abrdn Asia Focus 11 October 2022

abrdn Asia Focus (AAS) invests in growth-focussed Asian smaller companies. It has been managed since 1995 by a team that has included Hugh Young, who was appointed lead manager in 2018. Gabriel Sacks has also been at the trust for many years and later joined Hugh as co-lead manager, and the board tasked them both with revamping the investment approach. In 2021 Flavia Cheong was appointed joint lead portfolio manager alongside Hugh and Gabriel. The team take a bottom-up stock selection approach and have a focus towards quality companies with growth potential.

Hugh and the team report that the portfolio companies have been operationally resilient throughout the economic turbulence of this year, and they believe the companies’ strong balance sheets and attractive valuations make the portfolio look particularly attractive. The portfolio includes a mix of sectors experiencing secular growth, while the forward P/E ratio stands at 11.4x, a low level by historical standards (see Portfolio section).

Over the past year a number of board proposals have been adopted, the most significant of which was the removal of a strict market-cap upper limit of $1.5bn. The key implication is that this opens up the investment universe, especially towards Chinese stocks. The team have already raised the exposure to China and expects to make further rises in due course.

Shareholders have also approved a new performance-linked five-year tender offer that aims to provide some protection to the discount. Another change has been made in the fee structure, and last year’s OCF of 1.1% will come down due to lower management fees that will likely make AAS the cheapest trust in its sector. Other adopted board proposals have been to double the dividend payout and to implement a progressive dividend policy, giving AAS the highest dividend in the sector (see Dividend).

In the short term, the quality approach of Hugh, Flavia and Gabriel seems well suited to the current market environment, and we find it reassuring to hear the portfolio is performing well operationally. While we acknowledge the near-term environment is likely to remain challenging, we note that not only is the portfolio cheap, but the shares trade on a significant discount to NAV. As such, this could prove to be a good long-term entry point.

As for the long term, the team are stock-pickers, so they don’t run the portfolio according to macro or thematic views. Nonetheless, we believe key secular and structural drivers will play a big part in long-term returns: for example, rising levels of consumerism through the wealth effect. Alongside this, governments in the region, such as those in India and Vietnam, continue to implement pro-growth and development policies as well as ploughing money into huge infrastructure projects.

We believe the removal of the market-cap upper limit of $1.5bn could prove to be well timed since this previously limited investment opportunities in China. After the significant sell-off in Chinese equities, this could therefore be a good time to be looking for ideas. In our view the recent changes to the trust and the relatively wide discount add up to an attractive way to gain exposure to the growth opportunities afforded by Asia’s longer-term development path (see Discount).