Fund Profile

Disclaimer

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.

Overview
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Overview

Scottish Oriental Smaller Companies Trust (SST) aims to buy market-leading Asian businesses with a market cap below $3bn and hold them for the long term as they grow. Manager Vinay Agarwal aims to find companies which can generate high and sustainable earnings, typically from dominating a niche and having advantages which can’t be easily replicated. He aims to buy these companies on reasonable valuations and invest on a three- to five-year time horizon.

A key element of the investment process is investigating the downside performance of companies in tough economic periods in the past. Vinay looks for companies with operational resilience, low levels of debt and management teams with a track record of making prudent capital-allocation decisions. As we discuss in the Performance section, this focus on quality and resilience helped SST to outperform hugely in the aftermath of the 2007/8 global financial crisis.

After the outbreak of the pandemic Vinay took advantage of the market-wide falls to improve the quality of the portfolio, picking up some new holdings which were previously too large or too expensive, and adding to his preferred companies as they fell in price. The aim is to own businesses which should have the strength to survive the rough period and dominate the competition in the recovery.

Vinay does not make calls on individual countries, but his process has led him to have a large overweight to India and underweight to China, which has contributed to SST underperforming in recent years (including 2020). This underperformance is likely why the discount has widened out to 15.1%, over one standard deviation wider than its five-year history.

Analyst's View

SST is out of favour, with its shares trading on a wide discount compared to its history. While performance has been challenging in recent years, there could be better things ahead for the trust, with the pandemic potentially leading to more defensive, quality growth companies coming back into favour. In the meantime, there is an active buyback programme which could provide some downside support.

In our view, SST’s portfolio of high-quality companies with low levels of debt should do well in any rough economic period following the emergence of the pandemic, and thereby be in a good position to steal market share from competitors as the latter go out of business and struggle under debt burdens or under the pressure of reduced demand. This is what happened following the last global crisis of 2008, as we discuss in the Performance section.

Nonetheless history may not repeat itself, and crucial factors in the medium term will be the highly active country positioning (into India and out of China) and sector positioning (towards defensive consumer staples and away from high-growth companies and technology). However, after a period in which both biases have been deleterious to performance, we think the chances of mean reversion for the fortunes of the portfolio are good, with the economic fallout from the pandemic a potential catalyst.

bull bear
A track record of outperforming in a post-crisis recovery Highly active sector and country positions can lead to underperformance over periods
Wide discount relative to history, providing a good entry point Asian small caps could remain out of favour with international investors
A focus on absolute returns and downside protection which should help in rough markets SST has a performance fee which some investors do not like
Continue to Portfolio

Fund History

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…
12 Jul 2017 Fund Analysis
An emerging markets trust that has a focus on high-quality companies and was launched to great fanfare, but has struggled to keep pace during the recent rally...
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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