Scottish Oriental Smaller Companies (SST) announced its annual results for the year ended 31 August 2023. NAV total return was 6.5%, well ahead of the MSCI AC Asia ex Japan Small Cap Index which was up 1.8% and the broader MSCI AC Asia Ex Japan Index, which fell 8.4% Shares were up 8.4%. The largest contributors to performance were the holdings in Indonesia and India. The biggest detractors from performance were the portfolio’s holdings in South Korea and the Philippines.
Discussing the portfolio and the current outlook, the manager added:
“We noted varying economic outlooks during our recent visits to companies across Asian countries. The operating environment for businesses in China is difficult, with regulatory disruptions in industries such as healthcare and e-commerce, as well as the challenges emerging in the real estate industry. Large economies which are driven by exports to Western markets, including South Korea and Taiwan, are also facing cyclical challenges as demand across the global technology supply chain is weak. In contrast, businesses in countries such as India and Indonesia, whose revenues are largely driven by domestic demand trends, are witnessing stronger prospects as their economies have recovered from the pandemic. These countries saw a period of relatively weak economic growth during the previous decade. In this period, businesses de-leveraged their balance sheets and the governments of these countries introduced various reforms. Their stronger financial position and the formalisation of the economy has helped the market-leading organised sector companies to gain market share from their competitors in the informal sector. This provides a tailwind to Scottish Oriental’s holdings, with companies in India and Indonesia comprising over 60% of the portfolio.
“Scottish Oriental’s investment philosophy has remained unchanged since inception. While we are cognisant of macro-economic challenges, political and sectoral influences, these do not drive our investment decisions. The manager’s focus remains on finding well run businesses with solid long-term growth prospects available at attractive valuations. Our investment universe of smaller companies in Asia has grown consistently in recent years. In fact, there are now over 11,500 companies in Asia (ex-Japan, Australia and New Zealand) between US$ 100 million and US$ 5 billion in market capitalisation. This universe of companies has grown by 26% over the last 5 years*. Scottish Oriental’s active watch-list of companies, which we regularly monitor, has also grown consistently in size as our coverage has expanded and new businesses have been listed in Asia. The market-leading businesses in which we prefer to invest have emerged out of the pandemic with stronger competitive positions than before. We expect them to capture a greater share of the growth in their respective industries’ profit pools in the coming years.
“We are excited about the outlook for the portfolio. It remains concentrated among our highest conviction holdings, with the top 20 holdings comprising 60% of the portfolio. The median return on equity of the portfolio has consistently improved, which indicates the strong earnings quality of the holdings. At a median level, the portfolio’s holdings continue to maintain a net cash balance sheet, which makes them more resilient against the ongoing challenge of higher finance costs. The portfolio’s forecasted growth has moderated from the high base of recent years, which was largely due to the reopening of economies after the pandemic. On a normalised base, the portfolio’s holdings continue to offer attractive growth opportunities in the years ahead. In addition, the valuations, in the context of the attractive growth potential and high returns on equity, appear to be at acceptable levels.”
SSI : Strong year of out performance for Scottish Oriental Smaller Companies