Schroder AsiaPacific 20 February 2024
Disclaimer
This is a non-independent marketing communication commissioned by Schroder Investment Management. 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.
Schroder AsiaPacific (SDP) owns a portfolio of predominantly large-cap companies, which co-managers Richard Sennitt and Abbas Barkhordar identify through a bottom-up approach that looks for quality, but at attractive valuations. They are supported by Schroders’ extensive analyst network based in several offices in the region which help identify under-researched opportunities during the stock selection driven process.
The Asian market has been through a period of significant gyrations in the past year. China and Hong Kong have struggled due to an expected post-pandemic bounce failing to materialise, while South Korea and Taiwan have done well due to their high number of technology companies. This has played into the managers’ positioning and has had a positive impact on relative Performance.
More recently, the managers have been adding to China at the margin, though they remain underweight due to their cautiousness on the country’s structural issues. They have been selective, adding to quality companies they have monitored for a while, but are now trading at attractive valuations. Meanwhile, following the strong performance of their tech positions, they have taken some profit where valuations look full, demonstrating their disciplined approach – though the sector remains a significant overweight (see Portfolio).
The trust continues to trade at a Discount approximately in line with the five-year average as well as the average of the peer group. The board has been active in buying back shares, repurchasing c. 5% of the outstanding share capital in the past 16 months.
The managers have applied a modest amount of Gearing. This has not been a significant feature of the trust over the past few years, though has increased to 2% over the past few months, reflecting the number of opportunities the managers have identified.
Richard and Abbas have delivered another strong year of relative performance as a result of astute positioning led by their bottom-up stock selection process. We believe this reinforces SDP’s position as one of the more compelling trusts in the Asia Pacific sector.
The managers have continued to show discipline and have trimmed areas that have done well, such as technology, and rotated into areas where quality companies have fallen back to attractive valuations, most notably in China (see Portfolio). Despite this, the managers continue to be underweight the country due to concerns over a number of structural issues – although this is in part offset by an overweight to Hong Kong. The valuation discipline underlines the trust as a core offering which we think should appeal to investors who wish to gain broad exposure to the region, but share the managers’ hesitancy over the prospects for the Chinese market.
We believe the current Discount offers a compelling entry point. Whilst only in line with the five-year average, it should provide additional alpha in the event of a recovery in the region, which the managers believe has a number of factors that could provide a catalyst. The fact they have utilised a modest level of Gearing despite it rarely being a feature supports this, as does the high level of share buy-backs undertaken by the board.
Bull
- Impressive long-term outperformance driven by stock selection
- Trading at a wide discount
- Easing economic headwinds could support a recovery in the region
Bear
- Portfolio’s growth tilt likely to underperform in value rallies
- Underweight position to China could be exposed to government stimulus boosting the market
- A pullback in tech after a strong run due to AI demand would impact trust’s overweight