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Another bad year for Scottish Oriental

Scottish Oriental Smaller Companies AGM 2018

Scottish Oriental Smaller Companies reports an NAV return of 28.4% for the year ended 31 August 2021, well-behind the 37.8% return on the MSCI All Countries Asia ex Japan Small Cap Index. The return to shareholders was 28.9%. The dividend is maintained at 11.5p, some of this is being paid out of revenue reserves.

[I think we need to stress that these returns are poor because the chairman’s statement appears to gloss over this. Scottish Oriental Smaller Companies sits in a peer group of just three funds. Of those three funds, it trades on the widest discount and has produced the lowest long term returns. The chairman’s statement proclaims that “Scottish Oriental had a much improved performance last year compared to the poor result for 2020“. In addition to the small cap benchmark, it compares the fund’s returns to the large cap MSCI AC Asia ex Japan Index (which returned 14.7%), which is misleading in our view. It appears to defend the poor relative performance to the small cap index by highlighting the fund’s high active share – which translates as ‘we didn’t beat the index because we don’t hold the same stocks as the index’. Last year, the trust underperformed the small cap index by 20.3% – losing money when the small cap index made progress. So, yes in one sense this year is an improvement, but these numbers are still bad.]

The manager’s report lists the major stock contributions to returns

Top Five Contributors




Absolute Return (Sterling) %

Contribution Performance %






Mahindra Lifespace


Real Estate



Mahindra CIE Automotive


Consumer Discretionary



Hero Supermarket


Consumer Staples



Century Pacific Food


Consumer Staples




Mphasis benefited from strong demand for its digital transformation and cloud migration capabilities. Global enterprises have increased their spending on these areas as a consequence of COVID-19 disruption. The company reported a large increase in the value of new deals signed during the period from new clients as well as its existing customers.

Mahindra Lifespace appointed a new Chief Executive Officer (CEO) who has focused on faster land acquisition and increasing the number of new project launches. In recent years, Indian residential property buyers have been moving rapidly from local developers to larger companies such as Mahindra Lifespace which have stronger balance sheets. The share price rose as the new CEO’s initiatives combined with this industry tailwind are expected to drive an acceleration in its growth. 

Mahindra CIE Automotive had declined during the previous period due to the impact on the Indian and European automotive industries from the COVID-19 pandemic. We added to Scottish Oriental’s holding during this period. The company’s management implemented initiatives to reduce its costs. It also gained market share from smaller competitors who are struggling. The revival of automotive demand in its key markets led to a rebound in its share price. 

Hero Supermarket rose after it announced that it will shut down its Giant branded hypermarket stores and focus its operations on IKEA, Guardian pharmacies and Hero Supermarket brands. The Giant branded stores were loss-making while its IKEA, Guardian and Hero Supermarket brands are profitable. This should lead to a marked improvement in the company’s cash flows and return on capital employed. 

Century Pacific Food reported strong revenue and profit growth as demand for its canned food products remained high due to their long shelf life and affordable pricing. The company has also been gaining market share in the dairy products category. Its initiatives to enter new categories such as alternative meat products should sustain its growth momentum in the coming years. 

Top Five Detractors





Absolute Return (Sterling) %

Contribution Performance%

Philippine Seven


Consumer Staples



Vitasoy International


Hong Kong

Consumer Staples



Nissin Foods

Hong Kong

Consumer Staples




South Korea




Beijing Capital International Airport





Some of the detractors during the year were companies which operate businesses such as convenience stores, casual dining, and quick service restaurants. These businesses depend on customers visiting their stores, which was obviously affected by the COVID-19 lockdown. Our engagement with the management teams has indicated that their competitive position has strengthened during this period. Smaller competitors lack the strong balance sheets and technology investments which our holdings benefit from. 

Philippine Seven has been severely affected by the continuing movement restrictions in the Philippines. Its convenience stores have witnessed a decline in customer footfall. The company has changed its product mix to increase the share of essential products in its stores, introduced new services such as ATMs and partnered with e-commerce and delivery platforms. As footfall gradually normalises, these initiatives should improve the company’s profitability. We have added to Scottish Oriental’s holding in the company. 

Vitasoy International declined as it was affected by lower sales of its beverage products due to movement restrictions in Hong Kong as well as a temporary disruption to its fast growing business in China. The company has engaged proactively with authorities and increased investment in marketing to its Chinese consumers. Its products have regained their presence across major retail channels. Given its strong track record and long term growth potential in the Chinese market, we added to Scottish Oriental’s holding in the company. 

Nissin Foods’ instant noodle products had benefited from pantry stocking during the previous year. We had reduced Scottish Oriental’s holding during this period. As mobility levels improved in China, demand for its products fell to more normal levels. It also suffered cost inflation across its raw materials which affected its profitability. 

South Korea’s leading payment gateway service provider NHN KCP declined as it increased investment in expanding its service offering, which led to lower profitability. The company is likely to benefit from the structural increase in online spending in South Korea. The management has signed agreements to set up payment gateway services for large global clients. This should improve the company’s growth prospects and its profitability. We have added to Scottish Oriental’s holding. 

Beijing Capital International Airport reported weak operating profit due to a resurgence of COVID-19 and the re-imposition of movement controls in China. This led to a decline in passenger traffic. The company has reduced its operating expenses and should benefit from an improvement in passenger volumes, as travel penetration in China increases from a low base. We have added to Scottish Oriental’s holding.

SST : Another bad year for Scottish Oriental

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