If you haven’t the stomach for a volatile China trust, buy this Baillie Gifford Asia fund instead

The manager can now give the trust his full attention, the discount is attractive and it is the top performer over five and 10 years

‘Could this finally be a turning point for funds that have crashed by between 44pc and 71pc in three years?’

China’s efforts to stabilise its struggling stock market make it a good time to review investment trusts that invest in the country and in the Asia Pacific region more broadly.

The problems of the world’s second-biggest economy have weighed on the shares of Londonlisted China and Asia funds.

Beijing’s announcement that it would “guide” Chinese institutions to buy more shares on its stock market, which in sterling terms has halved in the past three years, saw the Shanghai Stock Exchange index jump by 6pc.

Shares in London’s four China trusts followed suit, raising the question of whether this could finally be a turning point for funds that have crashed by between 44pc and 71pc in three years.

These declines have left the trusts’ shares trailing 7pc-9pc below asset value. Although these discounts are not huge, readers should remember that the Chinese shares the trusts own are also depressed. Chinese companies trade at less than 10 times forecast earnings. Investors willing to risk further losses in a long-term bet on China’s economic and technological development should ignore the noise around the recent liquidation of Chinese property developer Evergrande and head for Fidelity China Special Situations.

With assets of £947m, this trust is already the biggest in its peer group and the easiest to buy and sell, attributes likely to improve further with the imminent merger with £177m rival Abrdn China.

Managed by Dale Nicholls, Fidelity China is the best performer in its sub-sector even though the shares have delivered just 0.1pc including dividends over five years. But in the 10 years Nicholls has run the portfolio, shareholders have received a more impressive 114pc total return, beating 46.4pc from the MSCI China index. The shares stand on a 6.7pc discount.

If you’re looking for a bigger bargain, haven’t the stomach for a volatile China trust or just aren’t convinced about a Chinese revival, cast your eyes to the Asia Pacific, where there are several attractively priced investment trusts that invest more broadly in the world’s fastest growing region.

James Thom, co-manager of one of them, Asia Dragon, told investors that all was not doom and gloom. While China and Hong Kong shares lost 19pc last year, markets in the rest of Asia gained 13pc.

He said double-digit corporate profit growth was forecast in most Asian countries in the next two years, including China, where the trust has a third of its assets. Growing demand for semiconductors and technology from the revolution in AI is poised to boost profits in Korea and Taiwan by 57pc and 17pc. India, where 17pc of the fund is invested, is growing at 6.3pc a year – faster than China’s 4.9pc – as its burgeoning middle class drives expansion in financial services and real estate. Company earnings are forecast to grow by 16pc this year, but Thom said the market looked dear.

Unfortunately, Questor’s view is that Asia Dragon is not the one to back yet. A merger last year with stablemate Abrdn New Dawn puffed Dragon’s assets to £680m and put it on the radar of more investors.

Its shares look cheap at 15.8pc below asset value, but that reflects poor performance, with a return of just 2.7pc over five years as its “quality growth” style struggled in a market led first by tech stocks and then by “value” stocks that rebounded as economies reopened.

When better-performing competitors are available on average discounts of 11pc, Asia Dragon doesn’t look cheap enough. Rivals Invesco

Asia, JP Morgan Asia Growth & Income, Pacific Assets, Schroder Asian Total Return and Schroder Asiapacific all have their claims, but the one we’d back is the Baillie Gifford-managed Pacific Horizon, the top performer over five and 10 years with returns of 85.7pc and 248pc respectively.

Like the others, the trust has suffered in the three-year downturn, but should benefit from the replacement this week of its lead manager, Roddy Snell, as co-manager of Baillie Gifford China Growth. That is good news for Pacific Horizon, where Snell, a pragmatic growth investor, can now focus his energies. On a widerthan-average 11.6pc discount, it’s the pick of the bunch.

Questor says: buy Fidelity China Special Situations, Pacific Horizon

Tickers: FCSS, PHI

Share prices at close: 186.4p, 556p

Gavin Lumsden is editor of Citywire’s Investment Trust Insider website