Fund Profile

Scottish Oriental Smaller Companies 02 October 2019

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.

Overview
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Overview

Scottish Oriental Smaller Companies Trust (SST) aims to generate capital growth from a portfolio of Asian ex Japan smaller companies which are selected for their long-term growth potential. Manager Vinay Agarwal looks for high quality companies trading on attractive valuations, and aims to hold them for three years at a minimum, but ideally for much longer. The strategy centres on finding companies with strong positions in growing markets and industries, and with management teams who work in the interests of all stakeholders, giving the approach a strong ESG tilt.

Vinay took over in 2016 and has revived the portfolio, accelerating a process of portfolio concentration initiated by the previous manager, Wee-Li Hee, and increasing focus on a new generation of businesses with strong competitive positions in growing markets. He has also benefited from the decision at the last AGM to expand the investment universe, which allows SST to invest up to 20% in companies of up to $3bn in market cap at the time of investment; that threshold was previously $1.5bn. This change has allowed the trust to keep pace with growth in the size of local markets, the manager explains, and has brought a number of companies into its remit which he believes can grow to many times their current size.

Downside risks are a key consideration for the managers, and Vinay aims to limit the loss potential even in down markets, which is aided by his concern for valuation. The defensive characteristics of the trust are clearly shown in the historic performance numbers. SST is currently running a cash weighting of 9.9% as high valuations lead to sales executing more rapidly than purchases; and Vinay maintains some dry powder to take advantage of market setbacks.

SST has managed to outperform the MSCI AC Asia (ex Japan) Small Cap Index handsomely over the past five years. In particular, the trust managed to outperform in the falling markets of 2018, thanks to the defensive characteristics of a value- and quality-centred approach. As a highly active strategy, at times the performance of the trust can diverge markedly from that of the benchmark – so for example in 2017 it was held back by a low weighting to China which stemmed from a mixture of quality and corporate governance concerns and the restrictions of its previous market cap limits.

The objective of the trust is to grow capital, so dividends are not explicitly targeted. That said, we understand the board is keen to at least maintain the dividend, which has thus been held at 11.5p for the past six financial years, making use of revenue reserves where needed. The yield is currently 1.2%.

SST’s discount has been stubbornly wide in recent years, over a period in which – unusually – small caps have underperformed large caps in the region. This discount may also be the result of lingering uncertainty over the management of the trust from 2013 to 2015 (when there were two changes of manager after a long-standing leader retired) as well as the 2017 underperformance. The trust is now trading on a 12.4% discount compared to its five year average of 11.8% and the all-cap AIC Asia Pacific sector average of 8.8%.

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Fund History

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...
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