Aberdeen Standard Asia Focus 04 February 2021
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by abrdn Asia Focus. 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.
Aberdeen Standard Asia Focus (AAS) invests in small cap companies in the Asia Pacific region which the managers, Hugh Young and Gabriel Sacks, believe are, or will become, market-leading in their industry or niche. The basic strategy is to identify companies with high quality financials and governance and invest at attractive valuations.
The quality characteristics mean that the companies should be more operationally resilient and, as discussed under Performance, AAS performed very strongly after the 2008 crisis in the long, slow recovery. However, in recent years performance has been more sluggish, with the portfolio behind the MSCI AC Asia ex-Japan Small Cap Index over five years. This was largely due to the trust not keeping up with the sharp rally from the March 2020 lows, even though it outperformed in the initial crash.
As we discuss under Portfolio, since 2018 the weighting to technology and ecommerce has been steadily rising as Hugh and Gabriel have set out to revive the portfolio. AAS owns momo.com, the Taiwanese equivalent to Amazon, which trebled in 2020, as well as a number of companies across the hardware and software industries. The portfolio remains balanced across ‘old’ and ‘new’ economy stocks, however, with high weightings to the consumer staples and financials sector too.
Hugh has invested in Asia since the 1980s and draws on the work of a team of analysts/portfolio managers based in the region. Gabriel has been assisting Hugh on AAS since 2018.
After a rally in the markets towards the end of 2020, AAS trades on a discount of 9%, narrower than the five-year average of 13.7% but wider than the average all-cap Asia trust discount of 2.4%.
AAS offers an attractive balance between old and new economy companies. While technology, especially ecommerce, has outperformed hugely since the pandemic, we think a more balanced allocation could be attractive at this time. If the economic recovery from the pandemic proceeds as we hope in 2021, with vaccines rolled out and restrictions eased, then we think technology could underperform in the short run as investors reacquaint themselves with the other growth opportunities in Asia, from financial services to consumer staples to manufacturing.
We also find it interesting that AAS did exceptionally well after the 2008 global crisis, and indeed in the recovery from the 2001 tech bubble bursting. While there are many factors that mean this pattern might not repeat itself (see performance section) we do think the quality strategy may well outperform in the troubled recovery we think we likely see in the coming years. For while optimism abounds about the vaccines, we note that vaccines will take time to roll out, and many economic problems remain to be resolved in the coming years, with weaker companies likely to suffer at the expense of their higher quality competitors as the lagged impacts of recessions work their way through economies.
AAS trades on a narrow discount by recent history but we think this is justified given the brighter outlook, and note it is wider than the all-cap sector. Although large caps have outperformed for the past four years, there is no guarantee this will continue.
|Focus on strong balance sheets and operational resilience should serve well in troubled environment
|Structural gearing increases the downside risks
|Strong secular growth potential in many of the region’s economies
|Highly active country allocations, such as the low weight to China, can lead to large under or overperformance at times
|Extensive experience and resources in the Asian Equities Team
|Asia large cap is in a sustained period of outperformance over small cap