Register Log-in Investor Type

News

Schroder AsiaPacific beat its benchmark and secures fee cut

Schroder AsiaPacific (SDP) has announced its annual results for the year ended 30 September 2020, during which it beat its benchmark by a significant margin and has secured a cut in fees. During the year, SDP provided NAV and share price total returns of 17.7% and 19.7% respectively, both of which are markedly ahead of its benchmark’s total return of 12.3%. The board is recommending the payment of a final dividend of 8.00 pence per share, which represents a decrease of 17.5% over the 9.70 pence paid for the prior year. This will require a small transfer from revenue reserves (in the wake of the pandemic, SDP’s net revenue income fell by 20.1%, from 9.90 pence per share to 7.92 pence per share).

Replacing Matthew Dobbs

On 24 August 2020, SDP announced that Matthew Dobbs will retire from fund management in 2021. In accordance with a succession plan agreed with the Board, he will hand over responsibility of the Company’s portfolio to Richard Sennitt as manager and Abbas Barkhordar as assistant manager. Richard and Abbas will be assuming formal responsibility for the management of the Company’s portfolio with effect from 31 March 2021.

SDP says that the key to these appointments is the continuity of approach they will bring to the investment strategy with Richard having worked with Matthew on his Asian funds for the last 13 years. Abbas has worked at Schroders for 13 years, most recently on Schroders’ Frontier Markets Fund. Robin Parbrook, who has extensive Asian investment management experience, will assume investment oversight from 31 March 2021 and take the investment reporting line of Richard and Abbas.

Cutting the management fee

As part of its appraisal of the Manager, the Board says it has reviewed the management fees and agreed that with effect from 1 April 2021, the management fee will decrease to 0.75% per annum on the first £600 million of net assets and 0.70% per annum on net assets in excess of £600 million. The notice period shall be set at six months. The effect of the change is expected to generate a saving of around £400,000 per annum.

Continuation vote

The articles of association contain provisions which require the Board to put to shareholders a resolution at the AGM that the Company continue as an investment trust for a further five years. Over the five year period ended 30 September 2020, the Company’s NAV produced a total return of 16.8% per annum, outperforming the Benchmark’s total return of 14.2% per annum, while SDP’s share price produced a total return of 17.7% per annum. In that period, the Company also joined the FTSE 250, and is the largest investment trust in its sector. The Board therefore unanimously recommends that the Company continue as an investment trust, and the directors intend to vote their shares accordingly.

Investment manager’s comments on performance and portfolio activity

“The Company’s performance has been strong versus the Benchmark over the year as a whole. Outperformance was particularly marked in the second half, thanks to strong stock selection, most notably in Singapore, Taiwan, China, Korea and Hong Kong. India was the only area of significant stock selection shortfalls as the bank holdings suffered due to fears of credit losses due to the disruption caused by COVID-19.

Country allocation has been less successful due to the overweight in Hong Kong and underweight in China. There was a partial offset from the minimal exposure to emerging ASEAN markets (apart from Vietnam) which performed very poorly.

The scale of market correction in the wake of the pandemic occasioned a flurry of activity in the Company, as a number of very attractive long-term opportunities emerged, primarily in the area of information technology, EV (electric vehicle) batteries, e-commerce and selected consumer cyclicals. These purchases were funded from financials, energy and real estate where we judged there to be less immediate upside.”

Investment manager’s comments on outlook and policy

“The rate of earnings downgrades across the region has slowed recently, but there is still a lack of visibility on the timing of an end to global lockdowns and travel restrictions, and the likely path of the subsequent recovery in activity. This is especially the case now given secondary spikes in infections in several countries, though so far largely outside Asia itself. It is, therefore, no surprise that companies are providing limited guidance on their shorter-term outlooks and continue to plan conservatively. In our interaction with management teams, our focus has been on understanding what measures they are taking to deal with the crisis and how well placed they are to ride out the downturn – operationally and financially. For many companies, this year’s earnings are likely to be something of a write-off, so it is important to focus on the longer-term prospects for our investee companies. As performance in the past few months has demonstrated, markets by and large are willing to look beyond this crisis, as long as there is scope for a healthy recovery next year to a more ‘normalised’ level of profitability.

Consequently, aggregate valuations for the region have risen to slightly above historic average levels. This is clearly already pricing in a measure of the recovery in earnings expected into 2021 and the upside for the ‘lockdown winners’. There is scope for disappointment, but the ultra-low level of interest rates and bond yields around the world provides support to valuations.

Behind the aggregate valuation measures, there is a very wide spread of multiples. This means that valuations in some of the sectors with strong momentum this year – notably selected healthcare, e-commerce, online gaming, 5G equipment, electric vehicle-related and other popular China A-listed shares – are much more stretched. We are also seeing some signs of ‘froth’ emerging in the very strong flows and performance of new initial public offerings in Hong Kong and South Korea. This froth is also evident in the high levels of retail participation in these deals and in market trading more generally. Although not yet at worrying levels, this sort of optimism does leave markets more vulnerable to disappointment.

The obverse of this is that many companies in less “fashionable” sectors are offering great value. However, we must be very selective as some industries are facing severe, even existential, disruption; for example the portfolio has relatively little exposure to hydro-carbon energy and autos, and we continue to take a very selective approach in banks and real estate. Across all sectors we remain sensitive to the long-term sustainability of company business models, working closely with our local analysts and our Environmental, Social and Governance (ESG) team.

It has been something of a tradition over the last twenty-five years that these reviews have been coy of making shorter-term forecasts on the likely direction of markets. We have never pretended to have any particular edge in short-term market timing and in penning his last review this writer is not going to change the habits of a lifetime. However, we have passionately believed in the importance and utility of active management, based on the long-term assessment of company fundamentals focusing on quality, good governance, and sustainable business models that we believe under-recognised by the consensus.

I am first to acknowledge that much of this “edge” has been due to my knowledgeable, diligent and committed analyst colleagues on the ground in the region, complemented by the excellent global research resources in London including our Global Sector Specialists, the Data Insights Unit and the Sustainable Investment Team. I thank them all, and know that they will provide full support to my successor, Richard Sennitt, who is uniquely qualified to guide the Company through the many twists and turns that Asia will doubtless throw up in the years to come.”

Leave a Reply

Your email address will not be published. Required fields are marked *

Please review our cookie, privacy & data protection and terms and conditions policies and, if you accept, please select your place of residence and whether you are a private or professional investor.

You live in…

You are a…