Investment Trusts

Picking the winners

Asia’s dynamic markets continue to attract attention from international investors. Whether in search of long-term, consistent returns or fast growing, higher yielding investments, access to thorough Asian stock research will remain vital. Schroders investment trust fund managers share insights on investing in the region and explain how they filter what really matters when researching local investment opportunities.

08/05/2015

When conducting stock research, it’s only natural for an investor to look at the current dividend yield and examine past performance. But Matthew Dobbs, manager of the Schroder Oriental Income Fund Limited and the Schroder AsiaPacific Fund plc, says that it is important to focus on a stock’s dividend potential rather than its current yield. The latter, he explains, may be misleading as a result of factors such as a one-off special dividend or a sudden ramp-up in payouts.

‘In a world where interest rates are still low and many developed economies are on the cusp of deflation, investing in Asian dividend stocks could offer investors both long-term capital appreciation and a steady income stream,’ he notes.

 

Local expertise and insight

Matthew has a strategy of thorough due diligence and trusting his team’s judgement – which proved particularly successful when, in the early months of 2014, broker consensus turned against Southeast Asian markets in favour of those in North Asia (China and Korea). ‘We ignored this trend entirely and our approach was vindicated by the end of the year when Thailand, Indonesia, the Philippines and India had all outperformed China and Korea by a wide margin,’ he reflects.

King Fuei Lee, co-manager of Schroders’ Asian Total Return Investment Company plc, points out that in Asia there is generally no correlation between economic growth and stock market returns. ‘Indeed, higher GDP is often the short-term consequence of aggressive and poor capital allocation decisions,’ he says. This is supported by the Co-Fund Manager, Robin Parbrook who notes that many sell-side strategists fail to understand, for example, that most Hong Kong listed stocks have little connection with the Hong Kong economy.

 

Interpreting regional nuances

Although the emphasis at Schroders is on buying good companies at a reasonable price, fund managers keep abreast of macro-economic developments that may act as catalysts to unlocking value. Often strong investment ideas are found among the smaller companies, partly because they aren’t as well researched and therefore aren’t fully appreciated by investors.

For example, Andrew Rose, who manages the Schroder Japan Growth Fund plc, has identified opportunities among medium-size companies listed on the Tokyo stock exchange. With industrial production and export volumes finally reflecting the benefits of previous yen depreciation, his portfolios are overweight industrials, including trading companies. Andrew, who has more than three decades of investment experience in Japan, has also been buying Tokyo-listed insurance and retail companies.

 

Entering a different arena

These sector and country insights provide a mere flavour of the intricacies of the Asian markets, while underlining the benefits of local investment expertise and experience. ‘Asia is not a homogenous region,’ highlights King. ‘Valuations and yields differ from country to country. So we see Korean companies paying very low dividends compared to Australia or Hong Kong, while there are internet companies in China running at valuations of 80-100 times earnings.’

Another marked difference in Asia is that, since growth does not always equate to stock market performance, it is necessary to look at the sustainability of the company’s business model and how it is managed in order to see the full picture. For instance, some family-run businesses in Asia are managed in the interests of the family, rather than shareholders.

So, while examining the numbers is extremely important when selecting stocks in Asia, having deep, local connections and knowledge is equally invaluable.
It is important to remember that when investments are denominated in currencies other than sterling, the exchange rates may cause the value of these investments, and the income from them, to rise or fall. Also, investing in emerging markets and the Far East involves a high degree of risk and should be seen as long term in nature. Less developed markets are generally less well regulated than the UK, they may be less liquid and may have less reliable arrangements for trading and settlement of the underlying holdings. Finally, please remember that the value of investments and the income from them may go down as well as up and you may not get back the amounts originally invested.

 

What are the risks?

  • Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.
  • The funds hold investments denominated in currencies other than sterling, investors should note that exchange rates may cause the value of these investments, and the income from them, to rise or fall. 
  • The funds invests in smaller companies that may be less liquid than in larger companies and price swings may therefore be greater than investment companies that invest in larger companies. 
  • The funds may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so 

 

Asian Total Return Investment Company plc , Schroder AsiaPacific Fund plc and Schroder Oriental Income Fund Limited 

  • Investors in the emerging markets and the Far East should be aware that this involves a high degree of risk and should be seen as long term in nature. Less developed markets are generally less well regulated than the UK, they may be less liquid and may have less reliable arrangements for trading and settlement of the underlying holdings
  • Investment in warrants, participation certificates, guaranteed bonds, etc will expose the fund to the risk of the issuer of these instruments defaulting 

 

Asian Total Return Investment Company 

  • The fund uses derivatives to achieve its investment objective. The way in which derivatives are used will increase the income paid to investors and reduce volatility, but there is the potential that performance or capital value may be eroded.

 

Schroder Oriental Income Fund Limited

  • Deducting charges from capital can result in the income paid by the company being higher than would otherwise be the case and the growth in the capital sum being eroded. As a result of the fees being charged partially to capital, the distributable income of the company may be higher, but the capital value of the company may be eroded.

 

Schroder Japan Growth Fund plc

  • The trust will invest solely in the companies of one country or region. This can carry more risk than investments spread over a number of countries or regions.

 

Schroders launched its first investment trust in 1924 and our range provides investors with access to a range of nine distinctive investment opportunities including: UK and Japanese equities, Pan-Asian equities and property.

To find out more, please visit www.schroders.co.uk/its


Important information:

The views and opinions contained herein are those of Robin Parbook, King Fuei-Lee, Matthew Dobbs and and Andrew Rose and may not necessarily represent Schroders house view or views expressed or reflected in other Schroders communications, strategies or funds. The opinions stated in this article include some forecasted views. We believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee that any forecasts or opinions will be realised. The views and opinions may change. The article is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The article is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations.

The sectors and countries mentioned above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
We recommend you seek financial advice from an Independent Adviser before making an investment decision. If you don't already have an Adviser, you can find one at www.unbiased.co.uk or www.vouchedfor.co.uk

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.


Issued in May 2015 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority.