I much prefer to invest in stocks I’ve researched myself than hand my money over to overpaid fund managers.
But there are some areas – such as emerging markets – where it makes sense to let the pros use their expertise to manage my money. And in that case, I always prefer investment trusts over more conventional funds like unit trusts.
Today, I want to show you how a good investment trust can be an excellent place for your money. I’ll tell you about one of my favourite investment trusts and why I think it looks like a great opportunity right now.
In a world where ‘risk-free’ assets like sovereign debt don’t look quite so risk free anymore, this particular trust looks like a solid place to put a portion of your money.
First, let me tell you about some of the virtues of investment trusts.
The number one reason I prefer investment trusts to other funds
One of the big plus points for me is that you can pick these funds up through your stockbroker, with none of the initial fees you get with unit trusts. They trade like any ordinary share.
And like other pooled funds, you get a diversified investment run by professionals. This can be very handy in specialist areas like the emerging markets.
But there’s something else that I find particularly appealing. I’m talking about the discount to Net Asset Value (NAV) that a lot of these funds trade at.
When an investment trust launches, the management company raises money from initial investors. That often includes the investment trust’s management, investment banks and private clients in on the deal.
And then the shares start trading on the stock exchange where anyone can pick them up. It’s not unusual for the trusts to trade for more than the initial subscription price.
In investment parlance, that’s called trading at a premium to NAV. Fair enough, you may think. A great management team are about to go out and make shareholders a load of money – why not pay a slight premium over what management paid for the stock?
But here’s the funny thing about investment trusts. After the initial glory days following the launch, trusts nearly always end up trading at a discount. Original investors who want to cash in their shares don’t generally get back the full value of their assets.
Why on earth would investors pay £10 if, when it comes to selling, they may get as little as 50% the fund value?!!
It’s a great question. And the easy answer is that investors get a little too excited at the initial launch. Most new fund raisings look like a great idea at the time.
There are often other inducements to get initial investors onboard like warrants, or subscription shares. But in the main, the reason investors pay full-whack for the offering is that they’re enthusiastic about what the fund will achieve.
Now, the thing about the fund I want to tell you about today is that I’m even more enthusiastic about it now than when it launched. Looking at European and US sovereign debt issues, I’m dead keen to send my money off to the emerging markets. And that’s exactly what this gem of an investment trust will do for me.
Ashmore Global Opportunities Limited (LSE: AGOL) is run by emerging markets specialists Ashmore Investment Management. It’s been an interesting proposition ever since it launched in 2007.
And today it’s looking especially interesting.
Today, you can get in at a near 20% discount to the value of its assets. That’s got to be worth a look. Let me tell you a bit about it.
Why I think AGOL looks great value
AGOL mainly invests in corporate restructurings through distressed debt, private and public equity. Around a third of its assets are in Brazil, India and Singapore. About 15% of the fund is invested in local currency and corporate debt.
The majority of AGOL’s investments aren’t traded on any stock market. That’s why you need a specialist fund manager like Ashmore. You simply wouldn’t be able to get into these sorts of investments without them. From an ethanol producer in Brazil, to an Asian telecoms infrastructure and network business, this fund is in at the ground level with some very interesting assets.
So why are these shares trading at such a hefty discount to the trust’s NAV? It’s all to do with the 2008 credit crisis.
Even though that was largely a Western world problem, the knee-jerk reaction of the moneymen was to whip cash out of the emerging markets. It went straight back to the perceived safety of the West.
The chart shows how AGOL took a pasting in 2008. And how its share price never fully recovered.
The blue line shows how the shares tanked nearly 50% during the crunch, though the NAV (red line) dropped by less than 20%.
Today, the NAV (£9.71) is more or less where it started in 2007. Yet the fund trades at a 17% discount to the value of its assets.
During the 2008 crisis, cash came flooding back to the West. Emerging markets were perceived as risky. But today I reckon that perception has changed. It is, after all, Western sovereign debt that lies at the heart of today’s brewing financial crisis.
And today there’s a lot of smart money moving to the perceived safety of the emerging markets.
That said, this is not a fund where I’m expecting stellar returns. What I’m paying for are smart returns while hoping to avoid the risks brewing in the West.
Of course, as with any investment, there are risks here. Let me spell them out.
If we hit another banking crunch, AGOL could well take a hit. I’m not denying it. But at the same time, I really think there’s a chance that AGOL could benefit from a flight to safety. Emerging markets economies look a lot sounder than those in the developed world, in my opinion. The fact is, nobody knows exactly how the markets will react.
Next, shareholders can vote to wind this fund up early. That would mean cashing in the holdings and returning cash to shareholders. Although that may sound good (as we should get the full NAV back), in reality the types of investment held may be difficult to shift. I don’t think shareholders will want to go for this, but with large holdings vested with a few parties, you can’t rule anything out.
The discount to NAV seems to have found its base at just under the 20% mark. What I’m hoping for is that it will narrow and possibly even get back to trading at a premium. But we have to bear in mind that discounts can widen when markets are in crisis – looking back to 2008, AGOL is a great example of that!
Another thing to be aware of is the management fees. A 2% annual fee and 20% of any out-performance over the benchmark is rich. But I recognise that running this sort of fund is a lot costlier than a conventional fund. You simply couldn’t get into the types of investment this fund holds as an individual. So I’m comfortable paying these fees in this case.
How to buy AGOL shares today
On balance, I reckon AGOL is a great way to get some exposure to strong emerging markets such as Brazil and India and the Far East. It’s trading at a substantial discount to the value of its assets – meaning that you can essentially buy £9.71 worth of assets for just over £8.00. That looks like good value to me.
If you’d like to know a bit more about it, you can read the fund’s most recent investment managers’ report here.
Share price: £8.05
Net Asset Value per share: £9.71
Market cap: £185m
52 Week High/Low: £8.40/£6.74
AGOL yearly performance since launch (December 2007): 2007 -2% | 2008 -28.9% | 2009 -6.3% | 2010 +23.9% | 2011 +4.1%
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