Schroder Asian Total Return 02 July 2019
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Schroder Asian Total Return. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Schroder Asian Total Return (ATR) aims to benefit from the impressive growth potential in Asian stock markets. At the same time, the managers seek to limit the equally impressive volatility that stock markets in the region have exhibited historically.
Managers Robin Parbrook and King Fuei Lee have built an investment process on a foundation of highly active, valuation-sensitive stock selection. They overlay this with the use of quantitative economic models to warn them of impending market corrections in the underlying countries, which allows them to apply hedges to the portfolio to limit the exposure to the downside.
The managers take a highly active, benchmark-agnostic approach, which they view as crucial in Asian markets. The valuation element to the stock-picking and the hedging strategy have helped the trust produce one of the highest upside/downside capture ratios in the sector over the past five years.
At the same time, the trust has handsomely outperformed the index and peer group under the strategy implemented by Robin and King Fuei since March 2013. Over the past five years, the trust’s NAV total return has been 110%, while the average trust in the AIC Asia Pacific ex Japan sector has returned just 76% and the index even less – 71.1%. The trust has also displayed NAV volatility significantly below the sector average over the period.
Although the trust has a total return objective, the managers view dividends as a sign of a well-run company and have been increasing their exposure to yielding companies as their view on the marker becomes more bearish. As a result, the trust’s dividend growth has been substantial in recent years, and the shares now yield 1.7%.
Schroder Asian Total Return has traded on a premium since July 2017, currently 1.3%, and has been regularly issuing shares. The trust has a performance fee charged on absolute rather than relative returns.
We think ATR offers an appealing way to invest in a volatile market. The strategy behind the stock selection and the hedging overlays have resulted in a portfolio with an attractive risk profile which has successfully managed to limit the losses in most falling markets. At the same time, the team have been able to capture much of the upside.
Beyond this, we agree with the managers that investing in Asia requires a highly active approach to isolate the well-run companies with solid growth prospects. The current premium rating seems to have developed at a time that investors were becoming more cautious on the outlook for the region and therefore more interested in strategies with a protective element. With the global economy seemingly nearer the end of the cycle than the beginning, we think ATR could well be an appropriate choice for Asian equity exposure.
|The strategy has proven it can limit losses in falling markets while providing good gains in rising markets
|Macro models can be confounded by events and policymakers
|A highly active approach which is more likely to lead to alpha generation
|The yield is low at 1.7%, although dividend growth has been high
|The defensive elements to the approach are well suited to a late cycle market, which we appear to be in
|Some will dislike the performance fee