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Trouble In Paradise Or An Opportunity For Investment

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Another closed-end fund is up for liquidation but its managers don’t agree with the proposal; APB is a favorable investment vehicle and liquidation would be untimely.

The China Swoon Is An Opportunity For Investment

The board of directors for the Asia-Pacific Fund Inc (APB) have proposed a liquidation of the fund. The liquidation is due to low investor interest and a deep discount to its NAV. The managers of the fund have worked hard to narrow the discount to NAV, a phenomenon common among closed-end funds, and failed to achieve their goal. Ironically, the decision to pursue a liquidation of the fund has achieved management’s goal, a narrowing of the discount, because the market is expecting to receive full value once the sale of assets is approved.

The proposed liquidation will be voted on at the annual stockholders meeting next month. The meeting is scheduled for October 12th in New York City at 9:00 AM. The fund’s management firm, Value Partners, does not, however, think this is an opportune time for such a move. In their view, the fund remains a viable investment vehicle for exposure to China and the Asian market. They also think a liquidation would be untimely in light of recent fear-driven weakness in Asian and Chinese stocks.

Value Partners’ response to the Fund’s proposed liquidation

  • In light of the proposal to liquidate The Asia Pacifi c Fund, Inc. (the “Fund” or “APB”) at the 2018 Annual Meeting of Stockholders on 12 October 2018; we at Value Partners strongly believe that the Fund remains a favorable investment vehicle and that liquidation of the Fund would be untimely. We expect a number of short-term headwinds to reverse in the next 6 to 9 months and, as such, recommend that investors either not liquidate the Fund or give the manager more discretion on the timing of liquidation

Many Asian markets are down 20% or more on fear of mounting trade tensions and this has the fund trading near a one-year low. The tensions are, as Value Partners puts it, one of a number of short-term headwinds expected to reverse over the next six to nine months. The ongoing saga of US-China trade relations is the top drag on Asian equities Value Partners expects to change soon, but it is not the only one. They also see a weakening of the dollar and loosening monetary policy within China aiding recovery of Asian markets.

JP Morgan’s Jamie Dimon downplayed the trade dispute calling it a trade-skirmish and not a war, helping to soothe market nerves as traders look toward growth as a driver of market value. In terms of growth, China’s economy is the most affected by the trade disputes but still expected to show surprising gains over the next 5 years. GDP growth is slowing but will remain above 6.2% until 2020 and then slowly decline to near 3.5% by 2030.

Looking at the charts there are signs that the fear is cooling down. The Shang Hai and Heng Seng indices both rebound from long-term lows in the last week and confirmed key support levels as trader scoop up stocks at bargain prices. The rebound may not lead to an immediate rally but it does show investor confidence is returning to the market and that, along with outlook, is enough for now.

Is the APB liquidation untimely? In light of the trade-skirmish and its effect on stock prices, I would have to agree. The trade war has Asian traders on edge and APB trading at long-term lows, if investors liquidate now they will lock in those fear-driven losses just when the market is starting to come back. In my view, China is still a great investment and today’s low prices are an attractive entry point for new investors, assuming, of course, the fund doesn’t choose to liquidate.