressure over recent years due to uncertainty surrounding the future of the country s economic model. These include China Conch Venture, which has an environmental waste incineration business that the team believes is significantly undervalued. Elsewhere, the trust s overweights relative to the index include financials, consumer discretionary and industrials, while key underweights are consumer staples, utilities, healthcare and telecoms, traditionally more defensive sectors. The trust is differentiated to its peers because it invests further down the market-cap spectrum and this has contributed to its medium-term returns. Though the trust still has 75 in what Morningstar deems as mega- and large-caps, this is c.2 percentage points lower than the index and its average peer. Instead, the trust holds 15 in mid-caps and a little over 3 in small and micro-caps. The proportion of the trust allocated to mid- and small-caps has drifted down in recent months as the market has sold off. Gearing Gearing is employed opportunistically and has been allowed to fall in recent months as Ian has his reservations about the sustainability of the recent rally. The trust was net cash to the tune of around.5 at the end of February. Although he has the ability to borrow up to 25 of NAV, over the past five years he has restricted himself to around 5 at most, often being net cash. From a geographical standpoint, the trust is broadly diversified, and hasn t taken huge active positions against the largest countries in the index, which should mean return characteristics are driven by stockpicking, rather than macro calls. However, the fund is underweight the ASEAN countries (ten south east Asian countries including Indonesia, Thailand and the Philippines), where valuations have become stretched in recent years. : country allocation of NAV 11 15 1 : Gearing 1.4.13-28.2.218 6 Relative to MSCI AC Asia ex Japan (end Feb 218) 95 214 215 216 217 218 4 2 China inc HK Source: Invesco Perpetual South Korea India Taiwan Japan Australia Singapore Thailand Philippines Indonesia Malaysia Pakistan Fund Index Powered by Highcharts Cloud : Market cap breakdown As of end Feb 218 6 Returns has delivered significant outperformance relative to both its peers in the AIC Asia Pacific ex Japan sector and the MSCI AC Asia ex Japan index. Over five years to the start of April 218, the trust s NAV total returns have been 81, meaning it has outperformed the index by c.23 percentage points. 125 1 : Performance vs benchmark and sectors 31/3/13 to 31/3/18 75 4 5 25 2-25 214 215 216 217 218 Market Cap Giant Market Cap Large Market Cap Mid Market Cap Small Market Cap Micro MSCI AC Asia Ex Japan Powered by Highcharts Cloud (NAV) MSCI AC Asia Ex Japan Morningstar IT AsiaPacific ExJapN IA OE Asia Pacific Excluding Japan
19.4.218 3 That outperformance has also been highly consistent. For example, the trust has beaten the index in seven of the past ten calendar years (which includes both rising and falling markets). The outperformance in 217 was delivered despite the trust being underweight many of the major technology stocks in the region (Tencent, Alibaba etc) that drove the index s stellar gains. 75 5 25-25 -5 The first few months of 218 have seen the market suffer and it has been more challenging for the trust (which hasn t been helped by its slant towards small- and mid-caps and cyclical areas). As discussed below, the manager foresaw tougher market conditions this year and took steps to protect investors by increasing his holdings in less aggressively valued areas of the market. Furthermore, in past calendar years that the market ended down, the trust has managed to outperform the benchmark. When we last met Ian, he urged caution regarding the outlook for his market. He argued that the bull run of 216 and 217 was justified given the low valuations of the starting point in 216 and that earnings growth had driven the market higher in 217 after a re-rating the year earlier. He warned that earnings growth had become more concentrated towards the end of last year and that valuations were not as attractive as a year earlier. The CFA Society UK survey on member sentiment supports this contention: there has been a significant fall in the percentage of respondents who think EM equities are undervalued as a whole, although only 31 think they are overvalued compared to 73 who think developed markets are too expensive. Dividend : Calendar year performance 28-218 28 21 212 214 216 (NAV) MSCI AC Asia Pac Ex Japan Morningstar IT AsiaPacific Ex Japan.5.4.3.2.1 Source: Invesco Perpetual/Kepler Partners Its annualised dividend growth has been 6.1 over five years (compared to 5.5 from the sector average) and the board has amassed revenue reserve cover of.82x the total 217 dividend. However, its yield is relatively low at 1.5 and, partly as a result of this, the trust has paid out less in total dividends over recent years than the sector (though a number of its peers are genuine equity income vehicles). Management Ian Hargreaves has been involved in the portfolio since 21 and took the reins as sole manager in 215, he is supported by a strong and very experienced team (average