Schroder AsiaPacific (SDP) has announced its annual results for the year ended 30 September 2022. During the period, SDP provided an NAV total return of -13.6%, marginally outperforming its benchmark, the MSCI All Country Asia ex Japan Index, which provided a total return of -13.9%, while the share price total return was -14.5%. SDP’s chairman, James Williams, comments that faster than expected rises in global interest rates, the war in Ukraine and the economic impact of continued COVID lock-downs as well as other developments in China, have dominated Asian markets this year. There have also been beneficiaries, for example from rising commodity prices, and there has been a significant divergence of returns from Asian markets.
Performance attribution and portfolio activity
While SDP is not an out and out growth fund, its modest growth bias was a headwind to returns. This was seen most acutely amongst its Korean and Singaporean internet related names, which underperformed materially. Although SDP benefited from stock selection in, and its underweight exposure to, healthcare stocks, avoiding some of the more high rated biotech names, SDP’s underweight exposure to some of the other more defensive areas such as consumer staples and utilities proved to be a drag on performance.
SDP’s overweight to financials added value, as did its stock selection in that space. The manager says that this was driven by the positions in banks which benefitted from a firming of interest rate expectations combined with their lowly valuations. The off-benchmark Australian resources exposure, including BHP, was also a positive contributor, thanks to higher commodity prices driven by the global recovery.
SDP’s overweight to information technology was a headwind as the sector saw negative earnings revisions, but, overall, the IT exposure added added value due to strong stock selection in some of the Taiwanese names, such as Hon Hai and Delta Electronics, which more than offset the negative from being overweight the sector.
From a regional perspective, SDP’s significant underweight to China added value. In China, internet names were among those that bore the brunt of the sell down. In Singapore, SDP’s overweight was positive but stock selection was a drag as the internet name it held there (Sea Limited) was in part impacted by higher rates, which resulted in a greater focus on how long this fast growing e-commerce business will take to achieve profitability.
SDP’s Korean and Taiwanese exposures were also a drag, in part due to the markets being quite globally focused which impacted our the fund’s IT names. Its lack of exposure to financials in Taiwan, and its allocation to more domestic growth areas in Korea, also detracted from relative performance. SDP’s off-index exposures to Australia and Vietnam were positive, as was its stock selection in Indonesia (Bank Mandiri) but its underweights to some of the other ASEAN markets, in particular Malaysia and the Philippines, detracted from performance.
SDP’s geographic exposure continues to be mainly spread between China, India, Taiwan, Hong Kong, Korea and Singapore. China remains a substantial underweight, despite modest additions during the year as the market underperformed. In part, this is offset by the overweight to Hong Kong. Over the period, the manager reduced SDP’s exposure to some of the more expensive domestic Indian names that had performed well, whilst adding to some of the IT services companies there (Infosys and Tata Consultancy Services) but overall taking the portfolio’s allocation down to being slightly underweight the index in relative terms. Elsewhere, the manager added to some of the smaller ASEAN markets including Vietnam (where it now has boots on the ground) and the Philippines.
As throughout much of the previous year, portfolio activity tended to take advantage of the valuation spread that the manager saw across industries, reducing those stocks that had performed particularly strongly and now looked more fully valued in favour of those names that had lagged and looked more attractive from a valuation perspective. The manager continued, in aggregate, to add to financials, where SDP is overweight, with valuations still looking relatively attractive given higher interest rates and subdued credit costs, in the manager’s view. The manager added principally to names in Singapore, including Oversea-Chinese Banking and United Overseas Bank. Elsewhere, the manager reduced exposure to the Australian resource names. It comments that the sector has performed strongly over the last year, in part helped by the surge in commodity prices.
Information technology is one of the biggest sectoral exposures in the fund, along with financials. Although near term earnings have been seeing downward revisions, the manager continue to see some strong long-term drivers for growth around digitisation and the roll out of 5G and ‘Internet of Things’. Its focus remains on the Taiwanese and Korean companies such as TSMC and Samsung Electronics.