Schroder AsiaPacific 23 May 2023
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 (LON:SDP) is run by manager Richard Sennitt who employs a bottom-up approach, looking to use the size and resources of the global Schroders organisation to exploit market inefficiencies in the under-researched Asian market. He is looking for firms which can demonstrate superior or improving returns on capital, which he believes will identify quality companies which can sustain their leading positions over the long term, whilst also trading at valuations which offer some upside to fair value.
As a result of the bottom-up approach, stock selection should be the primary driver of Performance. This has been the case in the past year. Richard has been underweight China for several reasons including the increased regulatory uncertainty there. The reversal of the zero covid policy led to a sharp market rise in Chinese equities which Richard was able to capture through good stock selection despite the headwind of the underweight position.
Richard is currently overweight the financial and technology sectors. With the former, Richard aims to capture the improved fundamental picture caused by higher interest rates whereas the technology overweight is based on the sector providing structural growth opportunities at attractive valuations. Richard believes he has been able to access global leading companies at knock-down prices as a result of concerns over a global economic slowdown. He highlights that the technology sector is very diverse in Asia so he can balance a good range of exposures and performance drivers. In exchange, Richard is underweight in defensive areas as he believes they have been overbought as the market has become overly concerned over the economic backdrop, and he believes that earnings risk remains thus potentially undermining their higher valuations (see Portfolio).
At the time of writing, the shares of SDP are trading at a discount of 11.7% which is almost one standard deviation wider than the five-year average of 9.9%. This compares to the peer group’s five-year average of 7% and current level of 8.8%.
In our view, SDP is an attractive way to invest in Asia for the long term. Richard has many years’ experience investing in the region and is well supported by the resources at Schroders which has supported Performance over the long term. Richard believes the recent bounce in the market has taken aggregate valuations back to long-term averages, though there remains a lot of dispersion between different countries and industries. We believe the well-resourced set-up leaves Richard well-placed to navigate this dispersion going forward.
We believe Richard’s positioning of considerably underweight China helps the trust stand out against comparators and may appeal to investors who share his concerns over the impact of the country’s uncertain regulatory environment. However, Richard has managed to benefit from the Chinese reopening surge with more nuanced choices, including through financial firms and an overweight to Hong Kong (see Portfolio). This positioning had impacted the trust recently as China’s reopening buoyed markets but was offset by stock selection which we believe is a strong quality of the trust.
The trust is trading at a Discount that is significantly wider than its five-year average which may prove an attractive entry point for investors. In our view, a peaking of US rates and a subsequent softening of the dollar would be supportive of the growth prospects of the region and could support the narrowing of the discount.
- Stock selection has been a strong contributor to returns
- Well-resourced team with local expertise
- Trust is trading at a discount wider than the five-year average
- Rising interest rates could impact the growth bias of the portfolio
- Asset allocation quite reliant on just two key overweight sectors
- Underweight to China could impact relative performance should the country outperform