Schroder AsiaPacific Fund plc: Why active investing works in Asia

The debate about the merits of active and passive investing attracts a lot of attention in the investment world and many commentators have a clear, almost evangelical, preference for one or the other.

The reality is that some regional equity markets can be notoriously hard to beat. Take the US S&P 500 index over the last ten years, for example. The dominance of a handful of technology companies for much of this period has made it hard (but not impossible) for any active manager to match that market’s return without exposure to those stocks. Nevertheless, it is important to remember that past performance is not a guide to the future, and the next ten years for that market, and indeed any market, could be dramatically different to what we have witnessed recently.

In other parts of the world, however, conditions tend to consistently favour an active strategy. Asia is one of these regions and, over the years, Schroders has developed an enviable track record of adding long-term value for its investors through an active approach towards Asian equities. Below we explore some of the reasons why that is the case.

Asia is a diverse collection of different economies and markets

Investing in Asia means embracing the opportunities and risks from a highly diverse set of very different individual economies and markets. The experience of 2023 demonstrates this really well, as we can see in the chart below. The overall market (as measured by the MSCI AC Asia ex Japan Index) was flat last year in sterling terms, but that masks a huge range of different performances from individual markets within Asia. Leading the way were Taiwan (+23%), Korea (+16%) and India (+14%), while Hong Kong, China and Thailand all posted double-digit percentage declines.

The same is true at the sector level, with Information Technology (+25%) and Energy (+9%) leading the way in 2023, while Real Estate (-19%), Consumer Staples (-11%) and Utilities (-10%) all disappointed.

Source: Schroders, Factset, in GBP, as at 31/12/2024

Click here to access further MSCI Asia Pacific ex-Japan performance data.

So for someone with a longer term perspective this spread of returns should give stock pickers the conditions in which they can take advantage of these dislocations. It only takes a modest tilt towards the better performing countries and sectors, and away from the disappointing ones, for an active manager to add value.

Capturing inefficiencies

Of course, it is vital that active portfolio managers employ a consistent and disciplined investment approach, in order to ensure that the sectoral and geographical tilts within a portfolio are capable of adding that value, rather than detracting from it. This is where Schroders’ capabilities and significant resources in the region come in to their own. Richard Sennitt, portfolio co-manager of the Schroder AsiaPacific Fund plc and a member of Schroders’ Asian Equities investment team since 1993, explains.

“Over the years we have observed that Asia is an inefficient set of markets and, as a result, it is a region in which you can add a lot of value through the consistent application of a bottom-up, fundamental approach, with stock selection at its heart. One of the most important things for us as a team, is the analytical resources that we have on the ground in the region. Although Abbas Barkhordar and I, as portfolio managers, are based in London, we have 40 analysts based in six offices across the region, who are actively visiting companies, compiling research reports and making investment recommendations. Abbas and I draw on the best ideas from this analytical output to build a differentiated portfolio in which we can hold high conviction.”

One of the main reasons Asian markets are inefficient is, in our view, because of the lack of long-term analytical coverage. There are plenty of brokers in the region that are providing stock-specific research, but the majority of it has a relatively shorter-term focus, with insights and recommendations based on expectations for the next 6-12 months. Richard and Abbas take a much longer-term focus, which enables them to take a differentiated view. Frequently, they will invest in businesses based on the long-term potential that they observe, at times when the market simply isn’t interested, because the short-term focus is elsewhere.

Corporate governance

Historically, corporate governance has been an issue when investing in Asian equities. Here, there are other aspects of the Schroder AsiaPacific Fund investment approach that can help to add value, as Abbas explains.

“As active investors, we are focused on identifying Asian companies with quality characteristics. We look for businesses with strong management teams that generate good returns on capital, and that have a track record of making sensible capital allocation decisions. Many Asian businesses have been guilty of poor capital allocation decisions, or decisions which disadvantage the interests of minority shareholders, which have weighed on long-term shareholder returns. Corporate governance is therefore a key consideration for us and the consistent nature of our approach, with its focus on quality, should add value over the long-term, in our view.”

A positive outlook

As a result of the above factors, the Schroder AsiaPacific Fund has consistently added long-term value for its shareholders through a disciplined, fundamental, active investment approach, as illustrated in the chart below.

Overall, the backdrop hasn’t been easy for Asian investors in recent years, with the region underperforming other major regional markets such as the US, but clearly there have been opportunities for active managers to add value.

Going forward, the outlook for the region is relatively upbeat. Asian equity valuations generally look reasonable when compared to long-term averages although, as you would expect, some markets look better value than others. Meanwhile, growth prospects in the region are broadly encouraging, supported by both domestic consumption growth and the potential for a recovery in export volumes as inventories normalise.

Historically, Asian equities have done well following a peak in US interest rates and when the US dollar has been soft. We may see these conditions in 2024, which bodes well for the performance of Asian markets generally. Richard and Abbas are confident that their consistent, disciplined and active investment approach can continue to add value for shareholders of Schroder AsiaPacific Fund over the longer term.

Source: Morningstar, Schroders

Fund Risk Considerations - Schroder AsiaPacific Fund plc

Emerging markets risk: Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty and operational risk.

Currency risk: The company can be exposed to different currencies. Changes in foreign exchange rates could create losses.

Concentration risk: The company may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the company, both up or down, which may adversely impact the performance of the company.

Gearing risk: The company may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.

Counterparty risk: Investments such as warrants, participation certificates, guaranteed bonds, etc. will expose the company to the risk of the issuer of these instruments defaulting on paying the capital back to the company.

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