abrdn AEF Fund Update February 2025

Nick Robinson, Portfolio Manager, joins Mike Taggart to discuss recent changes to the AEF's investment strategy. 

Transcript

AEF Overview Podcast – February 2025

Nick Robinson, Portfolio Manager interviewed by Mike Taggart, Head of Closed-End Fund Investor Relations

Mike Taggart:

Welcome to the latest podcast for AEF. Actually, it's the first podcast for the fund under its new name and investment strategy, the abrdn Emerging Markets ex-China Fund still ticker symbol AEF. I'm Mike Taggart, abrdn Head of Closed-End Fund Investor Relations. I'm excited to discuss the fund's new strategy and get an update today from Nick Robinson, abrdn Deputy Head of the Global Emerging Markets Equities Team and a Portfolio Manager on AEF. Nick, thank you for taking the time to discuss these exciting developments in the fund. 

Nick Robinson

Thanks, Mike, for having me on. It's always a pleasure.

Mike Taggart:

Nick, there's a lot we can unpack here with the investment strategy change. I'm hoping you can describe it for us in the context of abrdn’s broader investment philosophy. 

Nick Robinson:

Yeah, sure, happy to. So, you have a strategy change to move the emerging market income fund to an ex-China strategy. So, the strategy that that no longer has any investments in China, but still invest in the broader emerging market universe. We've done that for a couple of reasons, really. I mean - firstly, you know, one thing that's occurred over the last few years, it's just been this huge expansion of China as a proportion of the emerging market benchmark.

And certainly, you know, that is likely to continue given how the onshore Asia market is increasingly going to have its weight increase by MSCI. So, you know, today, China is a bit over 30% of the emerging market benchmark and I suspect that that will increase. That's quite a large risk for a global fund to bear having more than 30% of assets in a single country.

And I would say that risk is really accentuated by the fact that China is quite a different country to other emerging markets from a governance perspective. And certainly, you know, the deepening of geopolitical concerns between the US and China mean that that risk is has probably increased in the last few years. So, yeah, we think having a fund that invests in emerging market opportunities outside of China also gives investors the opportunity to manage their own China exposure.

And, you know, some investors may want to have less than 30% of their emerging market assets invested in that country. So having an ex-China strategy gives us the ability to do that. And then I think, you know, the second kind of big reason why we've kind of moved away from China in this strategy is that if fundamentally, you know, China is a tough market to invest in, in a way that's aligned with our investment philosophy.

So, if you look over the last few years in China, you know, the stock market, it's very much been driven by top-down government policy. So, we've had the kind of crusade against the tech industry that started in 2021, which was driven by governments and their kind of efforts to kind of broaden out the kind of economic wealth, that's kind of just distributed around, around the country.

We had the sudden reversal on zero Covid that really kind of sent shockwaves through the Chinese market. And then more recently, we've had quite a lot of government policy in terms of stimulus that's been announced. And I think all of that is really meant that, yeah, a lot of the stock market moves have been driven by policy. We haven't seen fundamentals of companies come through. And so, we think, you know, it's fundamental bottom-up driven investors. You know the Chinese market is a particularly tough place to invest in at the moment as it is being driven by government policy. So, by going to ex-China, we think our own investment style is more likely to shine through. 

Mike Taggart:

Right. And so you just mentioned that abrdn investment philosophy is fundamental bottom up, investment philosophy. You also mentioned kind of in passing the governance aspect. And you know, and I was wondering if maybe you could talk a little bit more about governance because it's so important, especially in emerging market, when you're investing in emerging markets companies and kind of what you look for in terms of governance.

Nick Robinson:

Yeah, sure. So, governance is yeah, really part of investing in quality companies. And, you know, the process that we use that has been kind of similar in terms of philosophy since the late 80s, has always been focused on finding high quality companies within emerging markets. And yeah, we think about quality it comes down to, heavy industry for companies in having a decent tailwind, being free from interference from regulators or governments. It’s companies with strong balance sheets, as well, and identifiable kind of cash flows and easy to understand financials.

