Dan Buchanan: Welcome to the latest in our Aberdeen Standard Investments Closed-End Funds podcast series, where we catch up with our closed-end portfolio managers and gain some perspective on these complex market conditions. Today, we are focused on emerging market equities with a manager of the Aberdeen Emerging Markets Equity Income Fund ticker, AEF, Nick Robinson. Welcome, Nick.
Nick Robinson: Thanks, Dan. It's a pleasure to be on again.
Dan Buchanan: Great. Well, let's begin with an update on the emerging market space.
Nick Robinson: Yeah. It's been a pretty reasonable year so far for emerging market equities. What's been going on is essentially the rally in assets that it started around the middle of last year when the crisis kind of started to pass, it continued. So that rally has continued being a fairly [audio cut 00:00:59] the types of companies that are performing well being mostly on the value end of the spectrum rather than growth, and that's essentially being driven by a couple of things. Firstly, the discovery and now subsequent rollout of a vaccine in emerging markets so that economies are now beginning to reopen and recover, increasing. And then secondly, just the amount of fiscal stimulus that's coming through, so fiscal policy has been pretty liquid in the last year. Monetary policy has been pretty loose. So you're just seeing quite good conditions for companies to generate good earnings. So that's really been driving markets and markets have continued to grow quite well.
Dan Buchanan: Well Nick, I'm curious to know, from your perspective, the mood of management at a lot of these companies that you're researching and investing in. What is their sentiment these days?
Nick Robinson: Yeah, I mean sentiment has generally been pretty good. Most companies in the kind of goods and manufacturing side of the economy have had a pretty good [inaudible 00:02:12]. To be honest, there hasn't -- the demand that they've seen with their products has been pretty steady throughout. Where we're seeing a bit more optimism now is more on the services side of the economy. So you know, people are beginning to start traveling again a little bit more, beginning to go to restaurants and the like, those businesses that are benefiting.
I think we have one slight shift perhaps in the mood in the last few months. There's been a bit more concerns for companies about inflation. So, you know, not just in terms of raw materials and commodities, but we're also seeing more discussion of wage inflation as well that's starting to come through. So as much as their earnings this year are still looking quite strong, earnings forecast to be up about 30%. year on year, we and I think companies are beginning to get a bit concerned that some of these inflationary pressures that they're seeing might be a little bit harder to pass through. So perhaps a slight, slightly more negative tone to some meetings versus recent months.
Dan Buchanan: I'm curious, Nick, have you been able to identify any striking opportunities in the marketplace, particularly a sector over the past year, that could benefit the fund down the road?
Nick Robinson: Yeah. I mean, we've been investing more in renewable companies in the last couple of months. We think the renewable story is pretty strong at the moment. We have -- China announced their intention to become carbon neutral by 2060, and you've had a host of -- announce their own targets in terms of emissions, and that we think is really going to benefit a lot of those companies in the renewables supply chain. So the companies that make parts of the electric vehicle batteries, companies that are in the solar panel supply chain, and we've invested in a company as well that's a manufacturer and operator of wind turbines. So we think that's a really exciting part of the market that has very strong tailwinds in terms of future growth that the portfolio should be able to benefit from.
Dan Buchanan: Nick, the fund AEF recently modified its distribution policy for dividends. Can you share the reasoning behind this?
Nick Robinson: Yeah. I think essentially the board of the fund were concerned with the discount that the fund was trading -- and felt that that discount should be narrower, and a way to manage that discount was to increase the distribution rate of the fund. So the fund has gone ahead to do that, and we expect that to be a steady 6.5% of net assets going forward.
Dan Buchanan: And does the fund apply leverage? I know a lot of closed-end funds in the industry utilize gearing or leverage; what is your position with AEF?
Nick Robinson: So AEF at the moment has about 8% of net assets as leverage, and yes, that’s the level that is appropriate for this type of vehicle given the financing costs of that leverage are pretty low so -- dividends on the portfolio is in excess of that cost. And it helps essentially to magnify some of the returns on the fund, particularly as we've enjoyed this good period of returns from the market.
Dan Buchanan: And leverage is one of those potential features of a closed-end fund structure. AEF is a closed-end fund. So as a portfolio manager, from your perspective, how does that closed-end fund vehicle help you to effectively manage a portfolio of emerging market equities?
Nick Robinson: Yeah it's a particularly good vehicle for emerging markets because one feature of emerging markets is some companies are less liquid than those companies you might find in developed markets, and so with a closed-end fund structure not having to manage inflows or outflows into the fund on a regular basis, yeah, it really enables you to go into slightly less liquid companies should we wish. Certainly, that's the case in the fund, in that we allocate a bit more in this fund towards some of the smaller opportunities that we have found in the market, and also some opportunities, which are particularly exciting within frontier markets. So in Vietnam and Kazakhstan, which we think will be very exciting from a capital return potential, but the liquidity of companies in those markets tend to be a bit lower as well, so that closed-end structure is very much well-suited to those types of investments.
Dan Buchanan: Thank you. And finally, Nick, why should investors be allocated to emerging market equities today?
Nick Robinson: You know, I think that the emerging markets are increasingly important in terms of global GDP, and certainly, very important in terms of the growth of global GDP with the contribution that comes from China. So it's a good way of generating exposure to that growth. But also, there's a huge amount of innovation going on in emerging markets at the moment, and some of the most innovative companies in the world now are coming out of emerging markets, which I think is not something you can [inaudible 00:07:58]. But being able to gain exposure to that kind of innovation that itself is levered to the huge populations that we see in emerging market countries, is something that I think makes a very attractive part of anyone's portfolio.
Dan Buchanan: Well, thank you Nick for your insights today. And thank you especially to our listeners for tuning in. You can find out more about the fund at www.aberdeenaef.com. I'm Dan Buchanan with Aberdeen Standard Investments. Do look out for future episodes.
