abrdn Closed-End Funds
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Closed-end funds are traded on the secondary market through one of the stock exchanges. The Fund’s investment return and principal value will fluctuate so that an investor’s shares may be worth more or less than the original cost. Shares of closed-end funds may trade above (a premium) or below (a discount) the net asset value (NAV) of the fund’s portfolio. There is no assurance that the Fund will achieve its investment objective. Past performance does not guarantee future results.International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods; these risks are generally heightened for emerging market investments.Concentrating investments in the specific regions subjects the Fund to more volatility and greater risk of loss than geographically diverse funds.Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).The Fund’s use of leverage exposes the Fund to additional risks, including the risk that the costs of leverage could exceed the income earned by the Fund on the proceeds of such leverage. Additionally, in the event of a general market decline in the value of the Fund’s assets, the effect of that decline will be magnified in the Fund because of the additional assets purchased with the proceeds of the leverage.Your portfolio may not have the same asset class weightings. Asset class weightings are subject to change.Diversification does not ensure a profit or protect against a loss in a declining market.Some of the information in this document may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies. These statements are only predictions and actual events or results may differ materially. The reader must make his/her own assessment of the relevance, accuracy and adequacy of the information contained in this document, and make such independent investigations, as he/she may consider necessary or appropriate for the purpose of such assessment.Any opinion or estimate contained in this recording is made on a general basis and is not to be relied on by the reader as advice. Neither ABRDNnor any of its agents have given any consideration to nor have they made any investigation of the investment objectives, financial situation or particular need of the reader, any specific person or for any loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information, opinion or estimate contained in this document.
abrdn Closed-End Funds
abrdn AEF Fund Update January 2024
In this episode, we sit down Nick Robinson, a manager of AEF.
The top ten holdings of AEF as of December 31, 2023 are below.
Taiwan Semiconductor Manufacturing Co Ltd (9.0)
Samsung Electronics Co Ltd (6.5)
Tencent Holdings Ltd (5.0)
Alibaba Group Holding Ltd (3.4)
HDFC Bank Ltd (3.0)
SBI Life Insurance Co Ltd (2.2)
Power Grid Corp of India Ltd (2.2)
FPT Corp (2.2)
Bank Rakyat Indonesia Persero Tbk PT (2.0)
Media Tek Inc (1.9)
CEF_AEF_Jan24_mixdown
Tue, Jan 23, 2024 12:21PM • 17:26
SUMMARY KEYWORDS
emerging markets, companies, portfolio, fund, valuations, investment, china, good, india, invest, year, aberdeen, terms, podcast, market, cyclical, investors, developed markets, countries, cutting
00:02
Welcome to the latest podcast for Aberdeen Emerging Markets Equity Income Fund ticker symbol A EF. I'm Mike Taggart. Aberdeen's us closed end fund Specialist. Today we have Nick Robinson, Senior Investment director with the global Emerging Markets Equity Team at Aberdeen and ATF suite Portfolio Manager. Nick, thank you for joining us today.
00:25
Hi, Mike. Thanks for having me on, sir. It's a pleasure to be here.
00:29
It's always a pleasure to have you on. Well, Nick, over here in the US, we're coming off a strong fourth quarter and a good year in the stock market for 2024. We're anticipating Fed rate cuts and the outlook domestically looks, you know, pretty good. So I guess my first question for you is why should investors consider allocating capital to emerging markets right now?
00:54
Yeah, I mean, I think that's a great question. I mean, particularly for us kind of dollar based investors who've really been enjoying some strong returns from from your local markets, I think. Yeah, emerging markets have been a bit disappointing over the last decade. But I think there's a couple of pretty good reasons why emerging markets are likely to do better going forward. I think the first reason is quite cyclical in nature, as you mentioned, there's likely to be some rate cuts in the US this year and, and that's something that actually should benefit emerging markets quite significantly, em tends to perform better when the US dollar is weakening, and certainly when the Fed is cutting rates, that also allows emerging markets central banks to start cutting their interest rates in order to support domestic demand. So the combination of a weakening dollar and am Central Bank's cutting rates should provide quite a good backdrop for the asset class outperformance. I think there's also a more structural reason as well, why emerging markets should do better going forward. And I think that's related to how em is positioned across three of the kind of big mega trends that we're seeing at the moment, namely, artificial intelligence and the investment that's going on there. You know, emerging markets are very well positioned there in terms of having a lot of technology companies in the supply chain, it's green commodities as well. You know, em, has real benefit from some of the biggest lithium and copper miners on the planet that are really crucial for the energy transition. And then also, this, this nearshoring angle is really interesting for emerging markets. And you're seeing that, you know, in many different countries now, as supply chains essentially diversify outside of China, you're seeing a real benefit to countries like Vietnam and Mexico, where the fund has some good exposure. So, yeah, I think those megatrends are likely to be in place for the coming decade. And that combined with the more cyclical elements we're seeing, you know, should mean that the 2024 outlook, and indeed the next decade or so should be a much more interesting time, I think, to invest in in these markets.
