Dan Buchanan: Welcome to the latest in our Aberdeen Standard Investments closed-end fund podcast series, where we catch up with our closed-end portfolio managers and gain some perspective on these complex market conditions. Today, we are focusing on emerging market equities with the Manager of the Aberdeen Emerging Markets Equity Income Fund, ticker AEF Nick Robinson. Nick, welcome, and thanks for joining us from London.
Nick Robinson: Thanks very much, Dan, it’s good to join you again and chat.
Dan Buchanan: Great, thanks. Last time we spoke was in December. And so I thought a good place to start would be your impressions, post U.S. election in particular and then maybe weave in State of the Union for the COVID-19 pandemic and how those results may effect emerging markets looking here in 2021.
Nick Robinson: Sure, yeah, that's a good place to start. Yeah, so I think when we last spoke in December, we just had the outcome of the U.S. election, and we were seeing quite a change in market conditions and the dollar was weakening, which was good for emerging markets. And we also saw quite a significant shift in how the market was behaving in terms of the types of stocks that were favored by the market.
So we saw a big shift towards value stocks, with growth stocks, performing less well. And that very much benefited the portfolio is the portfolio is comprised of a significant number of stocks that really fall into the value category of companies. So relatively cheap in terms of price to earnings ratios and have quite high dividend yields. So those stocks performed very well into the backend of the year. And the funds relative performance in the fourth quarter was very strong as a result of that.
We saw a change in January, when the market shifted towards more growth stocks, again, so the fund lagged a little bit in general, although markets still continue to be quite strong. And then the big shift has come more recently, in the middle of February, when the market started to get more concerned over interest rates and inflation. And we've seen a very sharp rotation back into value stocks, against the backdrop of a market that's been selling off a bit since mid February.
So things have been quite different, but those kind of market conditions where the value is outperforming -- tend to favor the funds relative performance. So, so far this year, the fund is outperforming by a percent or two.
In terms of the Coronavirus and how that impacts in the portfolio. Well, yeah, we're now at a stage I think where the market is, is beginning to discount or return to more normal conditions. And so you're seeing kind of reflationary trade going on with markets, commodity companies doing very well. Oil companies doing very well at the moment particularly post yesterday's OPEC decision to not increase supply.
So that's quite, I think a quite positive environment to the portfolio. I think emerging markets in terms of the vaccination progress are as expected somewhere behind developed markets at the moment, which is, I think, fairly not to be -- you probably shouldn't be too surprised about that, given emerging markets have been relatively slow to develop vaccines, and mostly reliance on the vaccines that have been developed by companies in more developed markets and so are kind of some way back in terms of the queue to get access to vaccines.
But I think, you know, by the middle, towards the end of this year, we should have pretty good insight on significant vaccination of most emerging markets, and I think that will be positive in terms of getting economies going again. Certainly, there's some concerns, but as economies reflate, we will see more inflation, certainly, it's likely that services inflation starts to tick up quite significantly, given the pent up demand for things like travel, entertainment, and the like. But whether or not that inflation is a bit more longer lived will be quite interesting in the face of the expectation at the moment is inflation will kind of nudge down again after we're back through this kind of reopening period, just because of the supply imbalances in economies out there at the moment, which again, would favor say the market again and probably be quite beneficial for overall market performance.
Dan Buchanan: Nick, you mentioned commodity prices, commodities have certainly been on the move as of late. I'm just curious if you could tie that into what the mood is among company managers or management of the securities and the firms that you look at for inclusion in AEF. What has that mood been like, as you've been speaking to executives around the world?
Nick Robinson: Yeah, I'd say the mood is pretty positive at the moment. I mean, that's against the backdrop at the moment where earnings expectations for the emerging market benchmark is earnings to be 30% higher this year versus last year, and at the moment, we're currently in an environment where those expectations themselves are notching up and have grown by a few percent since the start of the year. So the mood at the moment is pretty bullish I would say. Certainly when we speak to commodity companies, oil companies, they're there --- they’ve been pretty positive more recently. I would say the parts of the market, which is still perhaps slightly less positive would be those related to travel. Travel is still pretty challenging at the moment, and as much as there's optimism that travel will start to return to normal. There's also some concerns over new variants of Coronavirus, which could spread and dampen demand again, but also, there's a fundamental issue, I think behind the different approaches that some countries have taken to the pandemic and those countries that have really looked to stamp out Coronavirus, and have been quite successful in doing that like China, Korea, Taiwan. Those countries are actually going to find it harder to open up travel again due to the concerns that they would have over bringing Coronavirus into countries which have effectively virtually eradicated it. I think managements of those companies at the moment are a little bit more cautious.
