Aberdeen Standard Asia Focus 20 August 2020

Aberdeen Standard Asia Focus (AAS) invests in smaller companies in the Asia Pacific region, with a focus on finding market leaders with sustainable earnings growth and strong, resilient balance sheets.

AAS is managed by Hugh Young, one of the most experienced fund managers in the industry. In 2018 he took more personal control over the portfolio and initiated an overhaul at the board’s request. This move led to three changes: an increased concentration, a more ruthless attitude to underperforming companies, and a greater balance between old economy sectors and new economy sectors such as information technology.

The new approach led to outperformance in 2018 and 2019, and although returns in 2020 have been behind the index, the weighting to technology and ecommerce has boosted returns. In addition, the quality element to the approach has been evident in the operational resilience of the portfolio in an extreme crisis.

The portfolio has structural gearing, which has been a hindrance in a sharp market correction – as we discuss in the Gearing section. But structural gearing is intended to boost returns over the course of a cycle and avoid the manager having to time taking on borrowings.

The discount is 14.5%, slightly wider than AAS’ five year average of 13.5%. Small caps have largely been out of favour over that period as the market has focused on large caps, China and technology.

Dividend growth has been strong in recent years, as we discuss in the Dividend section, and the trust has around 2.5 years’ revenue reserves on the balance sheet. The historic yield is 2%.

In our view AAS’s focus on strong balance sheets and sustainable earnings is attractive in a troubled economic environment. The portfolio is now also more balanced in stylistic exposures following the 2018 revamp, with greater exposure to high growth technology companies. These have a tailwind behind them in the form of the coronavirus pandemic, and the increase in people working and shopping from home as a consequence of the virus. However we think having a counterweight in less highly valued companies less geared to increasing growth rates is now preferable; based on such a sustained period of performance, and the higher valuations typical in that segment of the market.

This is a strange crisis in that it has thrown individual countries back on their own medical, institutional and economic resources, which has resulted in some unlucky hits to AAS – given its highly active country positioning. However we would expect a lot of this to revert as the pandemic recedes, hopefully leaving the operational resilience of the portfolio as a more important driving factor.

On a wide discount and after a period of limited investor interest in small caps, AAS and Asian small caps in general would be easy to overlook. But we would note that trends can revert quickly, and the best returns are often made by being positioned early, with the shares trading significantly below par.