abrdn Asia Focus 30 November 2023

abrdn Asia Focus (AAS) owns a concentrated portfolio of companies from the lower end of the market-cap spectrum, from across the Asian region, excluding Japan and Australasia. Hugh Young, who has been involved with the trust since launch in 1995, is retiring at the end of 2023 and leaving the trust in the hands of existing co-managers Flavia Cheong, Head of Asia Pacific Equities at abrdn, and Gabriel Sacks, who has managed the trust with Hugh since 2018. They are joined on the management team by Xin-Yao Ng.

There will be no changes to the strategy though. The managers have a strong focus on quality to construct their portfolio and are highly active versus their small-cap benchmark. The active share is typically north of 90%, as the managers implement the disciplined and selective stock-picking strategy that is common across all portfolios managed by the Asia Pacific Equities team. This aims to uncover overlooked small-cap companies benefitting from the dramatic boom in Asia’s household wealth. The trust also pays a recently enhanced and progressive Dividend.

Performance has been largely driven by stock selection, and AAS has delivered strong returns over the benchmark in the past five years. Unlike in developed markets, the smaller company benchmark has significantly outperformed the larger-cap equivalent over a number of years, thanks in part to lower exposure to China. The managers argue this also demonstrates the growth opportunity in smaller companies and the diversification it offers in the region.

Despite the good performance, the shares of the trust trade at a wide Discount to NAV. The current level is one standard deviation wider than the five-year average, and wider than the peer group. The board has begun share buybacks in the past year to help narrow the discount.

AAS has delivered impressive returns in the past year, especially when compared to larger-cap peers (see Performance). We believe this is an excellent demonstration of the benefits of the asset class more generally and the trust within it, namely exposure to the best growth themes in the region and diversification from the typical large-cap names achieved through passive exposure.

In our opinion, the change of Management shouldn’t affect the appeal of the trust. Whilst the experience of Hugh Young is a loss, the managers have always advocated their team-based approach, supported by one of the most reputable teams in the industry. Flavia, Gabriel and Xin-Yao all have first-hand experience on the trust which we believe should offer reassurance.

We believe AAS is particularly compelling at present due to the wide Discount the shares are currently trading on. Whilst this has persisted for a number of years, it has widened recently, arguably as a result of negative sentiment towards global markets. The board has taken steps to influence this through share buybacks, which we believe is a positive sign. Not only that, but the portfolio itself has significantly better quality characteristics than the index but is trading at a valuation close to its own benchmark. We would argue this offers investors the opportunity to access a differentiated, lower-risk and higher-quality portfolio at a notable discount to its market value, which could make for a very attractive entry point for long-term investors.