Dan Buchanan: And Nick talked to us about dividends. We've been in this lower for longer interest rate environment, and we certainly have a very large demographic developed in emerging markets from a accumulation phase and their client portfolios to a distribution phase, and there's a desperate search for income. Talk to us a little bit about dividends, dividend yield on emerging market securities. Thanks.
Nick Robinson: Yeah, maybe last year was a pretty tough year for dividends. We saw a lot of cuts across the board as companies really looked to conserve capital, and it's hard to have enough capital to defend against what was a very tough demand environment. What's interesting this year is we are seeing dividends come back. I think what's perhaps the most striking area where we're seeing a resumption of dividend payments is in the financial sector. In the last year, we saw a lot of regulatory changes sweep through the banking sector within emerging markets, essentially forcing banks to conserve capital. So, dividends were cut really at the behest of regulators. As we, as we come into ‘21, we're seeing more banks and regulators start to relax now about capital and banks being able to pay out dividends. In many cases, the dividends that banks are paying out will include payments for dividends that were skipped in 2020. So that sector I think we could be looking at a real bumper year for the income as there is this effective catch-up and elsewhere as we see earnings estimates, as I mentioned, increased by 30% to this year and dividends will tend to increase by a similar amount. So I think, the income outlook at the moment for emerging markets is pretty good. And certainly they are an increasingly good source of income for those investors that that are looking for income opportunities, particularly in a world where interest rates and bond yields are also very low.
Dan Buchanan: Nick, I'd like to switch gears for a moment if I could and talk about the fund itself, the Aberdeen Emerging Markets Equity Income fund ticker AEF, is a closed-end fund vehicle. From your perspective as a portfolio manager, how does the closed-end fund structure help you to effectively manage a portfolio like AEF?
Nick Robinson: Yeah, I mean, Dan it makes it a bit easier in a way. The closed-end structure essentially means that you're not too worried about money coming into or out of the portfolio. So liquidity is less of a concern. In most open-ended structures, you have to have sufficient liquidity of positions in order to make redemptions or inflows, whereas within the closed-end structure, that's not really an issue. So it does mean that the opportunity set becomes a little bit broader in terms of what you can actually invest in. So you can go down the market cap into smaller companies. You can start to go into more frontier markets, in markets, which haven't reached that emerging markets stage of development yet, and also it enables you to buy different classes of shares of companies, which may have better income prospects to them, and offer those kind of higher dividend yields, classes of share tend to be less liquid. So it does open up some kind of more interesting ways of investing and meeting the goals of the mandate.
Dan Buchanan: It seems to give you a lot of flexibility and really to be able to stick to that, that long term strategy without short term knee jerk reactions, so that seems important. One of the features of a closed-end fund, unlike an open-end in most cases, is the use of leverage also known as gearing. And just curious what is the fund’s current position on leverage.
Nick Robinson: The fund has essentially maintained a pretty steady dollar amount of leverage, which I think today is about 10% of net assets. And that leverage has essentially been maintained for about the last two or three years, and that was maintained during the downturn. So unfortunately it did magnify losses this time last year, as we were kind of coming into the COVID crisis, but the leverage because it was kept constant in terms of dollar amount the portfolio has really benefited from that in the last 12 months or so, as the market has rebounded sharply. For funds that essentially comprise a very long term investments and thinking very long term, I mean, we make the investments and with the leverage costing about 1% a year, we can earn well in excess of that from the portfolio in terms of income levels. So it's really just a way of enhancing the income generated from a portfolio. And obviously, with emerging markets performing quite well at the moment, it's also enhancing the capital returns available to ultimate investors.
Dan Buchanan: And Nick, finally, what would you say to clients and shareholders to give them comfort that they should invest or allocate in their client portfolios to emerging market equities today?
Nick Robinson: I think emerging markets is an important part of a client's overall portfolio, in that you really get good exposure to economies that tend to be growing more than developed markets and economies where there's a lot of opportunities to catch up with developed markets. There are a lot of the businesses we invest in, and emerging markets have essentially tried and tested business models which are at a relatively early phase of their development. So you have an awful lot of opportunity in emerging markets. It's a very broad opportunity sector in terms of economies that you can get exposure to. Today, the valuations of emerging markets are looking very good, particularly relative to developed markets. But I think there are quite a few reasons why it's an attractive asset class to have some exposure to at the moment.
Dan Buchanan: Thank you Nick, for those insights today and thank you to our listeners for tuning in. You can find out more about the fund at www.aberdeenaef.com. I am Dan Buchanan with Aberdeen Standard Investments. Do look out for future episodes.
