Investment Trusts

Get set for the next great Asian investment ride

According to the Chinese zodiac, anyone born in 2016 – the year of the fire monkey – will be ambitious and adventurous, but irritable. In many ways, these character traits reflect those of the Asian markets, where there are clear pockets of opportunity, but also significant volatility.

17/06/2016

According to the Chinese zodiac, anyone born in 2016 – the year of the fire monkey – will be ambitious and adventurous, but irritable. In many ways, these character traits reflect those of the Asian markets, where there are clear pockets of opportunity, but also significant volatility.

Since 2015, slowing global and emerging market growth, particularly in China, has weighed on investor sentiment. Low oil prices have only added to the pressure on Asian stockmarkets and the introduction of negative interest rate policy in Japan has received a mixed reception. Although markets have recovered as 2016 has progressed, the short-term regional outlook remains somewhat pessimistic.

On the positive side, this is being reflected in discounted company valuations, meaning that some interesting investment opportunities are opening up. What’s more, Asia continues to offer investors significant structural advantages in terms of longer-term growth potential. The fundamentals here include government reform programmes, infrastructure investment and growing domestic consumption.

 

A smooth approach

One way that investors can look to gain exposure to Asia’s longer-term growth story, while minimising any interim market volatility – an inevitable part of the ‘rollercoaster ride’ of emerging markets investing – is through investment trusts.

As a type of collective or pooled investment fund, investment trusts can help income investors achieve diversified access to stockmarkets. In addition, specialist investment trusts offer investors exposure to a particular asset, sector, or geography, such as Asia, that they perhaps consider too challenging or too risky to invest in directly.

And given that Asia is not a homogenous region, diversification across industries and/or countries is a particularly important tool to help mitigate the negative impacts of stockmarket volatility.

Sound stock selection

But diversification is far from the only requirement for finding stable returns in Asian stockmarkets. Skilled stock selection is also critical – not only from the point of view of which stocks to invest in, but also which ones to avoid in order to minimise any ‘bumps’ in the investment journey.

Taking a bottom-up approach to stock picking – focusing on the analysis of individual companies rather than general market or sector trends – Schroders seeks to invest in high quality businesses that possess strong cash flows as well as sound balance sheets and capital allocation policies that are aligned with the interests of minority shareholders. Since growth does not always equate to stockmarket performance in Asia, Schroders also targets companies with robust and sustainable business models run by professional management teams.

 

As Matthew Dobbs, Manager of the Schroder AsiaPacific Fund, notes: “Over the 12 months to March 2016, positive stock selection added value, as the fund’s holdings in China (particularly the US-listed names) outperformed the broader market. Strong stock selection in Taiwan also added value, with the fund’s holdings in select technology exporters outperforming”



Schroder AsiaPacific Fund plc- Discrete performance

 

 

Q1 2015 – Q1 2016

Q1 2014 – Q1 2015

Q1 2013 – Q1 2014

Q1 2012 – Q1 2013

Q1 2011 – Q1 2012

Share price

-7.4

26.0

-9.7

14.7

8.2

Net asset value

-6.2

26.1

-8.8

16.9

3.3

MSCI AC Asia ex Japan (NDR)

-9.0

24.4

-6.1

12.4

-6.8

Source: Schroders, bid to bid price with net income reinvested, net of the ongoing charges and portfolio costs and, where applicable, performance fees, in GBP. In January 2011 the MSCI AC Asia ex Japan (NDR) replaced the MSCI AC FE ex-Japan Net (TR). The full track record of the previous index has been kept and chainlinked to the new one. Past performance is not a guide to future performance and may not be repeated.

 

 

Similarly, for the Asian Total Return Investment Company, managed jointly by Robin Parbrook and King Fuei Lee, stock selection was the biggest driver of returns. Over the first few months of the year, the fund benefited from holdings in Australia, including the private health insurer Medibank, China’s IT and leisure sectors and technology picks in Taiwan.

 

Asian Total Return Investment Company plc

 

 

Q1 2015 – Q1 2016

Q1 2014 – Q1 2015

Q1 2013 – Q1 2014

Q1 2012 – Q1 2013

Q1 2011 – Q1 2012

Share price

-4.3

26.5

-13.7

16.3

-6.1

Net asset value

-2.7

24.4

-9.2

9.7

-8.3

MSCI AC Asia ex Japan (NDR)

-8.4

19.7

-6.3

12.2

-6.5


Source: Schroders, bid to bid price with net income reinvested, net of the ongoing charges and portfolio costs and, where applicable, performance fees, in GBP. On 18/03/2013 the MSCI AC Asia Pacific ex Japan replaced the MSCI AC Asia ex Japan. The full track record of the previous index has been kept and chainlinked to the new one. Past performance is not a guide to future performance and may not be repeated.

 

Local expertise                                 

Selecting the right companies at the right time requires in-depth knowledge of local markets. This is partly because there are certain peculiarities in the Asian marketplace that simply don’t translate into traditional asset allocation models. But proximity, including site visits, is also key to truly understanding Asian companies and what drives them.

In addition to having an on-the-ground presence in Asia for over 40 years, the experienced fund managers who run Schroders’ investment trusts specialising in Japanese and Pan-Asian equities have worked in and covered Asian markets for decades. Andrew Rose, Manager of the Schroder Japan Growth Fund, for example, has more than 30 years’ investment experience and has lived and worked in Japan for a number of years.

Our professional fund managers are also supported by a large team of locally-based investment analysts, whose research form an essential part of Schroders’ disciplined stock selection process.

Patience is a virtue

Finally, it is worth noting that successful Asian investing typically involves taking a long-term view of market opportunities. In the words of Dobbs, “looking ahead, good quality companies will be able to continue to grind out decent results in a low growth, uncertain environment and buying these companies at the right price will prove profitable in the long term.”

So while there are short-term headwinds that need to be factored into investment decision-making, Asia should be seen as long-term investment destination that offers interesting growth potential as part of a diversified income portfolio.

If you’d like to learn more about investment trusts, see the Schroders Investment Trusts knowledge centre – built to help you make more informed investment decisions.

What are the risks?

  • Please remember that 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.
  • Some trusts invest solely in the companies of, or in property located in, one country or region. This can carry more risk than investments spread over a number of countries or regions.
  • Investing in the emerging markets and the Far East involves a high degree of risk and should be seen as long term in nature. Exchange rates may cause the value of investments denominated in currencies other than sterling, and the income from them to rise or fall.

 

Whatever the condition of the market, it’s important to choose the right investment tailored to individual circumstances.  If you are thinking about making a new investment or changing your investment strategy, speak to your Financial Adviser. If you do not currently have a Financial Adviser, you can find one near you at www.unbiased.co.uk

 

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
This article is intended to be for information purposes only and it is not intended as promotional material in any respect.  The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Schroders has expressed its own views and opinions in this document and these may change.  The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.

Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall.

Issued in May2016 by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority. UK10748

Important information: The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall. Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors. Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.