Results analysis: Schroder AsiaPacific

• Schroder AsiaPacific (SDP) has released its financial results for the year ending 30/09/2023. Over the year, the trust saw its NAV increase by 2.9% on a total return basis, which compares to a total return of 1.5% for the trust’s benchmark, the MSCI AC Asia ex Japan Index. The AIC Asia Pacific sector delivered an average return of -1.4% over the same period.
• This outperformance has been driven by good stock selection, and in part by an underweight allocation to China which struggled across the period. Despite this, the index delivered positive returns in local currency terms, though these returns were muted when converted back to sterling. Regardless, SDP has now delivered outperformance of the benchmark at an annualised rate of 2.4% over the past ten years.
• The board were active in buying back shares in order to support the rating. This totalled 6m shares bought back in the year, with a further 1.3m in the period post results, a total amount equal to 4.7% of the current share count.
• The managers remain focussed on achieving capital growth, though the trust does pay a dividend. The amount declared was 12p per share, in line with the amount paid in the previous year. This was fully covered by income which was 12.06 pence per share and equated to a yield of 2.5% at the date of publication.
• Gearing was 2.1% at the end of the period versus 0.2% at the beginning. This was supported by a renewal of a £75m revolving credit facility in June 2023. Of this, $30m was drawn down at year end. The managers also have access to a £30m overdraft facility.
• The tiered management fee was reduced in the year, from 0.7% to 0.6% on assets above £600m. Assets up to this level attract an unchanged fee of 0.75%.
• Chairman James Williams commented on the difficult market backdrop saying: “It is clear that market conditions in Asia – and indeed globally – will continue to be volatile … [but it is] “an ideal time for our managers’ investment strategy which remains focused on companies with structural and sustainable competitive advantages trading at attractive valuations.”

Kepler View

Whilst the Asian region has been through a period of volatility over the 12-month period covered by the Schroder AsiaPacific (SDP) annual report, managers Richard Sennitt and Abbas Barkhordar have delivered another impressive year of performance, delivering a total return 2.5% ahead of the benchmark return of 1.5%, and significantly ahead of the peer group which returned an average of -1.4%.

The period has been punctuated by a series of market gyrations, as macro events have had an impact on investor sentiment. This has led to various countries in the Asia Pacific region seeing a notable divergence in returns. In our opinion, this environment is likely to be beneficial for stock pickers and is a major reason behind the strong performance relative to peers. Currency translations have also had an impact on performance. In local currency terms, all but two of the eight major economies in the region had positive returns. However, when translated back to sterling, these returns were notably reduced. Indonesia, as an example, made c. 3% in local terms but c. -7% in sterling terms.

The managers were underweight China throughout the period which contributed to performance. They were, though, modestly overweight to Hong Kong to balance this which was a headwind albeit offset by good stock selection. The managers have been adding to both countries selectively as valuations have continued to fall. Taiwan was a good contributor to performance, particularly in the managers’ technology holdings, a sector they are overweight. This includes in semiconductor companies that benefitted from an AI and EV tailwind. Stock selection here was also positive, though the managers have begun to take profits in the strongest performers. They continue to like India, but believe valuations are pricing in a lot of optimism. As such, Richard and Abbas remain selective. We believe this pragmatic approach is one of the key drivers behind the consistent outperformance of the trust.

Despite the outperformance, the trust’s shares have remained at a steady discount to NAV across the year. The board has recognised the value this offers and has been active in trying to stabilise the discount through a large number of buy backs. This has been both NAV accretive, adding an estimated 0.4% to NAV over the course of the year, and in our opinion, is a positive sign to investors.

In the year, the trust also saw a reduction in its charging structure, with the upper tier of management fees reduced to 0.6% from 0.7%. This will provide further economies of scale should net assets grow.