Latest trust commentary

Performance overview

• Pacific ex Japan markets rose sharply in sterling terms in the second quarter of the year amid a pick-up in optimism towards artificial intelligence (AI) and a de-escalation of the conflict in the Middle East.
• Performance was dominated by the technology-orientated markets of Taiwan and Korea, which were driven by strong gains in memory and semiconductor stocks benefitting from continued AI demand. The signing of a fragile US-Iran peace agreement helped ease some geopolitical concerns.
• Australian equities were slightly higher but underperformed the benchmark index as the country’s central bank raised rates and inflation remained above its target level. China was weaker, weighed down by weakness in large internet and platform companies. Indonesia was the weakest-performing market as it faced potential relegation by MSCI to frontier status, and as its central bank raised rates three times in quick succession to support the currency.

Drivers of fund performance

• The fund produced a strongly positive return but underperformed the MSCI AC Pacific ex Japan index over the period.
• At the regional level, a weak allocation effect was the main factor behind the fund’s negative relative returns, and this offset favourable stock selection. The underweight to Korea had the greatest negative effect with the market rising some 86% over the quarter. Overweight exposure to Hong Kong and Singapore also detracted from returns, although the underweight to China proved to be a notably positive factor. Selection contributed positively, especially in Taiwan, while it was also supportive in China. However, it detracted in Korea.
• On a sector basis, the underweight to information technology (IT) weighed most heavily on performance, while the overweight exposures to consumer staples, real estate, and financials also detracted. However, the underweight exposures to consumer discretionary and healthcare had a positive effect. Stock selection was a more modest detractor and was strongest in consumer discretionary, while weak relative performance in IT detracted.

Outlook/positioning

• Following the US-Iran peace deal, improved oil flows through the Strait of Hormuz over time should reduce inflationary pressures somewhat in the global economy. This will hopefully reduce the risks to growth from an extended supply shock in the region, which had been of particular concern to economies in Southeast Asia and India. However, counterbalancing this positive move in oil has been a tightening of US monetary conditions in recent weeks as the Federal Reserve strikes a more hawkish tone. North Asian semiconductor and memory stocks have been among the biggest global beneficiaries of the AI capex boom in the last year, rising on the back of very positive earnings revisions. Valuation multiples in the sector are generally well above historical averages, and earnings expectations for the next 2-3 years are currently very elevated across the AI-related supply chain, leaving little room for disappointment. With capex spending approaching $1 trillion annually across the industry, the revenues, or “value added” for companies and consumers, required to justify this investment and deliver a sensible payback are compounding upwards to massive levels. Given the uncertainties about the medium-term outlook, we have continued to take profits gradually in some AI-exposed stocks and will reduce exposure further where prices look stretched against valuations.
• Within China, there have been few significant domestic policy announcements in recent months. Although there is plenty of commentary about the need to develop domestic demand, the authorities appear to be taking a “wait-and-see” approach before committing to introducing any more stimulus. The domestic economic backdrop in China therefore remains fragile and deflationary, the earnings picture is mixed, and any export slowdown in 2026 could exacerbate deflationary forces. However, on a more positive note, we have seen an important shift recently in the behaviour of many Chinese corporates regarding shareholder returns. There is much greater willingness to increase dividend payouts and buybacks. Although we remain underweight, given the compelling bottom-up value, we have been adding selectively to our China exposure. Our overweight to Hong Kong also offsets the underweight.
• Valuations across Thailand, the Philippines and Indonesia are undemanding, but local economic growth has been soft. The bottom-up stock opportunities remain limited in these countries, and we have very modest aggregate exposure.
• Turning to dividends, broadly, there has also been a pickup in the absolute level of dividend payments over recent months. This is, though, reliant on an ongoing improvement in the underlying earnings of the companies, where the recent conflict in the Middle East has led to greater uncertainty. The level of sterling versus Asian currencies will also continue to influence the absolute level of dividends received.
• With the recent strength in markets, aggregate P/E multiples for regional equities have moved back towards the upper end of the longer-term trading range. Valuations in Korea and Taiwan are very elevated by historical standards and aggregate valuations for the broader regional index build in little margin for safety.
• The macroeconomic backdrop for markets remains very volatile and the range of outcomes is wide, but we continue to see attractive longer-term opportunities across Asian equities. AI themes and the Korean and Taiwanese markets are clearly where the share price momentum and investor attention is focused currently. However, we do see attractive opportunities across a more diversified range of sectors and markets, and we are constructing portfolios to maintain this more balanced exposure.
• We continue with our bottom-up investment approach and look for good companies where we can clearly see a strong income case and the potential for capital growth, while remaining disciplined about valuations.

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• China risk: If the fund invests in the China Interbank Bond Market via the Bond Connect or in China "A" shares via the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect or in shares listed on the STAR Board or the ChiNext, this may involve clearing and settlement, regulatory, operational and counterparty risks. If the fund invests in onshore renminbi-denominated securities, currency control decisions made by the Chinese government could affect the value of the fund's investments and could cause the fund to defer or suspend redemptions of its shares.
• Concentration risk: The Company may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the company, both up or down.
• Counterparty risk: The Company may have contractual agreements with counterparties. If a counterparty is unable to fulfil their obligations, the sum that they owe to the Company may be lost in part or in whole.
• Currency risk: If the Company’s investments are denominated in currencies different to the currency of the Company’s shares, the Company may lose value as a result of movements in foreign exchange rates, otherwise known as currency rates.
• Derivatives risk: Derivatives, which are financial instruments deriving their value from an underlying asset, may be used to manage the portfolio efficiently. A derivative may not perform as expected, may create losses greater than the cost of the derivative and may result in losses to the fund.
• Emerging markets & frontier risk: Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty, operational and liquidity risk than developed markets.
• Gearing risk​: The Company may borrow money to make further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase by more than the cost of borrowing, or reduce returns if they fail to do so. In falling markets, the whole of the value in such investments could be lost, which would result in losses to the Company.
• Liquidity Risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. In difficult market conditions, investors may not be able to find a buyer for their shares or may not get back the amount that they originally invested. Certain investments of the Company, in particular the unquoted investments, may be less liquid and more difficult to value. In difficult market conditions, the Company may not be able to sell an investment for full value or at all and this could affect performance of the Company.
• Market risk: The value of investments can go up and down and an investor may not get back the amount initially invested.
• Operational risk​: Operational processes, including those related to the safekeeping of assets, may fail. This may result in losses to the Company.
• Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.
• Private market valuations, and pricing frequency: Valuation of private asset investments is performed less frequently than listed securities and may be performed less frequently than the valuation of the Company itself. In addition, in times of stress it may be difficult to find appropriate prices for these investments and they may be valued on the basis of proxies or estimates. These factors mean that there may be significant changes in the net asset value of the Company which may also affect the price of shares in the Company.
• Share price risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. This means the price may be volatile, meaning the price may go up and down to a greater extent in response to changes in demand.