Jenny Lowe looks at some of the most talked about investment trusts on offer and weighs up their value in the current market climate.

Emerging markets are traditionally seen as risky areas in which to invest but fund managers across the sector believe that the outperformance of emerging markets against the developed world is set to continue.

Global emerging market investment companies have outperformed the average investment company over both the short and long term. Emerging markets as a whole are expected to grow at an average of 4 per cent this year – ten times faster than the average 0.4 per cent projected in the developed markets.

Will Landers, manager of the BlackRock Latin American Investment Trust, believes that emerging markets, the Latin American countries in particular, have weathered the downturn well and will continue to produce good returns: ‘Latin America proved during the financial crisis that macroeconomic reforms undertaken over the past two decades safeguarded the region against the risk of global financial contagion.’

Landers is particularly targeting domestic-focused Brazilian stocks, as he believes that interest rates in the region will remain low for some time. ‘You have a growing middle class that now has access to credit thanks to record low interest rates in Brazil,’ he says.

‘Increasing numbers of people are starting to take on credit to buy “luxury” items such as flat-screen TVs and, for the first time, millions of people are potentially able to take out a mortgage to buy their first home.’

Interest rates in Brazil stand at 8.75 per cent – which is low compared with previous years, when rates have swung into double digits to stave off persistent inflation.

Landers believes that Brazil differentiated itself from other emerging markets, such as Russia and China, because its corporate governance standards resembled those in the developed world.

The Luxembourg-domiciled fund delivered a 263.7 per cent return over five years to the end of February and is currently five per cent overweight in Brazil.

Roddy Kohn, principal at IFA firm Kohn Cougar, likes the look of the Aberdeen Asian Smaller Companies trusts as one for the higher-risk investor who is looking for exposure to Asia.

‘This trust is managed by an old hand within the industry, Hugh Young, and he is a firm and trusted favourite of the expert adviser community.

‘Sitting on a reasonably attractive discount of 13 per cent, Aberdeen Asian Smaller Companies offers those investors who view the East as the growth powerhouse of the future an ideal trust.’

Kohn notes that the trust performed superbly well over the past year and, while returns over the forthcoming year may experience heightened volatility, the economic growth in the East should ‘prove fruitful over the long term for astute stockpickers like the team at Aberdeen’.

Consider Russia
Another recommendation for the more risky investor is suggested from Tim Cockerill, head of funds research at Ashcourt Rowan. He believes that, despite its extremely strong past performance, the Russian growth story may well have some more mileage.

Focusing on J.P. Morgan’s Russian Securities trust, he explains, ‘Although this trust has bounced significantly from its lows in March 2009, Russia has been the laggard of emerging markets. There are, of course, good reasons for this, but Russia may just surprise. It is a resource-rich country, and while demand globally for resources may be subdued at the moment, this isn’t going to last.’

He adds, ‘The valuation of stocks is attractive, with an average price-to-earnings ratio of eight times, very cheap by relative standards – the average in China is 50 times. The currency has stabilised and as the global economic recovery gains ground the Russian economy will benefit.’

The JPMorgan Russian Securities trust has some big positions, the largest being Sberbank at 13 per cent, but it isn’t
geared and is currently trading on a 10 per cent discount.

Opportunities in China
In terms of growth, however, there is only one name rolling off fund managers’ tongues – China.
‘China will have recessions like anywhere else, but it will remain the fastest-growing economy in the world,’ according to Russell Cleveland, president and chief executive officer of RENN Capital Group, a Dallas-based boutique fund manager that runs UK-listed investment trust Renaissance US Growth.

The focus of the fund is generally on ‘micro-cap’ companies (those with a market cap of less than £0.67 billion ($1 billion).

‘Every investor should have exposure to the best growth areas, and that means having a meaningful investment in China. The long-term growth prospects for companies investing in areas such as infrastructure, education, medical and food and water are considerable, partly because of the sheer scale of the government’s ambitions.’

To capitalise on these prospects, Cleveland invests 50 per cent of his portfolio in Chinese companies listed in the US, concentrating on smaller companies with entrepreneurial management who typically have a significant stake in their company.

With this in mind, he invested in Zhongpin, a US publicly traded meat and food processing company specialising in pork products, vegetables and fruits sold in the People’s Republic.

He says, ‘The Company is developing a nationally recognised high-quality brand for meats and food products that encompasses a meaningful part of the everyday Chinese meals.’

Zhongpin had a volatile 2010, falling in value from US$16.21 in January to $11.36 just a month later, but it started to recover and is currently valued at $13.39.

Emerging markets were tipped to be the top-performing region in 2010 in the Association of Investment Companies’ fund manager poll at the end of last year. And China has been at the forefront of the news so far this year, with Fidelity’s launch of its Chinese Special Situations fund, managed by fund manager Anthony Bolton.

Bolton will invest in firms listed in China and Hong Kong, or Chinese companies listed elsewhere. He will persist with his famed strategy of seeking out unloved and undervalued firms for long-term growth.

One concern is that Bolton has only committed to the fund for two years. Given his age, this may seem like a sensible precaution, but it may not sit well with investors who have bought into his long-term strategy.

Cockerill says, ‘Fidelity is trading on Bolton’s reputation and the excitement in China. This will attract people who wouldn’t normally have invested in China. I suspect that Bolton will want to manage the fund for longer. But if there are succession issues then that is definitely a negative.’

Commodities plays
Simon Moore, a research analyst at Bestinvest, picks out BlackRock World Mining as both a potential discount opportunity and a play on the growing Chinese economy.

He says, ‘The recovery in commodity prices continues to be supported by demand from China, where current economic data and GDP growth forecasts are impressive. Demand from the rest of the world is also beginning to improve.’

The portfolio of BlackRock World Mining is dominated by mining shares, and major themes in the portfolio are gold, platinum, copper and iron ore.

Moore adds, ‘Manager Evy Hambro has an excellent track record, and our analysis shows that over his 15 years of managing money in this sector he has, on average, beaten the HSBC Global Mining Index by 0.78 per cent per month.’

This is a large trust with total assets of more than £1 billion, and its current discount of 19 per cent is nearly at the widest point for 12 months.