03:19
Okay, so definitely some reasons, it's going to take the longer term view and structural and cyclical, that sounds good. Then moving to the fund, specifically, the fund's investment objective is that it seeks to provide both current income and long term capital appreciation. Now, the fund has a stable distribution policy where it makes quarterly distributions to shareholders at an annualised rate of six and a half percent and net asset value. So would you please share with us the overall strategy of how you construct the portfolio in terms of security selection with an eye on meeting that distribution?
03:55
Yeah, so the distribution is really generated through both income off the current portfolio and also capital gains? Yeah, we feel that that's probably the best way of structuring the portfolio because if we were we to manage a portfolio very much focused on just generating income, yeah, that would make life a bit tough in terms of not being able to invest in some of the more exciting companies in emerging markets, which don't necessarily necessarily pay significant dividend distribution. So So essentially, we try and run the portfolio just to find the best opportunities for capital appreciation in emerging markets. And that might give us a percent or two of of dividend yields coming off the portfolio, which obviously isn't enough to make that six and a half percent or so distribution. So a bit of that distribution will come from capital gains, and then the fund also employs a little bit of leverage as well. Which, you know, when everything is working well means that the capital gains coming off the portfolio is levered to an extent over leveraged, but we use as only about 10% or so of gross assets within the portfolio. So we try to, you know, we like to be fairly conservative in that respect, although we have changed that leverage, depending on market conditions. And depending on when, you know, we feel there are more opportunities in emerging markets.
05:30
Right. And in terms of security selection overall, I mean, how do you view the quality of the companies that you're investing in? I mean, are you I presume you're out kicking the tires on these companies? That sort of thing? Yeah, yeah,
05:46
absolutely. We have offices, all over emerging markets. So we have an office in Sao Paulo, which I was based out for quite a long time. And then, you know, all over within China, Hong Kong, most of certainly most of the major emerging markets, and part of the investment processes going out and visiting companies and, and really not just visiting the management teams, but going out and seeing the assets that companies have, and you're the meeting the board of directors and the independent directors on the board, it's something we do quite commonly. And that really just helps us build a strong picture of the companies and their drivers, and at which points in the cycle, they're, they're likely to do well. And we take all that information away and essentially construct the portfolio. Using those those best ideas that are coming out from from the country teams, with an eye on ensuring that the quality of the portfolio is always quite high. And so when we're thinking about quality companies, it's really the management teams and the governance of companies. And that's particularly important in emerging markets where your legal frameworks or corporate legal frameworks may exist, but aren't always enforceable. So you're much more reliant on a controller of companies to treat minority shareholders fairly. And that's probably one of the big differences really, between emerging markets and developed markets is in the US, you know, most companies unless they have an S, for tech companies with different classes of shares, you know, most companies are fairly diffuse in terms of their shareholder base, whereas emerging markets, you have these controlling shareholders who who call the shots. So that's a big angle of quality. And then if the other aspects of quality are picking companies and good industries, which can earn decent returns over the long term, which aren't necessarily interfered with by governments or regulators. And then also companies with strong financials, you know, emerging markets do tend to be more cyclical than developed markets. But that hasn't always been the case in recent years. But certainly, emerging markets tend to have more ups and downs. And therefore, it's even more important to invest in companies which can survive those tougher periods. And indeed, companies which can make the most of those tougher periods by having a strong balance sheet, that means they can continue to invest, while others perhaps are retrenching right,
08:22
to get them through the downturns, you know, into go on into the good times. So as an emerging markets fund, you know, AF, that's a that's a large swath of the world that AF can invest in. And yet, you know, the portfolio has about a third of its assets in Chinese and Indian securities. So, you know, what's your outlook for those two countries that you have a third of the portfolio in China and India? Yeah,
08:49
I mean, it's, I guess we are, you know, we're pretty close to where the benchmark is, I would say. So, yeah, we're benchmarked against the MSCI Emerging Markets benchmark. We were a little bit underweight China, actually, at the moment, and, you know, roughly neutral in India, and I would say the year the outlooks for both countries are quite interesting. And it's certainly a hot topic of debate on the team at the moment. Yeah, China is, I would say out looks quite different in the countries in a way. I mean, China's obviously had a pretty rough time. In terms of investing there. We've had three down years of market performance, which is, which is really unusual. Right, you know, I mean, you know, unusual even to get two down years in a row in in some cases, but to get three is, is quite a thing. Yeah, I mean, I think with China, you know, we're seeing extremely attractive valuations today. Yeah, across across a broad range of the market. And so that's something that you know, for a long term impact Astra is quite interesting. Certainly starting having those valuations we see today in China as a starting point is, is very, you know, it's