Why it pays to be active in Asia

Read almost any book about investing in the stock market and you are likely to receive the tip that private investors have an advantage over fund managers because they are not constrained by benchmarks.

Reality is more nuanced. Benchmarks are helpful for numerous reasons, whether it be gauging performance, providing support in portfolio construction, or getting an idea of what level of risk should be expected when investing in a specific country, region or sector.

However, it is true that they can be constraining. For investors in Asia, they can also prove riskier than you might imagine. Passive investments in some indices, most notably China, have not always made great long-term investments.

Those that are more concerned about the ‘tyranny’ of benchmarks and want the benefits that active management brings, may find Schroder Asian Total Return (ATR) an attractive offering. The trust was launched in 2013 and is managed by Robin Parbrook and King Fuei Lee. The two managers have several decades-worth of combined experience investing in Asian companies.

Robin and King look for quality companies that can deliver long-term growth to shareholders. These are typically businesses where management has a strong focus on return on invested capital and understands the importance of dividends as part of this process.

There is no ‘fixed’ number of stocks that they hold but the portfolio typically contains 40 - 60 companies at any given time, with the managers not usually holding more than 55 companies as this can dilute the impact of their best ideas.

However, the real appeal of the trust is the index-agnostic approach to the market that Robin and King take. They believe that indices are not indicative of the best opportunities to invest in Asia and so do not make decisions based on them.

This may not appeal to investors who want something more akin to the benchmark. But for those that are happy to put their faith in the managers to simply invest in what they believe are the best companies, it is more likely to be an attractive proposition.

The portfolio today is indicative of this process as well. The trust has holdings in Vietnam, the US, UK, and France, which aren’t included in the MSCI AC Asia-Pacific Ex-Japan Index, the benchmark for most Asia funds. It also has a sizeable overweight position to Taiwan and is substantially underweight China, a country the managers believe is likely to struggle in the future and which was overbought because of hopes about its reopening in early 2023.

Another key attraction of the trust is the fact that it can make use of derivatives to take short positions in the market – something very difficult for ordinary investors to do, and which is well outside the comfort zone of all but the most experienced. These derivatives are used to reduce exposure to market risk, focusing returns on the performance of the underlying stocks whilst cancelling out the impact that the broader market might have.

For example, the managers may buy put options on index futures if they believe there is risk of a drawdown in a market within which they are exposed to companies they are positive on otherwise. This is not a panacea against volatility but it can help to provide a level of capital protection in falling markets and means the returns delivered are a purer expression of the team’s stockpicking.

We think this fits with the wider ethos of the trust, with the managers given freer reign to invest in those companies they think are likely to deliver the best absolute returns for shareholders.

It is also an ethos that has paid off. ATR delivered annualised NAV total returns of 10.7% in the decade up to the end of September 2023. That compares to equivalent returns of 6.4% in the MSCI AC Asia-Pacific Ex-Japan Index over the same period. So perhaps all those stock tipping authors are right after all – it can pay to ignore the benchmark.

Our analysts rate the trust highly, saying in June: “We believe ATR offers two standout features for investors. Firstly, there is the structure, which offers investors high-quality stock selection within the region, alongside the hedging strategies which should help mitigate the more excessive risk factors that Asia can often present.

“Secondly, the trust has moved considerably underweight China as a result of the managers’ scepticism over the market reaction to the reopening of trade and structural challenges facing the market. For investors who are particularly cautious on China, this could offer a compelling opportunity.”

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