Asia Dragon (DGN), formerly known as Edinburgh Dragon, has generated strong absolute and relative performance over the past five years from a quality growth approach to investing in Asia ex-Japan equities.
The period has seen a return to form for the trust after a difficult 2013-2015 period. A more balanced portfolio, wider exposure to different branches of technology and more ruthlessness in selling out of positions have seen NAV returns well in excess of the benchmark, as we discuss in the performance section. Exposure to countries hard hit by the pandemic in Q1 2020 hurt relative performance but DGN has outperformed in the rebound.
DGN has a portfolio well-balanced across different sectors of the economy. This includes ‘new economy’ sectors such as e-commerce, software and hardware as well as ‘old economy’ sectors such as banks and real estate. Typically, the portfolio trades on a premium valuation versus the index, with higher expected growth and lower net debt (see portfolio section).
The trust is managed by Adrian Lim and Pruksa Iamthongthong of the Aberdeen Standard Asian Equities Team. They take a long-term perspective on their investments, and consequently have long embedded ESG concerns within their stock selection process. In particular, they look for companies with trustworthy management teams with a track record of good capital allocation and respect for minority shareholders (see ESG section).
Despite its strong recent performance, DGN remains on a discount of 9%. This compares to the five-year average of 12% but is wide when compared to the sector average of just 4.3%.
We think DGN is a strong core option for investing in the Asia ex-Japan region. Although the managers are resolutely active and bottom-up in their approach, they have built a portfolio with exposure to strong companies across a range of industries and sectors. We think that is attractive at a time of macroeconomic uncertainty due to the pandemic, and after a period of extreme outperformance for a narrow group of companies in the North Asian technology sector and e-commerce. Furthermore, the team have clearly integrated the new processes resulting from their 2017 review well without jettisoning the crucial building blocks.
Another factor supporting DGN as a core holding is the long-term investment horizon of the managers and the consequent high emphasis given to ESG issues. The team had integrated ESG long before it became fashionable to so do, and believe good corporate governance is integral to being a high-quality company. Their focus on shareholder engagement and encouraging companies to improve their behaviour and attitudes is likely to appeal to shareholders who value ESG highly.
DGN’s wide discount is perhaps partly explained by peers that are much more strongly focused on technology and e-commerce - which are in greater favour after an exceptional 2020. Although we cannot predict the future, we note that it can be dangerous to chase past performance and a narrow set of companies at the expense of diversification.
|The revamped strategy has led to a period of significant outperformance||Higher exposure to technology has brought with it higher beta than the trust had in the past
|Deep resources and highly experienced management
||Structural gearing, although modest, can increase downside risks (while helping on the upside)
|The quality approach should ordinarily lead to outperformance in troubled markets
||Large positions in three stocks could mean increased volatility