Behind the trust: Schroder AsiaPacific Fund plc
Investing in Asian equities may not always be plain sailing but with experienced hands on the tiller, investors in the Schroder AsiaPacific Fund stand to discover bright growth prospects
At an index level, emerging markets tend to be more volatile than developed ones but investors looking for long-term growth ignore Asia at their peril. Far from trailing the west, many companies operating in the region are global leaders in their fields.
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.
There are many pitfalls to investing in Asia, however. Asian equity markets are prone to geopolitical risk and investor sentiment often drives share prices. This requires a steady hand on the tiller and the expertise to assess company fundamentals and chart a careful course towards the brightest growth prospects.
Schroders’ Asian team is exceptionally well resourced and draws on a wealth of capabilities in London and across Asia. Harnessing them to their full potential is the Schroder AsiaPacific Fund.
An investment trust with an impressive track record, it has consistently achieved top quartile performance versus both closed-ended peers and open-ended funds, making it Numis Securities’ core recommendation in the Asia Pacific excluding Japan sector1.
Testament to the team’s stock-picking abilities is the trust’s significant outperformance of its benchmark, the MSCI All Country Asia excluding Japan Index, since its inception in November 1995. It has also outperformed developed stock market indices, such as Britain’s FTSE 100 and Japan’s Topix, over the longer term2.
How exactly does the team behind the trust identify companies that stand to benefit from the Asian growth story and what makes it a worthy addition to an investor’s portfolio today?
What does the trust do?
The trust principally invests in companies located in the continent of Asia excluding Japan and the Middle East. Such countries include Hong Kong, China, Singapore, Taiwan, Malaysia, South Korea, Thailand, India, the Philippines, Indonesia, Pakistan, Vietnam and Sri Lanka.
Its objective is to outperform the MSCI All Country Asia excluding Japan Index in sterling terms over the longer term.
Putting their significant experience in Asian and emerging markets towards that aim are Richard Sennitt and Abbas Barkhordar, lead and assistant manager respectively. In running Schroder AsiaPacific, they manage one of the largest and most liquid funds in the peer group.
How does it do it?
The fund managers employ a bottom-up, stock-picking approach. They seek quality companies with strong growth potential and have a bias towards larger firms. They have an eye on valuation too and look for ‘quality growth at the right price’.
Key themes resulting from their stock-picking prowess are tech leadership and innovation, the Chinese consumption and service sector, and Indian finance. Commonplace among holdings are technology hardware names such as semiconductor producers, as well as consumer discretionary and financial stocks, such as regional banks though there is little exposure to Chinese banks on governance grounds.
The trust represents the fullest expression of Schroders’ proven Asian equity capabilities. The research-intensive process benefits greatly from a wealth of local expert knowledge and a large team of skilled professionals analysing investment opportunities both on the ground in Asia and in London.
The result is a wide range of investments spread over multiple countries and in a range of industry sectors without any major bias towards growth or value investment styles. The trust holds around 60 companies that are geared into the secular growth trends in the region.
In all reality, however, it has exposure to far more companies because it has a small number of holdings in other funds. These add diversity to the portfolio and have allowed the managers to take advantage of specific opportunities such as the strong long-term domestic growth story in Vietnam and obtain exposure lower down the market capitalisation scale across Asia.
Why invest?
There are many compelling reasons to invest in the Schroder AsiaPacific Fund. Here are 10 of them:
1. Growth profile
The trust seeks to offer investors an attractive way to gain exposure to the compelling long-term growth profile of Asia and the growing volume and variety of world-leading companies based there. The portfolio is positioned to benefit from domestic growth in the region driven by rising household incomes, greater credit penetration, urbanisation and growing consumer demand for products and services. The managers focus on companies operating in industries with superior growth and benefitting from competitive positions or those that are steering a course towards this.
2. Focus on quality
The managers seek to mitigate the risk of investing in Asia by focusing on quality companies. They favour those with sustainable earnings, strong balance sheets, efficient capital allocation and good corporate governance.
