Scottish Oriental Smaller Companies 14 October 2022
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.
Scottish Oriental Smaller Companies (LON:SST) aims to build a concentrated portfolio of smaller, high-quality Asian companies with the goal of capturing the region’s compelling growth opportunities. Historically, the trust has performed well following global economic crises and this has been borne out in strong relative performance through 2021 and 2022.
Recently, the portfolio has benefitted from a tilt towards the domestic demand story in Asia, while demand falters in developed markets (see Portfolio). The managers believe that this has contributed to the trust’s recent resilience and should lead to strong earnings’ growth prospects, which should bolster performance in the future.
SST has employed the same basic investment strategy since inception, though a number of changes have been made to revive the portfolio over recent years. Vinay Agarwal, the lead manager, has reduced the number of holdings in the portfolio, while the board has taken out long-term structural Gearing. Last year, Vinay was joined by Martin Lau who has been added formally to the trust as co-manager, though he has contributed input for many years.
These changes have coincided with a strong period of performance for the trust, as the management team’s quality style and valuation sensitivity has been rewarded against a difficult market backdrop. The trust’s NAV has outperformed markets considerably this year (see Performance) but the share price has failed to keep up, putting the trust on a wide Discount compared to its own history.
The recent outperformance by SST has been a reminder of the benefits of discipline when investing. Much of the market touted quality-investing for large parts of the past decade but often overlooked the valuations they were paying for this, perhaps aided by loose monetary conditions. Vinay and the team at SST have maintained their discipline and investors have been rewarded, with the trust outperforming in difficult markets (see Performance).
Despite what we see as a demonstration of resilience, the trust has moved to a wide discount as the trust’s share price has not kept pace with the NAV. In our opinion, this differential could be attractive (see Discount).
The managers’ tilt towards more domestic exposure should help to offer a differentiated profile compared to other Asia-focussed trusts and, potentially, a purer exposure to the growth themes in emerging markets. We note that the trust has considerable holdings of Indian companies, which may lead performance in the event of large market movements.
Finally, the trust has recently taken on structural, long-term gearing which allows the managers to express fully the confidence they have in their portfolio and could provide a boost to performance should their investment thesis play out.
Bull
- Managers are optimistic about the earnings’ potential of the portfolio
- Trust has increased exposure to domestic demand themes and away from global cycle
- Portfolio has differentiated exposure to peers
Bear
- The trust has taken on structural gearing
- There remains a substantial weight to India which has some valuation concerns
- Trust has exposure to the reopening of trade which could tail off
Fund History
