During the six months to 30 June 2016, Schroder Asian Total Return produced a net asset value total return of 15.8%, outperforming both the MSCI AC Asia Pacific ex-Japan Index, which produced a total return of 12.9%, and the peer group average NAV total return of 14.5%. If this level of performance continues, a performance fee will be payable for the year ending 31 December 2016, with management fees as a whole capped at 2% of the Company’s net asset value at the year end. Much of the absolute return came from a sharp weakening of sterling after the EU referendum, rather than strong performance from Asian markets, which were mostly flat in local currency terms.
Within the region, the ASEAN markets were the biggest outperformers as stabilising currencies and hopes of reforms in Indonesia and the Philippines led to a strong recovery. The Chinese stock market was the laggard as concerns over economic growth and worries over rising bad debts continued to weigh on sentiment. There was high dispersion in performance across sectors, with Energy and Materials leading gains driven by higher commodity prices. Financials on the other hand came under pressure on the back of general weakness across insurance and bank stocks, due to concerns about a deteriorating credit cycle and the negative impact on margins of continued unconventional monetary policy.
Performance was driven by a strong contribution from technology holdings, in particular smartphone components and supply chain stocks in Taiwan and China on hopes of a pick-up in demand. Korean IT conglomerate Samsung Electronics also extended its positive momentum on signs of a turnaround in earnings driven by stabilising margins in its mobile handset division. In the internet space, China’s leading players Tencent and Alibaba outperformed as earnings continued to deliver steady growth on the back of long-term growth opportunities in the e-commerce and online advertising business.
Positive contributions also came from the Australian holdings, with logistics and healthcare names advancing on solid corporate results. Amongst the top contributors was Medibank, a private health insurer, which surged following news that it received government approval for a premium increase. Elsewhere, most ASEAN stocks saw broad-based gains amid improving sentiment, with Thai financials leading gains on expectations of a stabilising macro environment.
Amongst the detractors, export-oriented companies saw sluggish returns. Automotive component supplier Johnson Electric, bicycle manufacturers Merida Industry and Giant Manufacturing, as well as textile companies Pacific Textile and Shenzhou International fell on concerns over a slower global demand backdrop. Hong Kong-based conglomerate CK Hutchison was also down on worries over its UK business exposure post-Brexit.
The portfolio was slightly geared at 5.1% with total equity exposure of 104.7% at the end of June. Gearing was used to purchase high-yielding telecom stocks and REITs, which added to returns over the period. The contribution from capital protection (in the form of put options on the Australian, Korean and Taiwan markets and short futures on the Hong Kong, China H-shares and Singapore indices) was small given the flat markets, while the currency hedge on the Australian dollar pared some gains as the currency appreciated on the back of higher commodity prices. Adjusting for the derivative protection, net exposure was approximately 85.0% (93.3% delta-adjusted) at the end of June.
ATR : Schroder Asian Total Return benefits from technology exposure