Asia Dragon (DGN) owns a portfolio of Asian companies selected for their resilient earnings and strong balance sheets. The portfolio is well-spread across countries and sectors, with important overweights to technology and to more cyclical and value sectors such as financials too. The managers, Adrian Lim and Pruksa Iamthongthong, aim to generate steady long-term growth and moderate the volatility of the region’s markets.
DGN has produced solid outperformance of the index in recent years, as we discuss in the Performance section. The weighting to China and technology has significantly risen over the past five years, which has helped drive performance. However, the portfolio has always remained balanced across styles and sectors. This means it has not kept up with those trusts that have more exposure to these two themes.
Adrian and Pruksa have used the volatility during the pandemic to pick up high quality businesses when their valuations have fallen in systemic sell-offs. New ideas continue to arise (see Portfolio), with green energy being one area of interest, buoyed by the Chinese government’s commitment to net zero by 2060.
Adrian and Pruksa are members of the Aberdeen Standard Asian Equities Team, a locally based team of analysts and managers who take a consistent, disciplined approach to stock selection which places great importance on quality characteristics, valuation and ESG – particularly governance.
Despite its strong recent performance, DGN remains on a discount of 9.7%. This compares to the five-year average of 11.7% but is wide when compared to the sector average of just 5.3%.
We think DGN is a strong core option for investing in the Asia ex-Japan region. While it does have significant positions in the technology and ecommerce sectors and in China, these are balanced by positions across other themes such as middle class consumption, the development of financial services and the rapid growth in smaller regional economies. This diversity could make it more resilient in any broad-based sell-off or tough economic period.
The managers note that Asian markets are not cheap relative to their history, when measured through the lens of earnings multiple methods, as the pandemic has impacted profitability across the region. In addition to a recovery, they are also continuing to find new ideas for inclusion in their portfolio. This, and a cautiously optimistic outlook, means they are willing to continue to run a modest amount of gearing. We would add that Asia is likely to continue to grow in importance in the world economy and stock markets over the long run, whatever the short-term volatility.
DGN’s focus on quality should, in theory, lead to a portfolio better able to navigate the aftermath of the pandemic, as even if the medical situation is improving there are economic ramifications to work through and companies with strong balance sheets and good competitive positions should do better in a weak economy. However, with a high exposure to China relative to its peer group, the returns in that market are likely to remain critical.
The discount of the share price to NAV may give some downside protection, but we note it is currently narrower than the five-year average. However, performance has improved over that period, and a continuation of that trend could conceivably lead to a re-rating.
|The revamped strategy has led to a period of better performance
||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
||The portfolio has high exposure to China, with concomitant political risks