Schroder Asia Total Return hit by China weakness – Schroder Asian Total Return has published its annual report for the year ended 31 December 2018. The chairman says that 2018 was a difficult year. The company produced a net asset value total return of -8.1%, better than the total return of -8.6% from an equivalent index but trailing the total return of -6.6% from the average peer group NAV. The share price produced a total return of -7.3%. The board has recommended a final dividend of 6.20p per share for the year ended 31 December 2018, an increase of 29.2%.
The managers say it was a frustrating year. “Stockmarket falls in Asia were broad-based both by country and sector in 2018. On a sector basis technology, internet and export stocks suffered the largest falls as worries over the slowing global economy and high valuations (in the case of internet names) led to a sell off. Trade tensions with the USA and a slowing economy caused a big downturn in local and foreign investor sentiment towards the Chinese stockmarket. The situation was not helped by policies from the mainland authorities (more regulation, policies to favour state-owned enterprises over the private sector, increasing state control over many aspects of the economy) which were considered by investors as unfriendly to the long-term outlook for Chinese capital markets.
Those Asian markets that performed best over the year tended to be those with a more domestically-focused make up of earnings like India, the smaller ASEAN markets and New Zealand. India was also helped by the constant flow of local money into domestic mutual funds on belief in the “magic” of Mr Modi’s policies. This was despite the constant disappointments in Indian profits, and the significant problems that have emerged in the state banks and non-bank financial sectors. Whilst not a bubble we do think the Indian equity market is vulnerable if the ruling party, the BJP, does poorly in the 2019 elections.
It has been a frustrating year for your portfolio managers. We did get some things right – we were cautious at the beginning of the year and correctly trimmed the portfolio’s technology and internet positions. However, this has not resulted in material outperformance versus the portfolio’s Reference Index (the NAV total return fell 8.1% versus an 8.6% fall in the Reference Index).
The key area of losses has been stock selection in China where we bought back stocks too early (catching the proverbial falling knife), and hedging where policies were less effective than we would have hoped (hedging Taiwan did not prove good protection at a time when the heaviest falls were in Hong Kong and China). Your portfolio managers have reviewed the process and remain confident that after 11 years of managing the Asian Total Return strategy (and five years of managing the Company’s strategy), no major changes are required, though we may look to make some minor tweaks to the hedging process going forward.
As mentioned above, Stock selection in China has been the key drag on performance over the year, as the slowing economy and rising tensions with the USA hit some stocks hard. Internet stocks in particular posted sharp falls on the back of earnings disappointments and worries over increasing government regulations and interference in the sector (including Tencent and Alibaba which, whilst we trimmed positions, remained large holdings). Other Hong Kong and China names that hurt performance were the auto part holdings (Johnson Electric and Nexteer) which dropped on worries over weak car sales in China. The white goods related holdings (Midea and Sanhua) also suffered sharp falls on concerns over the housing cycle in China.
Technology stocks also tumbled across the region. Fortunately the portfolio had no material exposure to Apple related and smartphone related component names having sold out at the end of 2017 on increasing worries that the sector was mature and lacks the “next big thing”. However we continued to hold large weightings in Samsung Electronics, TSMC, ASM Pacific and Chroma ATE, all of which fell in 2018 on worries over the slowdown in the technology sector and US-China trade tensions. We used weakness to add to positions as we continue to see these names as a good way to play those areas of technology where we believe secular growth trends remain intact.
Capital protection strategies in the portfolio had a mixed time, which was disappointing in a weak year. Good money was made on put options on the Korean index and the sale of Taiwanese index futures in the second half of the year (both financial instruments designed to hedge part of the capital value if prices fall). However this was partly offset by losses on Taiwanese and Australian put options in the first nine months of the year. Overall the positives and negatives balanced each other out, which was frustrating to say the least given that there was around 14% protection on the portfolio in a falling year. At the end of 2018 the portfolio continued to have a small amount of capital protection via put options and also has a partial currency hedge on the Chinese currency exposure against tail risks in the Chinese financial sector.”
[QD comment: Schroder Asia Total Return really shouldn’t be posting big drops in its NAV given it employs protection strategies designed to protect the company’s downside. The company did well in 2017, however and it did manage to beat its “reference index”.]
ATR : Schroder Asia Total Return hit by China weakness