Schroder Asian Total Return has published its final results for the year ended 31 December 2023. Returns were good, with a NAV total return of 8.8% coming in well ahead of the 1.3% return posted by the MSCI All Countries Asia ex Japan Index. Shareholders got a return of 10.3%, helped by a narrowing discount.
The chair notes that the portfolio remained consistently underweight China for the year under review [which was good for returns], while in Taiwan and South Korea, technology stocks and chipmakers saw significant gains as investor enthusiasm for artificial intelligence (AI) continued to rise. The overweight position in Australia was also a positive, making a significant contribution to returns. Notwithstanding these beneficial asset allocation decisions, it was the manager’s stock selection that accounted for the majority of the outperformance during the year. In 10 of the 12 Asia Pacific markets, the portfolio achieved positive outperformance [that is impressive we think].
This fund is not managed to produce income and so it was not the end of the world that its revenue per share fell by 17.7% to 10.3p. The full year dividend has still been bumped up from 11p to 11.5p, with a small proportion coming from reserves.
Extracts from the manager’s report
Contributor #1: China stock selection
The largest driver of the Company’s performance, notably against the Reference Index, was our stock selection in China. The Chinese stockmarket had a tumultuous year. It kicked off with a surge of investor optimism, riding high on hopes pinned on its economic reopening, only to see the enthusiasm quickly deflate amid flagging consumer sentiment, escalating youth unemployment, and a burgeoning debt crisis in the property sector. Despite several attempts by the Chinese authorities to reverse the market’s downward trajectory, typically fuelled by claims of large scale fiscal and monetary stimulus, all efforts proved in vain. The year finished with the MSCI China Index recording a dismal annual return of -16.2% in sterling, a sharp contrast against the region’s return of 1.3% in sterling.
Amidst these stormy market conditions in China the Company navigated its way not only through stocks we chose to invest in, but also those we strategically avoided. Our decision to steer clear of major ecommerce players like Alibaba, JD.com, and Meituan, as well as sportswear giants Li Ning and ANTA, shielded the Company from the fallout of their plummeting share prices. Our portfolio’s zero-weighting in the imploding property market and limited exposure to the struggling domestic sectors further bolstered performance. Meanwhile, our continued investments in Chinese consumption plays such as Shenzhou International and LVMH, coupled with a well-timed purchase of New Oriental Education, ensured that our overall stock selection in the Chinese market yielded significant returns.
That said, charting the investment course in China has never been easy or clear cut. This was particularly true in mid-2023 when, having correctly sidestepped the temptation to jump on the reopening trade bandwagon, we found ourselves staring at the emerging pool of potential Chinese stock opportunities that invariably surfaces when markets plunge by 20%. The temptation to lock in the profits from our successful large underweight position in Chinese stockmarkets at that juncture was palpable.
However, after carefully trawling through these potential opportunities, we were led to a sobering conclusion: few were truly appealing. Faced with a scarcity of promising bottom-up ideas, and with stockbrokers universally maintaining a bullish stance on China, we adhered to our investment philosophy of only investing in companies that have robust long-term fundamentals and attractive valuations. To our minds, this outcome also underscores, once again, the advantages of a benchmark-agnostic, unconstrained bottom-up investment approach.
Contributor #2: Taiwan stock selection
The second key pillar underpinning the Company’s outperformance in 2023 was our investments in Taiwan technology, and more broadly, our stock selection in Taiwan. This was a mirror image of the Company’s performance in 2022, when our technology positions in Taiwan had a significant negative impact on returns. Initial worries over bloated inventory levels at the start of the year gradually evaporated over subsequent quarters as signs of digestion surfaced. Simultaneously, the surging demand for AI chips, spurred by the development of large language models (“LLMs”), only served to highlight the potent structural trends underpinning tech demand, a conviction your Portfolio Managers have steadfastly held since the inception of the Schroder Asian Total Return strategy in 2007.
This shift in market dynamics sparked a frenzied investor pursuit for tech stocks with a link to AI, no matter how tangential. While the Company may have missed out on not holding sizzling AI stocks like Quanta Computer, Accton, and Wiwynn, the pain was assuaged by our investments in Taiwan Semiconductor Manufacturing Corporation (“TSMC”), MediaTek, ASE Technology, and Chroma ATE, who also reaped the benefits of this trend. Yet, it was not just the AI halo effect that was propelling our holdings’ share prices. MediaTek has benefitted by growing investor optimism over a potential recovery in the smartphone industry. The timely release of the Company’s new system-on-chip, Dimensity 9300, designed to handle the more complex workloads of new generative AI and gaming applications, further bolstered this bullish sentiment. This launch, following a series of earlier designs that failed to ignite investor interest, is now seen as a game-changer that could give MediaTek a competitive edge over Qualcomm, the current leader in the high-end mobile market. A similar sentiment holds for the semiconductor stalwart TSMC, which boasts major clients like Nvidia, AMD, and Broadcom. While TSMC does reap benefits from the surging demand for AI chips, even TSMC concedes that these sales constitute only a small portion of its overall revenue. Nevertheless, with semiconductors powering all modern applications – from PCs and smartphones to cloud computing, AI, and autonomous cars – the long-term fundamentals of the firm continue to shine brightly.