And then that third parties is where kind of ESG comes in particularly governance. And you know, governance. We've always seen as probably been the most critical part of the ESG picture. I think, you know, the fundamental issue with governance is that if a company is governed well such that it can make capital decisions in the interests of all shareholders over the long term, then those capital decisions are likely to result in better outcomes in terms of return on those capital.

So, when we think about governance, it's essentially having, you know, companies which have demonstrated a willingness to be run in the interests of all shareholders, not just the controlling shareholder, which is if a governance strategy fund more frequently in emerging markets rather than to shareholder bases, which are more common in developed markets. And then really understanding the motivations of those controlling shareholders as well, you know, are they running the company, for the family, for the controllers themselves, or are they willing to let minority shareholders participate in that upside? So, all sorts of things go into that, like how compensation works, like how the board of directors is structured, how effective those meetings of the board, whether or not, yeah, we have access to the management team as well, which is, which is crucially important in terms of a bottom-up investment process. So, there's a number of factors that come into it.

But yeah, mostly it's how companies have treated minority shareholders in the past or whether or not they've taken advantage of lax legal frameworks in their local countries to somehow, take advantage of, the minority shareholders. 

Mike Taggart:

Right? I think it's one thing it's an aspect of emerging markets and investing that many of us kind of forget the governance angle, right? Yet you spend a lot more time thinking about that and say, you know, if you're investing in the S&P 500. I just want to be clear here, the name of the fund, the new name of the fund, the abrdn Emerging Markets ex-China Fund, the non-fundamental investment policy, it's ex-China. That means you could still invest up to 20% of the portfolio in China. Do you intend to invest in China?

Nick Robinson: 

No. We you know we think if you're buying an ex-China fund, then you're not expecting the, the portfolio manager to invest in China. So, you know, we won't invest in China. And actually, we already run some ex-China mandates, if there's a US mutual fund that we, we've been running for the last actually three years now. And during the course of those three years, we haven't had any investments in China. So, anticipation is but we won't be investing in China in this product in the future. 

Mike Taggart:

Okay. Excellent. Thanks for that clarification. And aside from the name change and no longer investing in China, nearly everything else is staying the same, which I think is a good thing.

Ever since I was a Morningstar analyst years ago, looking at abrdn funds, I've been impressed with abrdn’s truly global investment footprint. We have boots on the ground all around the world. So, could you please tell us about your investment team, where they're located and how they inform your decision making as a portfolio manager?

Nick Robinson:

Yeah, sure. So, we have, an investment team of more than 50 investment professionals that cover emerging market companies or run emerging market funds. So, we've got a pretty big deep team. It's been, you know, more than 50 since about 2017. So, you know, the number of people in the team has been pretty steady over the years. You know, the offices we have are essentially, you know, all over emerging markets. So, we have the office in Sao Paolo that covers a lot of Latin American companies and then various offices around Asia, with the hub really being in Singapore, where a lot of investment managers are located. Yeah, I'm based in London. So, the fund is run out of London. 

And so, we, you know, we essentially cover an awful lot of companies, with analyst space, and generally have views on those companies, which they articulate to the PMS through written notes and also through the various calls that we have with the analyst teams in their various locations.

Really through that, we try and identify the best opportunities within emerging markets ex-China. Yeah, that's really done by Portfolio Construction Group, which is, three individuals. It's myself, it’s Devan Kaloo, who's the head of emerging markets, and then also Shinya, who's based out of our Singapore office. So, we have regular meetings, across the offices where those best ideas are shared and it's really the three of us as portfolio constructors, but really work through that and, and try and construct the best possible portfolio from that opportunity set, which, which is huge in terms of a number of companies is well over a thousand that we could potentially invest in.

Mike Taggart:

Excellent. Well, thank you for that. A couple of things I'd like to mention, aside from what you do as a portfolio manager, Nick.

First, by the time this podcast gets uploaded in late February, the fund has just finished a 20% tender offer. It bought back 20% of its shares. The fund also has a conditional tender offer running from March 1, 2025 until February 28, 2028. If the fund's total return on a NAV basis does not equal or exceed the total return of the MSCI Emerging Markets ex-China Index, net daily total return, then the fund will conduct another tender offer for 20% of its shares.