typically a pretty good place to start in terms of future returns. The difficulty is, but the economy is still very tough. Very recovery that was been anticipated post reopening hasn't really come through the property market is still very weak. And that's having quite a big impact on consumer confidence and consumption in general. And so that hasn't come through consumers really have been building up their balance sheets and their savings, you know, through this through this last couple of years, and the government hasn't really done enough to increase consumer confidence to get consumers out spending again, and kind of driving the economy from that domestic consumption angles. So yeah, we've seen a lot of a consumption stocks in the portfolio, he has struggled a bit, you know, that said, there's been an awful lot of stimulus that's come through the property market has enjoyed various stimulus measures, rates in China have been cut. So we do think that that will come through. But the timings a little bit uncertain. So it's, yeah, it's one of those markets, which is quite tough to invest in at the moment from a confidence perspective. But you know, all really great investments often start with an element of discomfort. And I think that's where we are today in China. So, you know, think it, hopefully, it should be a better year there. But the timing is tricky. And then India, you know, it's kind of the other side of a coin, really, I mean, it's quite a different environment. If the economy has had really good momentum post the COVID reopening, I think GDP growth has been five 6% or so, last year. And that continues, you have a difficulty, I think we have with India is is just now I said that, you know, the valuations in China are a great place to start. I would say today in India, the valuations are not a particularly good place to start in that valuations are very high. So from a portfolio management perspective, what we're trying to do is really balance for fact that economic momentum continues. There's a great long term story in India, particularly now that there's India has now overtaken China in terms of being the most populous nation on the planet. So that's quite interesting from a consumption and demand perspective. So India, very exciting market, but valuations to match. So it's, it's really managing those kind of two kind of competing forces within the portfolio. And that kind of ends up, we end up landing slightly underweight India in the benchmark, you know, we think the valuations are pretty challenging. But, you know, that said, companies are likely to continue to do well this year, as there's nothing really on the horizon that's likely to to derail that, particularly with the likelihood that Modi is going to win another term as Prime Minister.
13:11
Right, that is interesting. It's a tale of two countries, right. And then just quickly, looking at the economic sectors, I noticed that nearly half of the portfolio is in information technology and financials. Is that simply a function of the engines of emerging market economies, information technology and a growing middle class utilising more banking services? Or is there something more to it?
13:33
No, I mean, that that, that really is a big part of the the angle of Matt, I think, I think in technology, as I mentioned, you know, there's some of the greatest tech tech companies on the planet or in emerging markets. So you have a fund's largest position is in Taiwan Semiconductor, which is the company basically the only company that can make the high end Nvidia chips that are driving the AI revolution. Yeah, there's all sorts of other companies like Samsung and various kind of semiconductor testing companies as well, but the portfolio owns which are all in this value chain, which we think should should really again be a kind of multi decade driver of of emerging markets. So you know, technology we think is a huge opportunities. And then yeah, like you say, financials. It really is this kind of big middle class in emerging markets. And yeah, it's things like UV, the low penetration that we see of products like life insurance, in em, which are hugely penetrated in developed markets, but it's still at the beginning of that journey in AM. So we have some large positions in in life insurers. The banks are obviously very key in emerging ma rockets and very much the engines of em economies in terms of moving capital around to, to places where it's needed for investment. And, you know, as countries are making huge efforts in infrastructure investments and the like, you know, the financial system generally benefits from bat. So, yeah, I would agree that those are, you know, those are two very well represented sectors within in the fund and certainly, where we see a lot of opportunities.
15:29
Excellent. Well, thank you, Nick, for that update on ATF, the Aberdeen Emerging Markets Equity Income Fund. It's always a pleasure speaking with you.
15:39
Thanks, Mike. It's been great to translate.
15:42
And thank you everyone for listening to this podcast. There are three convenient ways to learn more about ATF on the internet, visit abrdnaef.com. Email us at Investor dot relations at a brdn.com or give us a call at 1-800-522-5465. I'm Mike Taggart of Aberdeen, thank you for listening.
16:32
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for informational purposes only and should not be considered as an offer investment recommendation or solicitation to deal in any of the investments or products mentioned herein does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen. The companies discussed in this podcast have been selected for illustrative purposes only, or to demonstrate our investment management style and not as an investment recommendation or indication of their future performance. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns, return projections or estimates and provide no guarantee of future results.
Holdings as of December 2023
Taiwan Semiconductor Manufacturing Co Ltd (9.0)
Samsung Electronics Co Ltd (6.5)
Tencent Holdings Ltd (5.0)
Alibaba Group Holding Ltd (3.4)
HDFC Bank Ltd (3.0)
SBI Life Insurance Co Ltd (2.2)
Power Grid Corp of India Ltd (2.2)
FPT Corp (2.2)
Bank Rakyat Indonesia Persero Tbk PT (2.0)
Media Tek Inc (1.9)