This is a non-independent marketing communication commissioned by Schroder Investment Management. 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.
Anyone that’s visited one of the Asian megacities is likely to have felt in very tangible terms the growth potential that the continent offers.
In emerging economies like Vietnam or India, that can mean rapid urbanisation, lots of investment in infrastructure, and the nascent adoption of goods and services, whether that be people opening bank accounts for the first time or buying cheap consumer goods.
For more developed markets, like Taiwan, Korea or even China, the story is less about an expanding domestic economy and more about selling globally. Many companies listed in the region are leaders in their field and sell to customers around the world.
Much like finding your way around one of those megacities, navigating these opportunities can be difficult. Companies are often under researched for one. They are also difficult for individual investors to access. For example, India is arguably one of the key growth areas in the region but is close to impossible for individual investors in the UK to access alone.
For investors who are interested in accessing the growth opportunities that Asia offers, Schroder AsiaPacific (SDP) may prove an attraction option. A core holding for Asia investors, the trust is co-managed by Richard Sennitt and Abbas Barkhordar, who have decades of experience between them and take a benchmark-conscious approach to markets.
Richard and Abbas seek to take advantage of the fact companies are not well covered by research analysts and the commensurate opportunity for an informational edge that can create. The managers focus on companies that have sustainable competitive positions in their industry and which can demonstrate a superior or improving return on capital.
Today the trust has substantial overweight positions to both financials and technology. The thinking behind these positions is slightly different. With regard to financials, the managers believe that the well-capitalised firms they have exposure to benefit from higher interest rates, as well as increasing penetration of financial services in some markets, such as India or Indonesia. Of particular note here is an overweight position to companies in Singapore, which also provide indirect exposure to the ASEAN region.
Technology is a different story, with the managers believing that holdings, such as the Taiwan Semiconductor Manufacturing Company (TSMC), are well-placed for long-term growth. They are also leaders in their fields globally.
It is also worth noting that bracketing holdings into the ‘technology’ category can obfuscate the level of diversification that exists among companies in the sector. For example, Indian firms are often more focused on software and outsourcing services, whereas Taiwanese and Korean companies are more skewed towards semiconductors and other hardware, like smartphones or household appliances.
India is also a country that SDP is now almost flat on relative to the benchmark. The managers benefitted from positions in domestically-oriented companies listed in the country, but cut back those positions in early 2023 to take profits when valuations became inflated.
That also reflects the fact that Richard and Abbas are valuation-conscious, even if they are investing in companies that have greater growth potential. It’s an approach that has worked over the long-term as well, with the trust delivering substantial outperformance over the past decade.
Despite this, the trust was trading at a 13.3% discount to NAV as at 13/10/2023. Chaotic though it may be along the way, it is hard to see the Asian growth story disappearing any time soon and so, assuming long-term performance continues to be strong moving forward, then we may see a tightening of that discount as a result.
At their last update, our analysts said: “The trust is trading at a discount that is significantly wider than its five-year average which may prove an attractive entry point for investors. In our view, a peaking of US rates and a subsequent softening of the dollar would be supportive of the growth prospects of the region and could support the narrowing of the discount.”
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