Behind the trust: Schroder Asian Total Return Investment Company
Investors looking for an element of downside protection when investing in the historically choppier Asian equity markets need look no further than the time-tested approach of the Schroder Asian Total Return Investment Company
The art of successful investing lies not only in capturing gains; it is equally important to protect against losses. That is arguably truer in more volatile markets, Asia being a case in point.
In broad terms, emerging markets have a different risk/reward profile to developed ones. While the rewards can be plentiful, the risks can be manifold. Asian equity markets are prone to geopolitical risk and investor sentiment often drives share prices.
The approach to netting gains and safeguarding against losses taken by the Schroder Asian Total Return Investment Company serves to navigate this volatility and seeks to provide investors with a smoother journey in Asian equity investing.
Since the strategy’s inception in 2007, its managers have demonstrated their ability to capture a significant amount of the growth opportunities that the region provides, while protecting investors in more difficult market conditions. That is not to say that the trust only does well in less benign market environments. By harnessing the collective strengths of Schroders’ Asian team, it aims to protect and grow wealth in all market environments.
How exactly does the team behind the trust balance risk and reward when investing in Asian equities and what makes it a worthy addition to an investor’s portfolio today?
What does the trust do?
Schroder Asian Total Return invests in a diversified portfolio of 40-70 companies operating primarily in the Asia Pacific region, including Australasia but excluding Japan.
It seeks to provide a high rate of total return by investing in the shares of companies with strong growth prospects and making strategic and tactical use of derivatives – hedging techniques that offer a degree of capital preservation and therefore help mitigate some market risks of investing in Asia.
Since Schroders was appointed manager of the trust in March 2013, it has been co-run by two managers, Robin Parbrook and King Fuei Lee, who have worked together for more than 20 years and are renowned for their expertise in Asian equity investing. They are part of a team that is exceptionally well resourced and draws on a wealth of capabilities in London and across Asia.
How does it do it?
A great strength of the approach is that the trust invests on an unconstrained basis. That means the managers have wide scope in stock selection and are not obliged to have certain exposures in terms of geography or sector regardless of their representation in the reference benchmark index.
At a stock level, the focus is on quality companies – those with sound balance sheets, professional management teams and capital allocation policies that are aligned with the interests of minority shareholders.
In addition to stock picking, quantitative models are used as a guide to the top‐down hedging overlay and country exposure of the trust. And in a bid to reduce volatility and offer shareholders an element of capital preservation, the trust uses derivatives to hedge certain market risks inherent in the underlying equity holdings.
Why invest?
Here are a few of many compelling reasons to invest in the Schroder Asian Total Return Investment Company.
1. Unconstrained approach
The unconstrained approach means portfolio construction is not tied to the constituents of any benchmark. The managers can back their highest conviction ideas wherever they may be across the Asia Pacific with the size of stock positions reflecting where the managers see the best potential risk-adjusted returns. The trust is balanced across geographies and lacks the China bias inherent in many funds investing in the region.
2. Growth drivers
Although economic growth is no guarantee to stock market returns, the trust is an attractive way to access exposure to the Asian long-term growth theme. The case for investing in Asia remains strong, driven by a positive economic outlook, long-term growth potential from favourable demographics and a growing middle class fuelling strong domestic consumption. While the index has relatively low exposure to secular growth trends and high exposure to state-owned enterprises, corruption and governance issues, opportunities for stock-pickers like these managers are plentiful.
3. Smaller companies exposure
The fund is managed on a similar basis to the managers’ open-ended fund, Schroder ISF Asian Total Return, which they have run since it launched in November 2007. The main difference between the two is the investment trust’s higher exposure to small and mid-cap companies, which are considered too illiquid for the larger open-ended vehicle. The most exciting growth opportunities can often be found in smaller companies and over the longer-term the closed-ended investment trust has typically been the stronger performer of the two.
4. Use of hedging
A key differentiator from peers is that the managers use quantitative models and a top-down overlay to analyse economic and market trends and assess near- and medium-term market risks. This informs their use of derivatives, which protect the capital value of the portfolio or facilitate efficient portfolio management. This aims to give investors a smoother investment ride.
5. Flexibility
If the managers decide markets are significantly overpriced or face material risks of a substantial correction, they can opt to exit selected equity holdings and go into cash or cash equivalents to provide further downside protection. In extreme circumstances, and subject to board approval, most or even all the trust’s assets could be held in cash or near-cash instruments. Conversely, when they are optimistic about prospects, they can opt to not pay for protection and be fully invested in equities. They can also use gearing (up to a maximum 30% of NAV) to enhance performance.
6. Strength of management
The trust benefits from a strong and stable management team. The managers have spent their combined 50-plus years investment careers at Schroders. This is a region they know extremely well. Having joined Schroders as a graduate trainee in 1990, Parbrook has spent 25 years (out of a 32-year-long career) in Hong Kong and Singapore. King Fuei is based in Singapore.
7. Active ownership and ESG integration
The managers are supported by an experienced team of more than 40 research analysts (as at August 2022) based in six offices across Asia with an average of 15 years of experience. The team is one of Morningstar’s favourite in the region1. It places high value on regular engagement and its reputation gives it good access to the management of Asian companies.
Schroders believes sustainability and ESG analysis is of greater importance when making investing decisions in Asia than perhaps any other region in the world2. Schroders’ proprietary sustainability tools and extensive engagement with Asian companies provide a wide range of metrics for its analysts to utilise in identifying the best opportunities for investment.
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[1] - Morningstar Opinion, Samuel Lo, 19.01.22
Discrete yearly performance (%)
Reference index: MSCI AC Asia Pacific ex JP AR
Please check the latest company factsheet for latest performance figures
Fund risk disclosures
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, which may adversely impact the performance of the company.
Counterparty risk: Investments such as warrants, participation certificates, guaranteed bonds, etc. will expose the company to the risk of the issuer of these instruments defaulting on paying the capital back to the company.
Currency risk: The company can be exposed to different currencies. Changes in foreign exchange rates could create losses.
Derivative risk: The company can use derivatives to assist with efficient management of the portfolio. A derivative may not perform as expected, and may create losses greater than the cost of the derivative.
Emerging markets risk: Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty and operational risk.
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 that investment could be lost, which would result in losses to the fund.
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Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registration No 4191730 England. Authorised and regulated by the Financial Conduct Authority.
Important information
This communication is marketing material. 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.
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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.
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Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.