Results analysis: Schroder AsiaPacific

• Schroder AsiaPacific (SDP) has released its interim results for the period ending 31/03/2024. Over the period, the trust saw its NAV increase by 5.7% on a total return basis, ahead of a total return of 5.3% for the trust’s benchmark, the MSCI AC Asia ex Japan Index. The AIC Asia Pacific sector delivered a weighted average return of 7.9% over the same period.
• Relative performance has primarily been driven by good stock selection. Highlights include the allocations to technology firms which were the biggest positive contributors, particularly in Taiwan. Philippines, Indonesia and Hong Kong all provided positive stock selection, with examples including a Philippines port operator and an Indonesian bank benefitting from an improved macro-outlook.
• Whilst stock selection was positive in Hong Kong, an overweight allocation led to the country detracting from performance. Similarly, whilst the managers’ holdings in India performed well, the underweight position to the country impacted relative returns following its strong performance.
• However, the ongoing underweight allocation to China did contribute positively as the country continued to struggle with geopolitical headwinds and unpredictable policy decisions. China’s difficulties have contributed to the region underperforming global markets over the period and adding to negative sentiment towards the region.
• Despite the relative outperformance, the discount on the shares widened from 11.5% at the beginning of the period to 12.8% at the end. The board continued to undertake share buy backs to try and narrow the discount. Over 3.5m shares were bought back in the period at an average discount of 11.4%, representing over 2% of the share count at the beginning of the period.
• Chair James Williams commented on the changing outlook in the region saying “the outlook is again better positioned for [Richard and Abbas] to find opportunities to capitalise on the current conditions.”

Kepler View

SchroderAsiaPacific (SDP) managers Richard Sennitt and Abbas Barkhordar have navigated the challenging period covered by the interim statement well and have delivered another period where the trust has beaten its representative index. This has further contributed to the significant long-term outperformance of the benchmark.  

Positives in the period have come from the managers’ technology holdings which have performed well. This is due to a combination of optimism surrounding the proliferation of AI, as well as signs the inventory de-stocking cycle is ending, both being supportive to future earnings. The managers’ underweight position in China has also been positive to relative returns. The country has continued to struggle due to a range of factors such as the stuttering property market, geopolitical tensions and domestic regulatory risks which has contributed to SDP’s outperformance.

Both allocations are good examples of the managers’ stock selection approach, and the fact that it has once again been a major driver of performance is one of the key attractions of the trust in our opinion. Good stock selection has also come from companies in less mainstream markets such as a Philippines port operator and an Indonesian bank. We believe this demonstrates the strength and depth of the research capability supporting Richard and Abbas and is a prime example of why an active approach is beneficial for investors in the region.

There have been some drawbacks to relative performance, most prominently from an underweight in India. Whilst it is still one of the largest absolute allocations, the slight underweight has been a drag on relative performance following the strong market rally, which has been driven by domestic investor inflows. Furthermore, the managers have an overweight position in Hong Kong which has also negatively impacted performance. This has been taken in part to offset some of the risk of being underweight China, though encouragingly, stock selection was a positive in Hong Kong, rewarding the managers’ focus on high quality companies. The managers believe that the negativity towards China has been priced into stocks though, which could offer some investment opportunities. We note that there has been a strong rally in the region following the period end which has benefitted absolute performance of the trust.

Despite the outperformance in the interim period, and the rally since, the discount on the shares has remained wide, starting the period at 11.5% and ending it at 12.8%. The discount has moved little since, standing at 11.7% at time of writing. We believe the current level isn’t representative of the managers’ stock selection capability, nor does it reflect the NAV recovery post period end. The board has continued to be supportive through buy backs, though we believe the current levels could be seen as an attractive entry point for long-term investors.

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