Aberdeen stays as manager of Edinburgh Dragon on a reduced fee – Edinburgh Dragon says that, for the year ended 31 August 2017, the NAV rose by 21.6% on a total return basis. However, this performance was less than the benchmark’s increase of 27.2% in sterling terms. Following concerns over performance, the Board undertook a detailed assessment of the manager and commissioned a global consultancy firm to assist with its evaluation of Aberdeen’s investment style and performance. That evaluation concluded that, given Aberdeen’s investment style and the direction of markets over the past 5 years, the manager’s performance was not out of line with expectations. As a result of this report and their own due diligence, the Board resolved to retain Aberdeen as manager having agreed a number of clear parameters to be used to monitor the ongoing suitability of Aberdeen.
The share price rose by 19.5% to 361.0p, with the discount to NAV (diluted) widening marginally, from 12.4% at the start of the period to 13.1% as at 31 August 2017. Since the year end, this discount has narrowed to 11.7% as at 31 October 2017.
Taking into account the downward pressures on management fees, the Board has agreed with the manager a reduction in the management fee. With effect from 1 September 2017, the management fee will be calculated at 0.85% of net assets up to GBP350 million and 0.5% of net assets exceeding GBP350 million. Based on net assets at 31 August 2017, the revised management fee would have equated to GBP5.26 million and 0.66% of net assets.
Manager’s report
The following is an extract from the managers’ report: “Holdings in India, Singapore, and our substantial exposure to financials were the portfolio’s star performers. They are long-held positions that we have stuck to, as we deeply believe that they offer good quality and value. They also will stand to benefit from Asia’s growth.
India is home to many high quality companies, several of which are held in the portfolio. Its growth rate is among the best in Asia, and many of the India-listed holdings have good long term prospects. In fact, the Trust’s top performing stock, Grasim Industries, hails from India. Over the year, Grasim has managed to unlock more value through restructuring. It was also added to regional indices, which fuelled optimism for its stock. Elsewhere, private sector financial services firms Housing Development Finance Corporation and Piramal Enterprises did well. Investors liked their healthy balance sheets, and their favourable market positions that gave them an advantage over their competitors that are stretched and poorly run.
Singapore is an open economy backed by sound economic policies amid a stable political environment. It is home to many well run businesses, with high standards of corporate governance and scope to expand across the region. For example, Singapore-based developer City Developments was one of the portfolio’s top performers. It boasts a seasoned management with future value to be realised, not only from its sizeable low cost land bank, but also from its holding in the global Millennium & Copthorne (M&C) hotel chain. M&C has properties in prime locations in key cities around the world, but its brand name is still not as well recognised as other hotel chains.
Banks saw their share prices rise over the year, as expectations of interest rate hikes in the US also pointed to better days ahead for them as lenders. In addition, the ongoing global economic recovery meant that companies were gearing up their capital spending, which translated into a better outlook for financial institutions. For Singapore banks UOB and OCBC, their share prices received a further boost, when investors saw that they had reduced their exposures to the beleaguered oil and gas sector. This helped improve their balance sheets. In Hong Kong, HSBC’s stock was lifted by solid earnings and news of its multi-billion dollar share buyback scheme
While we were compensated for our views on India, Singapore, and in the financial sector, our conviction about China worked against us this year. We continue to see the mainland as a tough place to invest. While there are companies that meet our strict quality and valuation criteria, astute managers must still conduct due diligence and remain vigilant in such a market. China’s macro outlook seems to be improving, and the key for us is finding ways to tap into this growth through good quality companies that are well run and respect minority shareholders. Although the Chinese stocks in the portfolio did well, with video-surveillance products maker Hangzhou Hikvision, distilled-liquor producer Kweichow Moutai, and operator Shanghai International Airport emerging as top contributors, it could not compensate for the rally in the broader market.
China’s stockmarket performance has been led by the technology sector. Share prices of internet giants Alibaba and Tencent’s share prices did well over the past year, contributing to almost half of the MSCI China’s gains in the first half of 2017 alone. Although the internet ecosystems that they are active in are increasingly important to Chinese economic growth and Chinese consumers, we remain cautious about the sustainability of their business models, as they operate in a dynamic landscape. We are also mindful of their corporate structures in general.
The technology sector elsewhere offers many attractive companies. Taiwan Semiconductor Manufacturing Company (TSMC) is a market leader. TSMC’s large, global customer base and product diversification allows it to withstand fluctuations in global demand that buffet the consumer technology sector. Samsung Electronics (SEC), another key contributor, still accounts for the lion’s share of profits among Asian technology names. It is one of the world’s largest smartphone makers, and recently overtook Intel as the world’s largest chipmaker. But SEC is not without controversy. Recent news about parent Samsung Group’s de facto head Lee Jae-yong appealing against a bribery conviction has taken a toll on investor confidence. We believe SEC is well placed to weather any adverse impact, given its efforts at shoring up business operations – something we had engaged with management over the course of holding this company for more than ten years. Its management bench is deep and experienced, helped by an earlier move to appoint a co-CEO. Nonetheless, we view engagement with SEC as important, and we will continue our conversation with the company on issues, such as management succession.”
EFM : Aberdeen stays as manager of Edinburgh Dragon on a reduced fee