This big Asia trust to be is on the right track whatever Trump does

An £800m merger to combine two Asia investment trusts opens an opportunity for those willing to bet on a China recovery despite the re-election of Donald Trump in the US.

This article was first published in the Telegraph’s Questor column yesterday.

An £800m merger plan to combine two Asia investment trusts opens an opportunity for those willing to bet on a rebound in China, despite the re-election of Donald Trump as US president.

In an unusual move, Asia Dragon (DGN ), the second largest Asia Pacific trust with a market value of £673m, has agreed to join forces with £223m Invesco Asia Trust (IAT ), the sector’s smallest fund.

It is unusual to see a large trust liquidate and transfer its assets to a smaller rival, but Abrdn-managed Asia Dragon has struggled with poor performance. In the past decade it has returned 79% to shareholders, well below the 97.9% from the MSCI All Country Asia Pacific index. It also trails the 149% achieved by Invesco Asia which the Telegraph’s Questor column tipped in May last year, since when its price has risen 7.5%.

It is even rarer for two trusts to merge when their shares trade below their investments. Normally the leading fund in a transaction would trade at a premium above net asset value (NAV), offering shareholders in the acquired fund an uplift.

In fact, when the merger was announced last week, Invesco Asia shares stood 14% below NAV, a wider discount than the 9% deficit at Asia Dragon. That might look like Asia Dragon was better regarded, but its shares had been boosted by a merger proposal from the £39m Ashoka Whiteoak Emerging Markets (AWEM ) trust in May. While that approach was rejected, it led the board of Asia Dragon to launch a strategic review that culminated in the merger with Invesco Asia.

Under the deal, Asia Dragon shareholders will be able to sell a quarter of their shares at a 2% discount to asset value. That should leave the combined entity, which will be called Invesco Asia Dragon, with around £815m of assets. That should promote it to the FTSE 250 index where it will attract increased interest from tracker funds and wealth managers who like the Invesco fund managers’ ‘value’ stock-picking approach.

That could help narrow the discount and improve returns. Holders of 55% of Asia Dragon and 38% of Invesco Asia have backed the merger which will be voted on in January. A key attraction is the board’s plan to actively control the discount with a promise to hold a tender offer every three years, starting in 2028, that will let investors sell all their shares at 4% below asset value.

Neil Rogan, chair of Invesco Asia, wants to make the trust the ‘go-to’ Asia fund. With Invesco agreeing to cut its management fee, annual expenses could fall below 0.7% in the future and make it the cheapest in its peer group. In a further enhancement, the trust’s 4% annual dividend will be paid quarterly rather than half-yearly.

Whether the trust succeeds will depend on performance. While fund managers Fiona Yang (above) and Ian Hargreaves have done well, their decision to hold 40.5% of the portfolio in China and Hong Kong, the biggest allocation of any Asia trust and more than the 36.5% index weighting, has recently held back returns as the world’s second largest economy has struggled.

However, a concerted effort by Beijing to stimulate its economy saw China’s stock market soar 21% in September after a three-year decline. Rogan, a former global fund manager at Gartmore, believes this marks a turning point. ‘I think they will fix it and when the market realises, it will be off to the races.’

Singapore-based Yang, who became the trust’s lead manager in January, is more cautious but encouraged by the ‘early green shoots’ of a recovery in China’s property sector. Meanwhile, she can buy many profitable, well-run and growing businesses cheaply, such as Food Truck Alliance, the digital freight platform and ‘Uber of trucking’ that boasts a 60% market share.

Trump’s return to the White House makes increased US tariffs on Chinese imports likely. Yang said the trust’s exposure to companies exporting to the US had been cut back. Meanwhile, Asian shares were valued at almost half the level of global stock markets despite corporate earnings growing by 25% this year, which she believed was a ‘pretty exciting’ valuation gap that she was happy to exploit.

I agree. While Trump’s return to the White House casts a shadow over China and Asia, much of this is priced in. With Asian economies growing and benefiting from technological innovation, Invesco Asia Dragon’s long-term prospects are good, and its value approach complements the ‘growth’ style of rival Pacific Horizon (PHI) which we tipped in February.

Key facts

Closing price: 344p
Key facts
Market value: £225m
Year of listing: 1995
Discount: 10%
Average discount over past year: 12%
Yield: 4%
Most recent year’s dividend: 14.1p
Gearing: 1%
Annual charge: 1%

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