Asia Dragon (DGN), formerly known as Edinburgh Dragon, aims to identify well-managed, world-class businesses in Asia and buy them when they are on attractive valuations. The management team at Aberdeen Standard Investments, headed by Adrian Lim and Pruksa Iamthongthong, take a long-term approach to investing. They aim to be an active, engaged shareholder, encouraging good corporate governance and alignment with other ESG goals.
The trust has performed strongly since implementing a number of changes to the process in 2017 and 2018, bringing to an end a period of underperformance. The essentials of the process remain the same: identifying companies with low leverage, sustainable earnings and strong competitive positions. Following a period of poor performance in 2015, the analyst team has been reorganised, a greater emphasis placed on examining the downside risks for stocks and the weighting to technology stocks and to China has been steadily increased.
The process is bottom-up, and so companies are picked on their own merits rather than to gain access to a theme, country or industry. Nevertheless, consumption growth, urban development and technology are areas the team find particularly exciting.
DGN is one of the largest Asia-focussed trusts with total assets of £627m. The management team is locally based, with the two managers based in Singapore, and contains over 50 investment professionals, some with extensive experience.
The trust has consistently traded on a double-digit discount in recent years, despite the recent recovery in performance. High-growth strategies have tended to be favoured by the market, while DGN has quality and value exposures which have been less in favour.
The trust has a total return objective, and so the board does not commit to maintain or grow the dividend. Although the payout has grown steadily in recent years thanks to growth in earnings, the board does not explicitly target a growing dividend and the yield is just 1.2%.
DGN is an attractive core Asia holding, in our view. The quality characteristics of the portfolio should help to drive strong returns over the long run, and offer protection in any bad times. The portfolio is looking more balanced after the changes made in 2016 and 2017, with greater exposure to some growth areas. However, we are reassured that the compromise has not been on quality, but rather the team have become more comfortable with newer markets and companies and picked up exposure on relative share price weakness.
As one of the largest Asian investment trusts, with a highly experienced and well-resourced management team, we think Asia Dragon’s approach has the potential to generate steady long-term growth from a volatile region. While 2016 and 2017 saw frothy markets, the picture for Asia in 2020 is much cloudier. Trade wars, coronavirus scares and debt levels in China are all potential headwinds which make predicting the course of the markets difficult. A portfolio with low underlying leverage, made up of businesses with strong competitive positions which should grow irrespective of the cycle, is attractive given this outlook.
We think the discount of 10.6% is interesting as an entry point. With corporate action having made little change to the level of discount, we think good performance is likely to be needed for it to close. As such, if the team can continue to deliver on the strong performance shown in 2018 and 2019, we think it only a matter of time till the market wakes up and we see the discount narrow.
|The revamped strategy has led to a period of significant outperformance||The discount has been stubbornly wide despite a fully subscribed tender offer|
|Deep resources and highly experienced management, with the lowest OCF in the peer group||The yield is low|
|The quality approach should lead to outperformance in rocky markets||Structural gearing can increase downside risks (while helping on the upside)|