Schroder Asian Total Return (ATR) has been the standout Asia Pacific trust over five years, thanks to strong stock selection and an innovative hedging overlay based on proprietary economic modelling. Not only has the trust generated the highest NAV total returns in its sector, but as we discuss in the Performance section, it is also the standout trust on a risk-adjusted basis, with the hedging strategies helping protect investors in rough markets.
Managers Robin Parbrook and King Fuei Lee draw on the company research of Schroders’ large, locally based analyst team. They aim to identify high-quality companies and the best time to buy them, namely when companies’ current valuations underestimate their long-term growth potential. The philosophy is that if the managers are longer term in their thinking than their peers, the trust can outperform.
The hedging strategies are based on the results of short- and long-term statistical models. These models use numerous indicators to highlight the risks of a correction or periods of material overvaluation in the underlying stock markets, and suggest to the managers when to hedge out exposure to certain countries. This allows the managers to maintain exposure to their preferred stocks when they think they will continue to perform in absolute terms.
ATR has traded on a premium for most of the past two years. Following the emergence of the COVID-19 pandemic, it fell onto a wide discount but has rebounded to just a 1% discount at the time of writing.
The trust’s overall strategy aims principally for capital growth, but dividend growth on the underlying companies means that the prospective dividend yield is now 2.1%.
In our view, ATR is an attractive way to invest in Asia’s growth for the long term, and its quality bias and focus on long-term fundamentals mean it could be an interesting option for those looking to cautiously get back into Asia after the recent sell-off. While Asia has exciting growth companies, its markets are also full of less interesting state-owned or controlled companies and those with troubling corporate governance. This means that a focus on stock-picking is essential, in our view.
ATR’s extra advantage is the hedging strategy, which has historically helped the managers navigate the volatility in Asian markets. Since the inception of the strategy in its open-ended format in 2007, the hedging overlays have had a good track record of providing some capital preservation in falling markets. While the trust has not outperformed in the current sell-off, we would attribute this to the temporary underperformance of blue-chip, high yielding names which have not held up as well this time round. In our view, the trust is likely to weather the coming volatility better than its peers, and we regard the current discount as a very interesting long-term entry point, albeit recognising that there may be more losses to come before markets recover.
|The strategy has an attractive track record of limited losses in falling markets and strong gains in rising markets||Macro models can be confounded by one-off events and policymakers|
|A highly active approach which is more likely to lead to alpha generation||Some will dislike the performance fee|
|The defensive elements to the approach could appeal in uncertain times||Using gearing in a countercyclical fashion can magnify short-term losses|