Fund Profile

Scottish Oriental Smaller Companies 02 October 2019

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Scottish Oriental Smaller Companies. 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.

Overview
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Overview

Scottish Oriental Smaller Companies Trust (SST) aims to generate capital growth from a portfolio of Asian ex Japan smaller companies which are selected for their long-term growth potential. Manager Vinay Agarwal looks for high quality companies trading on attractive valuations, and aims to hold them for three years at a minimum, but ideally for much longer. The strategy centres on finding companies with strong positions in growing markets and industries, and with management teams who work in the interests of all stakeholders, giving the approach a strong ESG tilt.

Vinay took over in 2016 and has revived the portfolio, accelerating a process of portfolio concentration initiated by the previous manager, Wee-Li Hee, and increasing focus on a new generation of businesses with strong competitive positions in growing markets. He has also benefited from the decision at the last AGM to expand the investment universe, which allows SST to invest up to 20% in companies of up to $3bn in market cap at the time of investment which are now larger; that threshold was previously $1.5bn. This change has allowed the trust to keep pace with growth in the size of local markets, the manager explains, and has brought a number of companies into its remit which he believes can grow to many times their current size.

Downside risks are a key consideration, and Vinay aims to limit the loss potential even in down markets, which is aided by his concern for valuation. The defensive characteristics of the trust are clearly shown in the historic performance numbers. SST is currently running a cash weighting of 9.9% as high valuations lead to sales executing more rapidly than purchases; and Vinay maintains some dry powder to take advantage of market setbacks.

SST has managed to outperform the MSCI AC Asia (ex Japan) Small Cap Index handsomely over the past five years. In particular, the trust managed to outperform in the falling markets of 2018, thanks to the defensive characteristics of a value- and quality-centred approach. As a highly active strategy, at times the trust can underperform thanks to market movements it has no intention of chasing – so for example in 2017 it was held back by a low weighting to China which stemmed from a mixture of quality and corporate governance concerns and the restrictions of its previous market cap limits.

The objective of the trust is to grow capital, so dividends are not explicitly targeted. That said, we understand the board is keen to at least maintain the dividend, which has thus been held at 11.5p for the past six financial years, making use of revenue reserves where needed. The yield is currently 1.2%.

SST’s discount has been stubbornly wide in recent years, over a period in which – unusually – small caps have underperformed large caps in the region. This discount may also be the result of lingering uncertainty over the management of the trust from 2013 to 2015 (when there were two changes of manager after a long-standing leader retired) as well as the 2017 underperformance. The trust is now trading on a 12.4% discount compared to its five year average of 11.8% and the all-cap AIC Asia Pacific sector average of 8.8%.

Kepler View

In our view, SST’s portfolio looks more exciting than it has for years, with a ‘leaner and meaner’ line-up of high conviction holdings – now shorn of the lower conviction tail. This puts the trust in a stronger position to generate alpha in the future, we think. The expansion of the mandate to allow the manager to invest in larger companies is a potential game-changer, opening up a wider universe of quality companies which are still small relative to their fast-expanding stock markets.

The focus on stock-picking fundamentals is a highly attractive way to invest over the longer-term, in our view; and is especially appealing at the moment given that Asian markets have become dominated by central bank and political factors which are hard, if not impossible, to predict. By looking through the noise to long-term secular trends, we believe the manager has a good chance of outperforming (judging by the team’s track record and approach), while the discount does not reflect the changes made to the portfolio and improving performance in recent years.

bull bear
A consistently-applied process which has proven itself over past cycles The active approach can lead to underperformance in the short run – for example the trust is heavily exposed to Indian companies
A focus on absolute returns and downside protection which should help in rough markets
The yield is low although broadly in line with the sector peer group

A wide discount, which could close as management is more stable and as the trust’s style becomes more favoured
Continue to Portfolio

Fund History

16 Mar 2023 Diversity matters
We examine the effect of blending multiple funds within your regional allocation and find that – while the culture wars may rumble on elsewhere – the benefits of diversity for investors are unarguable…
14 Oct 2022 Fund Analysis
SST has performed well in a tough environment thanks to its quality focus…
20 Apr 2022 On the hunt
We review discounts in the investment trust space against a backdrop of harsh conditions...
12 Jan 2022 Bargain hunt
We survey the discount opportunities in the market and update on the performance of our Discounted Opportunities Portfolio…
01 Dec 2021 Fund Analysis
SST is “better positioned than ever” following strong 2021 performance…
21 Oct 2021 Results analysis: Scottish Oriental Smaller Companies
SST’s tilt toward India has contributed to a strong set of results this year…
14 Jul 2021 Grade inflation
We look at how our discounted opportunities portfolio has done in the first half of the year and update on the performance of our long-term rated funds…
30 Jun 2021 Inflation – a real threat or hot air?
Two of our analysts ask whether recent high inflation numbers indicate something long-lasting and troubling is happening…
14 Apr 2021 Wide Boys
We review our portfolio of chonky discounts as one star performer hits its target…
14 Apr 2021 Fund Analysis
SST has performed strongly after past global crises thanks to its preference for quality companies…
14 Jan 2021 Get 'em while they're hot!
We review the widest discounts in the investment trust universe and look at our selection of attractively cheap trusts…
04 Nov 2020 Fund Analysis
SST outperformed strongly after the last global economic crisis in 2008 and is trading on a wide discount…
07 Oct 2020 The real reason to invest in India...
India is struggling economically – could there be a value opportunity in the stock market?
18 Mar 2020 Their darkest hour?
We update our shortlist of discount opportunities...
05 Mar 2020 Don't panic: the case for investing in Asia this ISA season
We examine the relationship between stock market and GDP growth, before debating the case for an allocation to Asia...
02 Oct 2019 Fund Analysis
SST’s more defensive approach has served it well in recent choppy markets…
28 Aug 2019 Quality street: can the dominant style continue to outperform?
For several years, quality as an investing style has dominated, outperforming both value and growth. We examine why the case for quality remains strong and the importance of taking an active approach…
03 Jul 2019 Push-me pull-you
Two contrasting influences are dominating the outlook for Asian markets - we analyse them and how Asia trusts are positioning their portfolios in response...
31 May 2019 Fund Analysis
SST has generated strong performance in falling markets, but is still sitting on a wide discount...
25 Jul 2018 The Endurance Growth Portfolio
The purpose of the Endurance Growth Portfolio is to generate long-term capital growth with a bias towards quality and defensive characteristics...
19 Apr 2018 When others are fearful...
We ask whether it is time to be greedy after the recent selloff in Asia equities...
19 Apr 2018 Fund Analysis
The board has taken an active approach to managing the discount, buying back shares in the mid-high teens...
24 May 2017 Hard knocks
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24 May 2017 Fund Analysis
20 Apr 2016 A wild ride for Endurance Growth
Our long term growth model portfolio has had a white knuckle ride since launch in July...
19 Apr 2016 Fund Analysis
05 Apr 2016 Fighting spirit
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01 Dec 2015 A tough call for Asia investors
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07 Jul 2015 Fund Analysis
10 Jun 2015 The Endurance Growth Portfolio
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