But it was not just technology stocks that bolstered our performance in the Taiwan market. Our investments in non-technology sectors, including companies like shades and blinds manufacturer Nien Made Enterprise, fabric producer Eclat Textile, and industrial computing and automation solutions provider Advantech, also registered robust share price gains, thereby amplifying our overall stock selection returns in Taiwan.
Contributor #3: Australia and ASEAN
The Company achieved positive outperformance in 10 of the 12 Asia-Pacific markets and, despite being theoretically more efficient, it was pleasing that the Australian market emerged as a significant contributor to positive returns.
Our Company was bolstered by investments in Cochlear, a trailblazer in hearing solutions; James Hardie Industries, a titan of fibre cement production; Aristocrat Leisure, a master manufacturer of slot machines; Seek, a facilitator connecting job seekers with employers; and Medibank Private, a stalwart in the health insurance landscape.
However, these gains were somewhat tempered by our lack of exposure to the four major Australian banks and our stake in ResMed, a leading provider of respiratory care solutions. The performance of the latter has been disappointing and somewhat unexpected. This is particularly so considering that the Company posted its highest-ever annual revenues in the fiscal year of 2023. The share price was hit by worries over the threat posed by GLP-1 drugs which could potentially offer a new treatment avenue for obese individuals with obstructive sleep apnea, thereby encroaching on ResMed’s revenues. This concern continues to cast a pall over its performance, even if the realistic impact of the threat remains limited, in your Portfolio Managers’ view.
In addition to Australia, our outperformance was boosted by our stock selection in the ASEAN markets, which added a noteworthy 1.0% to our overall gains. This is particularly heartening, considering the markets of Indonesia, Malaysia and Philippines are small and we only hold a handful of stocks.
Main detractor: India stock selection
It was not all positive. India emerged as a detractor to the Company’s performance in 2023, contributing a -0.2% relative return (Source: Factset). While in the broader scheme this is not a massive drag, it still marks a regrettable milestone for your Portfolio Managers, as it is the second consecutive year the Indian market has made a negative contribution to the Company’s returns. Despite the overall market weighting being in line with the reference benchmark, our stock selection within this key market failed to hit the mark, extending a period of underperformance.
The Company’s lack of exposure to the so-called brown or traditional sectors, encompassing internal combustion engine (“ICE”) manufacturing, fossil fuel production, cement manufacturing, and steel milling, surfaced as a significant drag on our relative performance. These sectors collectively constitute approximately one-fifth of our Company’s Indian stock universe. Intriguingly, they also account for a massive four-fifths of the stockmarket’s total greenhouse gas emissions – an unsurprising statistic given the environmentally harmful nature of their operations. However, our strategic decision to sidestep investments in these sectors culminated in a nearly one percent negative contribution to relative returns.
Our Company’s lack of exposure to India’s non-bank financials (“NBFCs”) also emerged as a key detractor in a year that saw the sector undergo a remarkable metamorphosis. The NBFC landscape was reshaped by a series of significant developments, not least of which was the surge in credit demand from the small enterprise sector – the NBFCs’ primary clientele. This was propelled by substantial government policy support, ranging from sector-specific production-linked incentives to initiatives aimed at promoting businesses in regions like the Northeast and those linked to technical skilling and digital technologies. These measures ignited a boom in credit demand. The Reserve Bank of India further stoked this positive momentum with a directive that provided considerable relief to borrowers, mandating that lenders return all original property documents and erase registered charges within 30 days of full loan repayment. The sector’s dynamism was further amplified by the arrival of a new player, Jio Financial, following its demerger from Reliance, and the continued pursuit of NBFC licenses by fintechs, which kept the sector in the headlines. Amidst this flurry of activity, the robust share price performance of Indian NBFCs weighed on our relative performance.
While the Company did enjoy strong returns from our holdings in MakeMyTrip, Apollo Hospitals Enterprise, and ICICI Bank, they were insufficient to counterbalance the impact of the stocks we did not own. This resulted in an overall negative stock selection in India.
ATR : Great stockpicking boosts Schroder Asia Total Return