3. Buying opportunities
The trust offers exposure to attractive Asian growth opportunities but it does so with a keen eye on valuation. More difficult investment environments, where stock markets have indiscriminately sold off, often lead to buying opportunities. One recent example is 2022 when Asian valuations looked significantly more attractive than the previous year, not only relative to their historic averages but also relative to valuations in other key global markets. Ongoing shifts of sentiment and market dislocations often present attractive opportunities for the managers.
4. Strength of management
Although they only took over the strategy on 31 March 2021 following the retirement of Schroders veteran Matthew Dobbs, Sennitt and Barkhordar provide stability and experience, having spent their entire investment careers in Far Eastern and emerging markets at Schroders. Sennitt joined Schroders in 1993 and Barkhordar in 2007. Morningstar senior investment analyst Lena Tsymbaluk points to Sennitt being an ‘experienced and proven investor’3 and the continuity provided by him working closely with Dobbs for the prior 13 years. Numis points to Abbas bringing more experience in asset and country allocation decisions and the team using more data to help inform decisions4.
5. Information advantage
Sennitt and Barkhordar are based in London but draw upon the rich resources of Schroders’ Asia Pacific equities research team. This comprises of around 405 analysts based in six offices across the region as well as Schroders’ London-based global sector specialists. In addition, a London-based data insights unit boasts 25 data scientists monitoring investment themes and screening for ideas. The strength of these resources gives the managers an information advantage in under-researched and inefficient markets.
6. Diversification
While many other Asia Pacific equity funds have a large slug of assets in China, reflecting its significant weight in the index, the Schroder AsiaPacific Fund casts its net far and wide to find the brightest growth prospects across the region. Making thoughtful allocations to other funds aids diversification. In 2022, the trust had modest exposures to both a third-party fund focusing on Vietnam (Dragon Capital Vietnam Enterprise Investments) and an in-house fund focusing on smaller companies in Asia and emerging markets (Schroder Small Cap Discovery Fund). Having exposure to other collective investments gives investors in Schroder AsiaPacific access to further expertise in Asian equity investing.
7. Active management
The benefits of active management shine in a higher risk/reward market like Asia. While it may not always remain the case, the biggest change in the portfolio under the new managers has been a reduction in exposure to China given their concerns about the regulatory clampdown there in 2021. By the fourth quarter of 2022, China represented less than 20% of the fund compared to almost 36% of the index. Within China, they have rotated out of areas negatively affected by regulation, such as education and the internet, and into the areas that they believe should benefit from the policy shift, such as consumer stocks.
8. Company engagement
The quality of management is important to the approach, therefore high value is placed on regular engagement with companies. Generally, the fund management duo aims to be in Asia two to three times a year. They benefitted during the Covid-19 pandemic from corporate availability from the rise of online meetings.
9. ESG integration
In addition to fundamental financial analysis, Schroders’ proprietary sustainability tools and extensive engagement with Asian companies provide a wide range of metrics for its analysts to utilise in identifying the attractive opportunities for investment.
10. Competitive fees
Fees charged to investors in the trust were reduced on 1 April 2021. The ongoing charges ratio for the year ending September 2021 was 0.86%. There is no performance fee. Indeed, Schroder AsiaPacific has amongst the lowest fees of its peer group.
[1] - Schroder AsiaPacific: Benefitting from the Asian Growth Story, Numis, 15 October 2021
[2] - Based on performance since inception to 31 December 2021
[3] - Morningstar analyst research, 21 October 2021
[4] - Schroder AsiaPacific: Benefitting from the Asian Growth Story, Numis, 15 October 2021
[5] - Schroders, December 2021, see p2 here. Includes Schroders’ local specialist team of nine equity analysts in Sydney, as well as a joint-venture team of eight Indian equity analysts at Axis Asset Management (Axis AMC) in Mumbai. The Axis AMC team is fully integrated and provides support and coverage for Indian stocks within the research universe.
Fund Risk Disclosures
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.
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
The company can be exposed to different currencies. Changes in foreign exchange rates could create losses.
Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty and operational risk.
The company 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.
Important information
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