Closed-End Funds Offer Emerging Asia at a Discount

TheStreet.com

NEW YORK (TheStreet) -- Global stock markets continue to push ahead to new all-time highs in many of the most commonly traded indices. In Asia specifically, stock market rallies have come largely as a result of policy actions like the unprecedented stimulus programs put in place by the Bank of Japan earlier this year. These policy strategies are indicative of the broader support central banks have shown in propping the manufacturing sector and regional export markets.

But the elevated stock market valuations seen now can make it difficult for investors looking to gain regional exposure at inexpensive prices. For these reasons, some alternative asset instruments should be considered when looking for long-term value in emerging Asia, as there are still ways to benefit from the immense growth potential in the region.

Exploring Alternatives

One alternative option can be found in closed-end funds, which exhibit some marked differences from more commonly known mutual funds. Specifically, closed-end funds offer a fixed number of available shares. This creates a scenario where share values are tied more closely to the supply and demand visible in the markets, while other investment vehicles tend to be priced based on their net asset values.

This difference is important for investors looking for long-term value opportunities, as many closed-end funds allow investors to buy-in at substantial discounts relative to NAV. With stock markets pushing to extreme highs, closed-end funds provide one of the best options currently available because there's a smaller possibility for downside correction when compared to the benchmark indices.

Growth Positives in Emerging Asia

Asian economies present some well-documented growth opportunities when compared to their more developed counterparts in the West. For 2013, Asian economies are expected to expand at a rate of nearly 6%, which is much higher than the 2.1% projections seen for the U.S., and the stalling 0.2% growth rates seen for the eurozone.


As a partial reflection of this, Asian benchmarks have posted strong rallies so far this year. The MSCI Asia Pacific Index (one of the broadest measures of the region) has seen gains of 11% year-to-date, supported largely by improvements in importing countries (such as the U.S.) and stimulus measures from central banks. Debt levels in emerging Asia are much lower than what is seen in the West, and the region's total contribution to global GDP is expected to grow from the 27% levels seen now to 49% by 2050. When we combine these supportive external factors with the strong fundamentals present in Asian economies, a highly bullish scenario emerges.

Gaining Exposure with Closed-End Funds

With the long-term picture solidly positive, it is a good idea for investors to gain at least some investment exposure to the region. Closed-end funds trading at a discount provide one of the least expensive ways of doing this.

One option that is well-positioned for growth is the Asia-Pacific Fund , which trades at a 10.3% discount relative to NAV, and places a good deal of its investment focus on healthcare, the tech sector and in high-yielding equities.

With a market-cap of $112 million, the Asia-Pacific Fund invests in areas likely to benefit from changing demographic trends and a steadily rising middle class. These factors will continue to form a larger base for economic growth, making the region less reliant on its export markets.

"Given the growing maturation of these economies and substantial increases in disposable income," explains portfolio manager Hyung Jin Lee, "demand growth for in areas like healthcare should remain robust for many years."

Here it is clear that the fund sees these demographic trends in conjunction with undervalued sectors as a basis for its investment approach.

Income-Based Options

For those looking to gain regional exposure with more of a focus on income, the Aberdeen Asia-Pacific Income Fund offers another option. With a $2 billion market-cap and a dividend yield of nearly 5.5%, the fund gives investors access to emerging Asia's bond markets. The fund's discount is lower (at 2.3%) but the added dividend yields are attractive enough to help offset these higher valuations.

Other differences include larger exposure to Australian markets, and this will be viewed as a positive for more conservative investors looking to avoid some of the volatility that is typically associated with emerging Asia. In recent months, we have seen credit upgrades in regional economies and government reforms in the social security nets supporting aging populations. Both of these factors help to create demand for long-dated assets, and this is a bullish scenario for funds like Asia-Pacific Income Fund which offer exposure to these areas of the market.


Overall, these close-end funds provide investors a way of gaining exposure to a growing region at discount prices. The long-term scenario remains bullish for investors willing to accept the higher volatility that is often seen with assets in emerging Asia. Most stock markets around the world have experienced major rallies so far this year, but when we look at closed-end funds as an alternative option, excellent values can still be found. At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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