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Fund Profile

Scottish Oriental Smaller Companies 14 April 2021


Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Scottish Oriental Smaller Companies. 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.

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Scottish Oriental Smaller Companies (SST) invests in market-leading businesses which have a market cap of below $5bn at the time of investment. These companies are chosen for their low levels of debt, strong management teams, and ability to compound earnings consistently over the long run.

SST performed very well after the 2008 financial crisis and the 2000 bursting of the tech bubble, as discussed in the performance section, which has contributed to it being one of the ten best-performing trusts in the AIC universe since 2000 on an NAV total return basis. Typically, high-quality companies can gain market share from weaker, more indebted competitors in times of crisis, and the managers report there have been signs of this happening in their portfolio during the course of the pandemic. However, the quality style and sensitivity to valuations as well as the country and small-cap biases have worked against SST, leading to disappointing performance over five years.

In response to this disappointing period, the board and manager have implemented a number of changes intended to help turn around performance. This includes Martin Lau being named as co-manager with Vinay Agarwal, lead manager since 2016, and the addition of the first structural gearing for many years. The market-capitalisation limit has also been increased from $3bn to $5bn, reflecting growth in markets, and the mandate has been broadened to include Australasia and Japan – bringing SST in line with the two Asia small-cap peers. There is no change to the quality, long-term investment approach being taken.

SST trades on a discount of 12.1% compared to a five-year average of 13.2% and the AIC Asia Pacific Smaller Companies sector average of 7.7%.

Analyst's View

SST has had a disappointing few years in which it has faced multiple external headwinds. The quality-growth style has lost out to high growth and momentum, while the allocation to South Asia and low exposure to China have been unhelpful. Meanwhile large caps and technology have both been in favour. However, we think it is possible the pandemic will lead to a shift in style leadership. We note that after the past two global crises quality-growth outperformed, and SST did particularly well. With Asian economies having to deal with the aftermath of COVID-induced economic trauma, high-quality companies may find themselves in favour once again.

We think shareholders should be reassured by the board’s approach of evolution rather than revolution, ensuring the trust will stick to the strategy which has given it long-term success rather than chasing what has done well in the recent past. In our view the implementation of structural gearing adds to the attraction of the trust, as it is a way to potentially boost long-term returns which can’t be matched by open-ended funds. That said, it does add marginally to risks and/or volatility.

SST’s wide discount also looks interesting in our view. Many trusts have seen their discounts narrow in the reflationary trade since Q4 2020, but SST has lagged. There are risks in the near term as some of the countries it is heavily exposed to are still struggling to control the pandemic, but over the longer term there is catch-up potential.

bull bear
A track record of outperforming in post-crisis recoveries

Highly active sector and country positions can lead to underperformance over periods
Wide discount relative to peers, potentially a good entry point
Asian small caps could remain out of favour with international investors
The managers focus on absolute returns and downside protection, which should help in rough markets
Structural gearing will increase downside sensitivity, as well as upside
Continue to Portfolio

Fund History

16 Mar 2023 Diversity matters
We examine the effect of blending multiple funds within your regional allocation and find that – while the culture wars may rumble on elsewhere – the benefits of diversity for investors are unarguable…
14 Oct 2022 Fund Analysis
SST has performed well in a tough environment thanks to its quality focus…
20 Apr 2022 On the hunt
We review discounts in the investment trust space against a backdrop of harsh conditions...
12 Jan 2022 Bargain hunt
We survey the discount opportunities in the market and update on the performance of our Discounted Opportunities Portfolio…
01 Dec 2021 Fund Analysis
SST is “better positioned than ever” following strong 2021 performance…
21 Oct 2021 Results analysis: Scottish Oriental Smaller Companies
SST’s tilt toward India has contributed to a strong set of results this year…
14 Jul 2021 Grade inflation
We look at how our discounted opportunities portfolio has done in the first half of the year and update on the performance of our long-term rated funds…
30 Jun 2021 Inflation – a real threat or hot air?
Two of our analysts ask whether recent high inflation numbers indicate something long-lasting and troubling is happening…
14 Apr 2021 Wide Boys
We review our portfolio of chonky discounts as one star performer hits its target…
14 Apr 2021 Fund Analysis
SST has performed strongly after past global crises thanks to its preference for quality companies…
14 Jan 2021 Get 'em while they're hot!
We review the widest discounts in the investment trust universe and look at our selection of attractively cheap trusts…
04 Nov 2020 Fund Analysis
SST outperformed strongly after the last global economic crisis in 2008 and is trading on a wide discount…
07 Oct 2020 Five ways to play Indian equities
India is struggling economically – but could there be a value opportunity in the stock market?
18 Mar 2020 Their darkest hour?
We update our shortlist of discount opportunities...
05 Mar 2020 Don't panic: the case for investing in Asia this ISA season
We examine the relationship between stock market and GDP growth, before debating the case for an allocation to Asia...
02 Oct 2019 Fund Analysis
SST’s more defensive approach has served it well in recent choppy markets…
28 Aug 2019 Quality street: can the dominant style continue to outperform?
For several years, quality as an investing style has dominated, outperforming both value and growth. We examine why the case for quality remains strong and the importance of taking an active approach…
03 Jul 2019 Push-me pull-you
Two contrasting influences are dominating the outlook for Asian markets - we analyse them and how Asia trusts are positioning their portfolios in response...
31 May 2019 Fund Analysis
SST has generated strong performance in falling markets, but is still sitting on a wide discount...
19 Apr 2018 Fund Analysis
A conservatively managed Asian equity portfolio which has drifted out to a double digit discount on the back of recent underperformance...
19 Apr 2018 What now for Asia?
We examine battered Asian equities amid talk of a trade war between the US and China...
30 Nov 2017 Race ready?
We analyse the outlook for emerging markets and, in particular, the genuine active funds that focus on them…
01 Jun 2017 Fund Analysis
A small-cap Asia trust run with a keen focus on capital preservation that has delivered strong outperformance with low levels of volatility...
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