of 19 years experience) of seven investment professionals, with 13bn under management in Asia. They are based in Henley, forming part of Invesco s 68-strong team of investment professionals, with an average industry experience of 17 years and an average tenure of nine years. Ian also works alongside Nick Mustoe as part of the Invesco Global Smaller Companies Group, advising Nick on Asian small caps, which play a larger part in this portfolio than they do in those of most of his Asia Pacific peers. Discount : Historic dividends 29-217 21 212 214 216 Despite the trust s significant and consistent outperformance over recent years, its shares have continuously traded at a wide discount to NAV, currently 12. The AIC sector average is 7, and the trust has consistently traded at a discount to the peer group. Though the investment approach is primarily based around capital growth, Trust has a track record of dividend growth. For example, it has an unbroken dividend track record over the past 1 years (though it held its 213 dividend) and its 217 dividend of 4.3p represented a 17 increase on the previous year. However, there is no yield target, but this is an output of stock selection. A focus on valuation is likely to lead to a bias towards yielding sectors. One reason for the persistent discount is likely to be the presence of large-value investors on the share register such as City of London and Wells Capital Management. This means that investors may fear that there are likely to be significant sellers of the shares when the discount narrows, which would weigh on the discount once again.
19.4.218 4-5 -1-15 -2 : Discount/premium Ord 2/4/213-3/3/218 214 215 216 217 218 Morningstar IT AsiaPacific ExJapN The board looked to address this issue, and that of the persistent discount, last year by announcing plans to buy back shares via a tender offer for 15 of share capital. This happened last summer, with the board buying back 12.5m shares (leaving 9.9m shares in issue plus 4m shares in treasury). As the chart above shows, the tender offer has not materially affected the discount. However, it has led to a 5 reduction in the shares held by trading firms. The board retains the ability to buy back up to 15 of share capital, but has removed the commitment to conduct a tender offer linked to the discount level. The board aims for a discount under 1 in normal market conditions, and its preferred calculation is on ex income NAV, given the trust doesn t target a yield. On these numbers the discount is roughly 2 tighter. Charges The trust has an ongoing charges figure (OCF) of 1.2, compared to a sector average of 1.3 and no performance fee. This includes a management fee of.75. The KID reduction in yield figure is 1.18, the second lowest in the sector.
19.4.218 5 Invesco Perpetual is a client of Kepler Trust Intelligence. Material produced by Kepler Trust Intelligence should be considered a marketing communication, and is not independent research. Please see the important information at the bottom of the page. Important Information Kepler Partners is not authorised to make recommendations to Retail Clients. This report is based on factual information only, and is solely for information purposes only and any views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment. This report has been issued by Kepler Partners LLP solely for information purposes only and the views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment. If you are unclear about any of the information on this website or its suitability for you, please contact your financial or tax adviser, or an independent financial or tax adviser before making any investment or financial decisions. The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country. Persons who access this information are required to inform themselves and to comply with any such restrictions. In particular, this website is exclusively for non-us Persons. The information in this website is not for distribution to and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States of America to or for the benefit of US Persons. This is a marketing document, should be considered non-independent research and is subject to the rules in COBS 12.3 relating to such research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice. This is not an official confirmation of terms and is not to be taken as advice to take any action in relation to any investment mentioned herein. Any prices or quotations contained herein are indicative only. Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, but will at all times be subject to restrictions imposed by the firm s internal rules. A copy of the firm s conflict of interest policy is available on request. Past performance is not necessarily a guide to the future. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that Independent financial advice should be taken before entering into any financial transaction. PLEASE SEE ALSO OUR TERMS AND CONDITIONS Kepler Partners LLP is a limited liability partnership registered in England and Wales at 9/1 Savile Row, London W1S 3PF with registered number OC334771. Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority.