Investors in Invesco Asia Dragon (IAD) will likely be pretty happy with an underlying investment return of 39.6% and a share price return of 44.7% for the 12 months to 30 April. However, on this occasion, an index-tracking fund might have done even better as the MSCI AC Asia ex Japan index returned 45.7%.
The driver of the uplift and the problem for many active managers is the soaring share prices for a number of AI capex-related plays such as Taiwan Semiconductor Manufacturing (TSMC) – which is IAD’s biggest holding – Samsung (no.2), and SK Hynix, which IAD does not hold. There has been some volatility in these stocks since, and the statement says that since 30 April, the total return on net assets has been 6.4%, outperforming the index return of 4.3%.
The share price discount narrowed over the period from 10.2% below net asset value to 7.2% and currently sits at 7.1%.
Last year’s combination with Asia Dragon has helped lower its running costs – the ongoing charges ratio fell to 0.59% from 0.73%.
The chairman suggests that “the AI dominance of TSMC, Samsung Electronics and SK Hynix is reminiscent of the Technology, Media and Telecom bubble in 1999-2000.”
QuotedData’s James Carthew said “At the end of June, three stocks – TSMC, Samsung Electronics, and SK Hynix – accounted for 34.4% of the MSCI AC Asia ex Japan Index. Year to date, they are up 51.4%, 97.4%, and 170.3%, respectively, but SK Hynix – for example – is 37% off its June high. Navigating that as an active manager is hard. However, I would point out that, in its Asia Pacific Income sector, IAD’s one-year NAV returns sit fourth – behind Schroder Oriental Income (SOI), JPMorgan Asian Income & Growth (JAGI), and Aberdeen Asia Income (AAIF), but ahead of Henderson Far East Income (HEFL), which brings up the rear as usual.”
The managers say that technology stocks were the biggest single contributors to performance, particularly overweight positions in Samsung Electronics and passive components manufacturer Yageo, while semiconductor design company MediaTek also added value. However, this was offset by the impact of not holding other large cap technology names that outperformed, like SK Hynix and Delta Electronics.
Elsewhere in Korea, Samsung E&A enjoyed a strong run on the back of Samsung Electronics’ capex plans and post-war rebuilding opportunities in the Middle East. Materials stocks Anglo American and Valterra Platinum contributed strongly, benefitting from higher metals prices, while an off-benchmark position in Australian oil & gas major Woodside Energy added value as the oil price broke higher.
Selected Chinese consumer discretionary stocks also added value. Auto-parts manufacturer MINTH re-rated as it looks to grow into new markets like AI data centre cooling and humanoid robotics, while hotel operator H World outperformed as earnings consistently beat expectations thanks to improving supply-demand dynamics in the hotel sector and the benefits of a structural shift to an asset-light model and a compelling capital return programme.
On the downside, although being underweight India supported relative performance, holdings in private banks detracted given macro headwinds, with HDFC Bank amongst the biggest detractors following the unexpected resignation of its chair. Indonesian banks and United Overseas Bank in Singapore also underperformed.
Stock selection in industrials detracted. Full Truck Alliance saw earnings momentum soften, although the managers believe that the Chinese digital freight platform remains in good shape with potential to grow orders and the take rate in medium term. Meanwhile, Grab has underperformed amidst concerns about potentially reduced ride-hailing commissions in Indonesia (mandated by the government), which the company should be able to mitigate by small increases in fees charged to customers.
They say that another theme evident in global markets has been a preference for companies with hard assets rather than intangibles, which are perceived to be more at risk from AI disruption. Software and IT services stocks have de-rated, as have game developers, and the portfolio’s holdings in EPAM Systems and Chinese gaming companies Tencent and NetEase all underperformed. They feel valuations in these areas reflect a far more pessimistic outlook than is likely.
Finally, Chinese consumer stocks have remained out of favour, with weak demand and confidence, and a sector-wide de-stocking cycle leading to pricing pressure, earnings downgrades and valuation de-rating.
