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Ryan Lightfoot-Aminoff
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Updated 18 Mar 2024
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Disclaimer

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 Asian Total Return (ATR) has released its financial results for the year ending 31/12/2023. Over the year, the trust saw its NAV increase by 8.8% on a total return basis, which compares to the benchmark return of just 1.3% over the same period. The AIC sector average delivered a total return of -0.5%.
  • Performance over the year has been primarily driven by stock selection, with the managers extracting positive attribution from 10 of the 12 countries in the index. Firstly, the managers’ decision to avoid many Chinese companies has contributed to an underweight allocation, which delivered good relative returns as the country struggled in challenging conditions. Secondly, the decision to allocate to a number of technology stocks, particularly in Taiwan, led to strong returns following positive sentiment over the proliferation of AI.
  • Stock selection in India, such as underweights to traditional manufacturing, was a small relative detractor, but still contributed significant absolute returns. This was more than offset with performance elsewhere and leading to significant outperformance of the benchmark and peers in the year, furthering the long-term cumulative returns.
  • The trust announced a 4.5% increase in the dividend to 11.5p which indicates a prospective yield of c. 2.5% based on the current share price (as at 13/03/2024). The dividend was supported by revenue reserves which remain significant.
  • The discount at year end was 4.6%, slightly narrower than the level at the beginning of the period of 5.8%. The board have been very active with the goal of keeping the discount narrower than 5% by undertaking significant share buy backs. In total, over 7.5% of the share capital at the beginning of the year has been bought back over the course of 2023.
  • Gearing has ranged between 4.6% and 10.3%, with an average level for the year of 7.9%.
  • Chair Sarah MacAulay commented on the trust’s strong performance in a challenging period by saying “our unconstrained approach to investing in Asia has not only delivered good returns but also provided a degree of capital protection in difficult market conditions”

Kepler View

Schroder Asian Total Return (ATR) is a unique offering in the AIC Asia Pacific sector. Managers Robin Parbrook and King Fuei Lee take a benchmark agnostic approach to building a portfolio of companies in the region. They have demonstrated repeatedly their high-quality stock selection capabilities which has provided significant alpha generation, as well as having the use of hedging strategies to help lessen some of the volatility that can be present in the Asian region.

We believe the 2023 results represent a return to form for the managers. Whilst the region has seen a number of challenging headwinds over the past few years, Robin and King Fuei have demonstrated the strengths of their experience and the quality of the process to deliver a year of highly impressive returns. Much of this has come from stock selection in China, including the decision to avoid the big e-commerce names such as Alibaba and JD.com. Conversely, the names they did hold, such as Shenzhou International, performed well and delivered significant alpha.

Stock selection alpha has been prevalent throughout the portfolio. Of the 12 markets the managers invest in, ten have delivered positive attribution. This includes generating positive returns from markets that have otherwise fallen. Their holdings in technology companies, mostly based in Taiwan also rose significantly following increased demand from the proliferation of AI. Whilst this has not been a specific focus of the managers, it has been a positive tailwind to performance and, in our opinion, demonstrates the success of the process.

Despite the excellent performance, the shares have traded at a persistent discount throughout the year. The board has been very active in trying to mitigate this through extensive buy backs, with the goal of keeping the discount within 5% of NAV. This goal was achieved at the end of the period, though the discount has since widened, albeit the level is considerably narrower than the average of the peer group. As such, we believe the current discount represents an attractive entry point for long-term investors.

On a broad level, the managers believe that many companies in the region are in good shape, with robust balance sheets and strong cash positions. Not only do they think this allows them a good foundation from which to continue to deliver growth, but it also supports the dividend outlook for the region which we believe can be a strong contributor to total returns.

The portfolio continues to have an underweight allocation to China, and is overweight more developed Asia Pacific countries such as Taiwan and Australia. The managers have considerable resources and experience to support their top-down overlay, which we believe can help mitigate the worst of the risks in the region on the portfolio. As such, we believe ATR may appeal to investors who maintain a cautious outlook on China, but still wish to capture many of the exciting growth trends that are present in Asia.

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