Asia Dragon 15 February 2023

Asia Dragon Trust (LON:DGN) is one of the largest and oldest investment trusts in the Asia sector. It is run by two co-managers, Adrian Lim and Pruksa Iamthongthong, who are bottom-up fundamental stock pickers. They look to build a portfolio of world-class quality companies based in the Asian region, to be held for the long term. The quality characteristics they look for include sustainable business models, robust finances and being driven by structural growth themes. These may lead to some sector biases, though the managers will otherwise look to keep a diversified range of exposures (see Portfolio).

The past year has been challenging for the trust, with the zero weight in traditional energy names affecting the trust’s relative performance, which the managers’ strong stock-selection skills were unable to offset. However, the long-term performance of the trust remains notably ahead of the benchmark (see Performance).

The managers tightened the portfolio in 2022 by adding conviction to their higher quality names, which they believe should be in a better place to manage an economic slowdown. More recently, they have selectively taken advantage of valuation opportunities, such as in the Chinese internet names, which have been sold off over regulatory crackdowns and which they now believe to be cheap. These have since been supported by the reopening trade in China as the country reverses its zero-covid policy.

The managers argue that Asia may be less impacted by a global recession due to the positive impact of China’s reopening and less aggressive central bank policies, which may begin to restore investor confidence in the region.

The past year has been a rare period of underperformance versus the benchmark for DGN. We understand that much of this has come as a result of stock-specific issues, though there have been broader factors that have affected the short-term returns of the trust (see Performance). Having a zero weight to energy has been painful, but we believe Adrian and Pruksa’s alternative exposure to the likes of renewable energy has a longer-term growth trajectory that should support investors as the energy situation settles. The headwinds that Asia is facing are, arguably, receding; China seems to have reversed its zero-covid policy and we believe this could provide upside for the region, not least in terms of sentiment.

The managers’ approach of identifying quality companies should help the portfolio’s resilience and enable it to protect against economic difficulties and it could, therefore, be well-placed to capture this upside when it happens. The increase in concentration of the portfolio’s top ten holdings demonstrates the managers’ commitment to this, making it the most concentrated trust of the peer group, and we think should provide confidence to investors (see Portfolio).

The trust runs a structural Gearing level which should enable it to outperform should markets come back strongly. Even in the event this takes longer than hoped, the core approach should offer defensiveness in the meantime, with the ability to capitalise on valuations as they weaken.