Commentary - Private Investor

"You can’t dine off relative returns, and in Asia we believe the benchmark indices are a poor reflection of the overall investment opportunities. The priority of the Company is to make money, whilst providing an element of capital preservation in a volatile asset class."

Robin Parbrook & King Fuei Lee

Co-Managers of the Schroder Asian Total Return Investment Company

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Coronavirus update

A recent update from fund managers, Robin Parbrook and King Fuei Lee:

The fund is close to fully invested at the moment and we still have around 7% in hedges¹. At the end of January we had about 4% cash and 20% hedges. We have not been rolling the hedges² as they expired as hedges have moved to an extremely expensive price level and, with markets falling, our models are turning increasingly positive (both models are now predicting high positive returns over 6 months and 1 year). Basically, if we survive COVID-19 without extremely severe economic outcomes we should see a good bounce in Asian markets from this level.
In a nutshell, we had been adding exposure mostly in February which was unfortunately, too early. We took the view that with virus fears easing in Asia and the situation calming down there – and with plenty of stocks attractively valued - we should be adding. We were completely wrong sided by the response in Europe and spread of virus.
In terms of what we have been adding, its nothing too specific but bits of tech , RIO/BHP funded from other names in Australia. We see lots of bottom up value in Asia at moment so we are mostly focussed on adding in tech in Taiwan and blue chips in Australia.
As far as an outlook, it appears that we are reaching one of those once-in-10-year opportunities in Asia (97/98, 2003, 2008, etc.). Our models are almost at the trigger point when we close the remaining hedges and invest all cash/raise stock beta. Earnings will clearly be terrible in Asia this year but the good news is that corporate gearing in Asia outside a few pockets (China property developers etc.) is pretty low.
Performance has been disappointing. In January, we held up very well in the initial falls. The last 6 weeks have been much more difficult as the hedges have rolled off and selling very broad based. Stock selection is mixed - we have very little banks and almost no oil exposure (good) but little defensives names (consumer staples and telcos which we view as expensive and mostly weak fundamentals). So, the good and bad have broadly offset each other. As at last Friday, on our internal numbers looks like we are 1-2% ahead of index. The protection strategies have added around 2% or so to performance this year but the stocks have not proved defensive.

1: Hedges: an investment to reduce the risk of adverse price movements in an asset

2: Rolling hedges: a strategy for reducing risk that involves obtaining new exchange-traded options and futures contracts to replace expired positions

Q4 2019 Commentary

Market summary

Asian equities delivered a strong return in Q4, supported by easing geopolitical risk as the US and China reached a phase one trade deal, to be signed on 15 January. US dollar weakness also provided support to returns. China, South Korea and Taiwan all outperformed, led by gains in the technology sector. In Taiwan, strong performance from technology sector companies boosted returns, as earnings expectations were revised upwards amid optimism on 5G-related demand outlook. Korean technology companies was also driving market performance on the back of positive earnings upgrade buoyed by improved memory demands outlook.

Investment outlook

Our strategy for Asian equities remains balanced as we move into 2020. Overall market valuations in Asia look reasonable against historical comparisons. However, this masks the fact that sectors such as banking, automotives and commodities drag down the headline valuations. The valuations of stocks we want to own are definitely not cheap, so we anticipate moderate returns from the region. However, we have a strong long-term conviction on where the best opportunities are in Asia. These include stocks in sectors such as Chinese consumption, insurance, technology, real estate in Singapore and Indian private-sector banks.

Quarterly overview

The fund posted solid gains in absolute terms but moderately lagged the regional benchmark over the quarter. Improved sentiment from expectations of a Phase 1 US-China trade deal and the monetary largesse from central banks around the world have set a euphoric mood in equity markets as the year came to a close. On the fund’s performance, the biggest contribution came from our consumer-related, industrial and ecommerce names in China. Technology leaders across Taiwan and Korea also drove significant gains over the period. Similar to previous upcycles, with markets rising rapidly this led to a small drag from the capital preservation strategies in the fund.

At the individual stock level, our core holdings in technology leaders TSMC and Samsung Electronics have contributed strongly to performance on the back of improved sentiment in the sector. Share price of TSMC traded higher on continued optimism on the semiconductor cycle into 2020 driven by the pick-up in 5G related demand. The accelerated roll-out of 5G devices and likely bottoming and imminent recovery of memory prices also supported share price gains of Samsung Electronics. China’s ecommerce giant Alibaba rallied on the back of strong quarterly results and new sales record achieved during the 11.11 global shopping festival. Outside the technology sector, innovative drug developer Hutchison China Meditech bounced back strongly from oversold levels as the market digested the earlier placement of the stock.

Meanwhile, some of our blue chip exposures struggled to keep up with strongly rising markets, such as Hong Kong landlords like Hongkong Land and Sun Hung Kai Properties. Australia stocks such as Medibank Private and Tabcorp lagged the market rally as worries over economic impact from the widespread bushfires led to a downturn in domestic sentiment. In India, IT services company Infosys saw share price stumble, owing to the ongoing fallout from a whistle-blower’s revelations, which highlighted possible financial irregularities and management issues. However, share price of the company has subsequently pared some of the losses as investigations found little evidence to substantiate most of the allegations.

Discrete yearly performance (%)

	Q1/2015 - Q4/2015	Q1/2016 - Q4/2016	Q1/2017 - Q4/2017	Q1/2018 - Q4/2018	Q1/2019 - Q4/2019
Share price	-0.6	37.0	43.9	-7.3	13.1
Net Asset Value	3.0	28.5	34.8	-8.1	15.7
Reference Index	-4.1	27.3	25.1	-8.6	14.6

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.

Investors in the emerging markets and Asia 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.

The Company holds 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 Company 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 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.

Investments such as warrants, participation certificates, guaranteed bonds, etc. will expose the fund to the risk of the issuer of these instruments defaulting on paying the capital back to the Company

The fund can use derivatives to protect the capital value of the portfolio and reduce volatility, or for efficient portfolio management.

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Please remember that 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.

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Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England.

Schroder Unit Trusts Limited is an authorised corporate director, authorised unit trust manager and an ISA plan manager, and is authorised and regulated by the Financial Conduct Authority.

Please note: for the Schroder UK Public Private Trust plc, the important information is below:

Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.

Schroder UK Public Private Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

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