Schroder Asian Total Return outperforms during tough 2021 – Schroder Asian Total Return (ATR) has published its final results for the year to 31 December 2021. During the period under review, its NAV returned 7.4% while its share price returned 4.9%. This compares with a -2.0% return from the reference index. ATR also outperformed the NAV performance of the peer group, which produced an average total return of 6.8% for the calendar year.
At the AGM on 7 May 2021, shareholders granted the board authority to issue shares, including out of treasury. The company’s buyback authority was also renewed. 7,840,000 new shares were issued during the year at an average premium to NAV of 1.1%. ATR will continue to implement both an issuance and a discount management policy and shares will be issued at a moderate premium to net asset value while the discount policy will continue to target a discount to NAV of no more than 5% in normal market conditions. The board will be seeking approval from shareholders to renew the issuance and the buy back authorities at the next AGM.
Gearing was used effectively by the trust during the year to enhance performance. ATR started the year with gearing of 5.7% and this increased to 8.3% at the year end with average debt during the year at 6.9%. Shareholders should be aware that the use of borrowing must be seen in the context of the use of derivative hedging instruments. Gearing will not exceed 30%.
Performance and attribution commentary from the manager:
- After the strong returns from Asian stockmarkets in 2020 there was a significant reversal in fortunes in 2021, with the reference index we use for the Company, the MSCI AC Asia Pacific ex Japan index falling 2% in sterling terms. The Company enjoyed a reasonable year with the NAV in absolute terms rising 7.4%.
- The overwhelming factor behind the fall in the reference index was the 21% fall in the MSCI China index which given it comprises around one third of the reference index dragged down overall returns. In contrast the MSCI India and MSCI Taiwan both rose 27% over the course of 2021, so it really was a year of differing fortunes.
- What were the reasons behind the divergent returns? The MSCI China index was hit firstly by a major regulatory and policy reset (discussed in the outlook section) which affected the internet stocks in particular, and secondly by worries over the slowing economy and the impact of rolling bankruptcies in the property sector. This caused broad based weakness across all sectors in the Chinese stockmarket, but in particular those stocks hit by new regulations were very weak. Education stocks dropped 90% as their principal activity (tutoring school age children) was turned overnight into a non-profit sector, meanwhile moves to control pricing and “fairness” hit the healthcare, internet and insurance sectors. Outside a few perceived policy beneficiaries in the “green” space and technology areas there were few places to hide in China.
- In contrast India did well as, after a very traumatic start to 2021, it was viewed as a post COVID recovery play. It also appeared to be the default market to buy as investors switched out of China. Taiwan’s strong performance in 2021 was primarily driven by the technology sector which continued to benefit from very strong demand dynamics coming from both near term working from home demand and also strong secular growth drivers in the semiconductor and software areas.
- Other markets were less noteworthy. The MSCI Australia rose 10% as the banks and financials, which are heavily weighted in the index, rebounded on hopes rising interest rates would lead to a recovery in net interest margins. The smaller ASEAN markets (Thailand, Malaysia, Indonesia, Philippines) all ended the year close to flat as governments continued to struggle with COVID and the delayed reopening of economies led to earnings downgrades. Korea, after a strong 2020, fell 8% as companies (as is often the case in Korea) failed to deliver on sell side analysts’ overly optimistic earnings forecasts.
- The Company did well (vs the reference index) due to two key positions. We reduced our China positions and internet stocks in particular during the first half of the 2021. When the major Chinese regulatory changes were announced over the summer the Company was (vs reference index) substantially underweight so, whilst we lost money, our positioning was relatively less painful. The second key positive for performance was our exposure to technology stocks in Taiwan (semiconductors) and India (software) both of which did well. The combination of these led to nearly all the relative outperformance over the year.
- The biggest negative to performance was our underweight position in financials which across the region rebounded on hopes that rising interest rates would rescue net interest margins. We added some exposure to financials over the course of 2021 but remain cautious long-term on most names in the sector due to the rise of well funded and innovative fintech competitors and in many countries risks of Government interference/regulations. The other negative was our zero exposure to fossil fuel stocks which did well on the back of rising energy prices. In the Company we do not invest in Asian fossil fuel companies given our long-term views on energy dynamics and market developments, and for ESG reasons.
ATR : Schroder Asian Total Return outperforms during tough 2021