When open-end fund managers had to deal with redemptions in early 2011, followed by inflows later in the year and early 2012, it was business as usual for their investment trusts peers.
2011 was a disappointing year for emerging markets. The worsening sovereign situation in Europe resulted in increased risk aversion in the spring. That was followed by the US being downgraded over the summer and growing fears over a possible hard landing in China, the world's growth engine. By year-end, the Morningstar Global Emerging Markets Equity Category, including ETFs, recorded nearly EUR 2.3 billion in outflows. At the same time, sovereign stress in Europe started to decline and expectations grew for better performance from emerging markets through increasing consumer demand. In December the category recorded inflows of EUR 38 million--modest in comparison with the overall outflows that year but a sign that risk was back in vogue. 2012 has started very strong with the average Morningstar category fund returning over 8% in January (in GBP).
So what was going on in the investment trust space throughout this time? Due to the closed-end structure of investment trusts, there are no inflows or outflows to measure; however, discounts provide a sense of market sentiment. Overall, emerging-market investment trusts weathered the storm well. Investment trusts in the AIC Global Emerging Markets Sector traded at an average one-year discount of 10.5% compared with an average three-years’ discount of 11.5% (data as at Feb. 15). This has widened to 12.2% in the last three months, but that's still broadly in line with the long-term story--arguably, that's an opportunity.
The investment trusts suffered less in 2011 in performance terms, too. Eleven of the 12 Global Emerging Markets investment trusts have beaten their Morningstar category. Three have more than 10 years' history and each of these three has outperformed the category over the long term. These are: Templeton Emerging Markets Investment Trust (TEM), Genesis Emerging Markets (GSS) and JPMorgan Emerging Markets (JMG). This serves well as a reminder that the closed-end structure often leads to superior results for investment trusts versus their open-ended cousins, and that the compound effect of this cannot be ignored.
Templeton Emerging Markets Investment Trust has been run by Dr Mark Mobius since 1989--a length of tenure that's rare to see. It was also the first dedicated emerging markets investment trust launched in the UK and is the largest closed-end fund, with assets under management exceeding £2.2 million. Since its launch, the fund has returned over 15% annualised, twice as much as its average peer. It's also done far better for its investors than its OEIC equivalent. For example, over five years annualised, the trust has gained 14.7% and the OEIC just 5.6%--a big difference in returns. The investment trust tends to participate better in up markets and lose less in down markets, but its standard deviation (a measure of risk) is above the category average. Its three-month average discount is 6.3%, which is broadly in line with its one- and three-year averages.
Genesis Emerging Markets was launched just one month after Templeton Emerging Markets. This has also delivered an impressive return of over 14.5% annualised since its inception. Its one-, five- and 10-years' standard deviation is lower than its category average. Its short term, three-month average discount of 8.3% is a little wider than its one- and three-years average of roughly 7.5%.
Last but not least is JPMorgan Emerging Markets, which was launched in July 1991. JPM veteran Austin Forey has been at the helm here since mid 1997; supported by a vast research team, the fund has returned 9.7% annualised since its inception, compared with the category average of 7.6%. This investment trust has beaten its category over one, three, five and 10 years with its standard deviation broadly in line too. Over the last three months, the fund has been trading at an average discount of 8.6%, which is in line with its one-year average and 1% higher than its three-year average.
There are undoubtedly several factors behind the success of such investment trusts, but their closed-end structure is certainly one of them. A number of prominent open-ended peers have had to soft close in recent times (raising fees to limit demand); for investment trust managers, having the burden of inflows and redemptions lifted from their shoulders, they can concentrate their full attention on the tasks at hand. That tends to lead to better returns and, with discounts a little wider than normal, there are some interesting opportunities for those wanting to buy emerging-market investment trusts.
