Japan Joins Israel in Fund Growth That's Easing Bleak Year at Aberdeen

NEW YORK (TheStreet) -- Aberdeen Asset Management's  (AND) stock has had a bleak year so far, but its closed-end funds that let investors tap markets such as Israel and Japan are delivering impressive returns.

The Israel Fund (ISL) has climbed 16% so far this year and the Japan Equity Fund (JEQ) has risen 19%, while shares in the Scottish asset management company have tumbled 5.8% in U.S. trading.

Closed-end funds are essentially pooled investments, just like mutual funds, except closed-end shares are issued through initial public offerings and trade on exchanges. Investors typically count on the funds for reliable cash flow, given the lower risk of share redemptions when markets hit turbulence.

Aberdeen's principal advantage may be diversification, allowing typical retail investors a way to counterbalance a stock portfolio that's too heavily weighted toward U.S. markets, especially if they see emerging markets as positioned to jump.

"In the closed-end-fund wrapper, you tend to see the same leverage that's employed in fixed income funds, and so you're increasing the yield available," said Rennie McConnochie, business development manager at Aberdeen. "It can work in two ways: increasing yields in good markets and decreasing the returns in bad markets, but you generally will see a higher yield than your typical mutual funds."

Another advantage is that "closed-ends won't force you to sell assets during redemptions," he said. "Funds tends to be 100% invested because you don't need a cash buffer to meet redemptions."

As for Israel, investors "wrongly believe that geopolitical insecurity in the region means a tough time for markets and Israeli companies," William Scholes, an Aberdeen investment manager said in a company video post.

"It's true that consumer data -- showing traffic through malls for example -- will be subdued during periods of conflict, but we tend to see that as demand deferred as opposed to cancelled," Scholes explained. "Investors wrongly conceive that Israel is now a developed nation and therefore one of slower growth, but if you look at the IMF projection of 3% out through 2019, that exceeds the United States and real GDP growth of European nations as well.

In addition to being a "start-up nation," Israel is particularly attractive because of its conservative debt structure, young population and positive wage growth, all of which points to long-term expansion, according to Scholes.

"I think if I were to pull out two defining characteristics of Israel as a market, it would be on the one hand, innovation, and the other hand, conservatism," he said.

The company has attributed the success of its Japanese closed-end fund to lower oil prices, which have helped the energy importer cut costs, and a stronger dollar that has made for a cheap, export-friendly yen.

"Some of that is down to confidence in the U.S. economy," Kwok Chern-Yeh, Aberdeen's head of investment management for Japan, wrote in a recent letter to investors. " The strong dollar is keeping the yen down and may help boost export revenues. Growth has been creeping up."

Because many of Aberdeen's broader funds are tanking -- the Global Income Fund (FCO) is trading down 26% from a year ago, as of Friday -- it can be more challenging for retail investors to spot opportunities. By comparison, rival BlackRock's (BLK) International Growth and Income Fund (BGY) has dropped 10% over the period, while Franklin Templeton's (BEN) Global Income Fund (GIM) has fallen 13%.

Aberdeen, however, says many of its funds' trajectories may be changing course, particularly the Aberdeen Greater China Fund (GCH), which barely budged in the 12 months through Friday. Aberdeen is forecasting the fund to grow as China adopts policy changes to rev up its economy. The fund has already picked up nearly 5% since January.

"The Chinese economy has essentially slowed down and the authorities are looking to do something about that,"  Devan Kaloo, Aberdeen's head of global emerging markets, said in an April video posting. "So we are likely to see an easing by the Chinese authorities with regard to interest rates, reserve rations, and potentially spending a bit more on infrastructure, which would help stimulate the economy."

There is an expected relaxation in monetary conditions in China, and the economy has set a 7% growth target, according to McConnochie. "They are introducing some stimulatory measures to spur economic activity on, but the Asia market is on a heck of a run so we're being cautious."

Aberdeen's top holdings in its Greater China fund includes life insurance giant AIA group, a pan-Asian company in terms of its earnings stream. AIA shares are up 16% on the year.

"When you refer to Greater China you are also referring to Taiwan," McConnochie said. "We have Taiwan Semiconducter (TSM), Swire Pacifics and we're also invested in China Mobile (CHL) and Petrochina (PTR)." 

Abberdeen expects the emerging markets to move in different directions depending on the country, as some countries such as big commodity exporters such as South Africa and Brazil are more exposed to depressed prices, and while energy importers are benefiting off cheap crude oil, according to McConnochie.

An especially interesting market is India, as fuel price subsidies have been eradicated and lower oil prices can stimulate the economy with more purchasing power for consumption and investment, he said. 

 

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