Aberdeen Standard Asia Focus 28 July 2021

Aberdeen Standard Asia Focus (AAS) is the purest small cap Asia Pacific trust. Managers Hugh Young and Gabriel Sacks take a quality growth approach to investing in companies they view as leaders in their industries with the potential to generate high and sustainable long-term growth.

While they look for sustainable growth, the managers also have a disciplined approach to valuations. This and a bottom-up based approach mean the portfolio is quite balanced across sectors and styles. The top performers in 2021 have come from both old and new economy stocks, illustrating the potential in such an approach, and in fact AAS is the top-performing Asia Pacific trust across the small and large cap sectors in 2021 (see Performance).

Whereas historically AAS had a bias to the consumer and financial sectors, over the last few years it has evolved into a rather different animal, aiming to combine the best of the old economy with a considerable weight to technology, high-tech manufacturing and ecommerce. As we discuss in the Portfolio section, technology and industrials are now the two largest sector positions.

AAS has long-term structural gearing which helps to balance the typically lower beta stocks in the portfolio given the quality growth approach. Net gearing is currently c. 10%.

Although the discount came in markedly around the start of 2021 as markets rallied, recently it has widened again and sits at 13.8%, close to its five-year average, despite excellent performance in the year to date and especially in the early summer.

AAS is a different proposition from what it was in the past. The basic strategy has not changed, and it remains a quality growth proposition with a keen eye for valuations, but the tweaks to the process made by lead manager Hugh Young since 2018 have led to a diverse portfolio, encompassing fast-growing ecommerce stocks and traditional industries like shipping. What unites them is the quality characteristics that the managers see in them: their ability to grow faster than the market and their peers and their strong balance sheets which should see them through tough economic periods.

We think one such period is arriving, and the quality approach espoused by Hugh and Gabriel could pay off – it may even be the recent strong performance is the beginning of such a long-term trend, although it is too soon to be sure. Hugh and Gabriel report strong earnings on their portfolio this year as economies rebound. While they are cautious on the immediate outlook, given the pandemic is by no means over, they do report that some portfolio companies have seen their competitive positions improve during the crisis, which should be expected of high-quality market leading companies. We note that AAS strongly outperformed in the aftermath of the 2007/2008 financial crisis – as well as after the market turmoil of the tech bubble bursting in 2001. On a wide discount of 14%, it looks like an interesting exposure to take into the latest post crisis period.