Both of these tender offers reflect the Board of Directors commitment to address the fund's discount. Second, another sign of the directors and abrdn’s commitment to addressing the discount is the fund's new distribution policy, beginning with the fund's March 2025 distribution, the fund will distribute 10% of its NAV on an annualized basis, and that will be based on the average daily NAV for the previous three months. AEF will continue to pay its distribution quarterly. 

Nick, I don't know what the outlook is in London. In the US, there are a lot of things going on less than a month into the Trump administration. I think it's fair to say that 2025 looks to be a year of unknown unknowns, a given that, why should U.S. investors put their money into emerging markets right now?

Nick Robinson:

Yeah, so, I think emerging markets quite interesting as an opportunity at the moment. I mean, I think yeah there's a few factors, but I think really the key one is that emerging markets tend to do well when global CapEx is increasing. So, when the world is spending money on capital spending, in order to grow businesses and grow economies, Yeah, a lot of that money finds its way to emerging markets. And certainly, the last time emerging markets had a long phase of outperformance was during the previous global CapEx boom, which was between around 2005 to about 2012. And that was really kind of driven by China's infrastructure spending and that money found its way into emerging markets largely through commodity prices, and commodity demand. You know, today we're seeing another boom in capital spending, globally, and that's really being driven by three things. It’s the kind of shift to the energy transition and the shift to green forms of energy production, you know, emerging markets, are well placed there in terms of being dominant producers of copper, and lithium which are key commodities for the energy transition.

Secondly, there's the near shoring trend, which is still intact. I mean, it's still there. And this really plays into the China theme in the manufacturing and investment is moving now outside of China. You know, given that kind of developing trade tensions that we've had over the last nearly decade now. Yeah, we're seeing a lot more manufacturing, building being generated or being invested in closer to home. So, we've seen in in Mexico, benefit from that in Vietnam and benefit from that. You know, the outlook is a little bit murky on that theme and the obviously there's more tariff talk. But even so, you know, that means that there's going to be more friend shoring as manufacturing is moved into a more friendly nations where perhaps they've managed to avoid tariffs.

Certainly, it argues for a more diversified manufacturing base. If you're a global manufacturer and the ability to shift manufacturing around depending on what happens, the tariffs. 

And then thirdly, there's been this CapEx boom that's being driven by, this kind of latest kind of tech spending, mostly related to artificial intelligence and the adoption of that and again, emerging markets very well positioned here. And, that a lot of the kind of picks and shovels for AI investments, particularly in data centers. Yeah, a lot of those manufacturers are based in emerging markets. So particularly places like Taiwan and and Korea. And again, the China angle here is quite interesting given how, you know, there's been this bifurcation of technology between China and the rest of the world.

So, you know, by playing the kind of emerging market ex-China film, you're really kind of getting more focused into those kind of Western centric, tech stocks. And, you know, the investment that's going on and, and, and picks and shovels, data centers. But increasingly now companies that are monetizing that and certainly that's the next phase of that. And we're seeing evidence of that for in emerging market companies as well. So, you've got this CapEx trend which is supportive. And then I think, you know, that's, you know, combined with valuations in emerging markets that are still very attractive and they and certainly compare very favourably to valuations of developed market companies. So yeah, there's still value in EM and there's some pretty good tailwinds at the moment in terms of, those CapEx drivers that I've talked about, which I think also support the asset class.

Mike Taggart:

Yeah, that sounds like a compelling case there, Nick. So, thank you. And thanks for the, the update overall on the refreshed AF. It's always a pleasure speaking with you. 

Nick Robinson:

Thanks very much, Mike. It was it was a pleasure. So, let's do it again soon. 

Mike Taggart:

Absolutely. And thank you everyone for listening to this podcast. There are three convenient ways to learn more about AEF on the internet.

 Visit abrdnaef.com, email us at Investor.relations@aberdeen.com give us a call at 1-800-522-5465. I'm Mike Taggart of abrdn. Thank you for listening.

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