Fund Profile

Scottish Oriental Smaller Companies 01 December 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) aims to identify high-quality Asian businesses with market-leading positions and strong balance sheets which can grow faster than the market over the long run. The strategy has a track record of generating good returns after global economic crises. As we discuss in Performance, it has done well in 2021 so far too.

SST has been run to the same basic strategy by the same team at FSSA since launch in 1995 but has been revivified in recent years under lead manager Vinay Agarwal, who has cut out lower conviction holdings and concentrated the portfolio in the team’s best ideas. The board and manager agreed on a number of changes in 2020 to improve on previously sluggish performance. This includes taking out structural Gearing for the first time in many years and formalising Martin Lau’s position as co-manager.

As we discuss in the Portfolio section, SST’s portfolio is now much more concentrated and shows attractive financial characteristics, with particularly strong earnings growth expected over the next two years. The team report that their businesses have shown operational resilience through the crisis and have used the crisis to take market share from weaker competitors. The managers say they think the portfolio is better positioned than it has ever been – and we note the team collectively increased their personal shareholdings significantly over the latest financial year.

The discount remains wide at 10.8% (at the time of writing), although this is narrower than the 13% five-year average. The board has been supporting the share price with regular buybacks and has announced a tender offer to be held every five years conditional upon performance versus the MSCI AC Asia ex Japan Small Cap Index (see Discount).

Analyst's View

SST’s strong performance in the year to date is promising given its track record of doing well after past global crises. In theory, companies with low levels of debt, good cash generation and strong market positions should be able to steal market share and continue to grow in tough economic environments. The managers tell us this has been evident in a number of holdings in recent months, and, should the recovery from the crisis be protracted, we think this gives reason to be optimistic the market environment has finally shifted back in SST’s favour. In particular, we note that in an environment of high inflation, companies with pricing power should do better – and this is a key characteristic the team look for.

SST is a highly active proposition, with the managers paying little attention to any index. A number of their key characteristics or exposures have worked against them in recent years, contributing to sluggish medium-term performance. However, the managers have stuck to their guns, supported by their board, rather than trying to chase performance. We think there is some evidence their main bias to quality could be a tailwind in the short to medium term. The new tender offer should provide further support to the share price discount over the medium term, and in our view, increase the attractions of the current discount as an entry point.

bull bear
A track record of outperforming in post-crisis recoveries due to quality bias
Highly active sector and country positions can lead to underperformance over periods
Wide discount is a potential good long-term entry point
Asian small caps could remain out of favour with international investors
Managers believe their portfolio is better-positioned than ever
The performance fee is calculated against a large cap index
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...
View all

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