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 plc

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Q2 2019 Commentary

Market summary

Asian equities posted modest losses in the second quarter as trade tensions and economic risks dominated investor sentiment. Global monetary policy was another key focus of markets. In particular, the US-China trade war escalated in May after the US raised tariffs on US$200 billion worth of Chinese imports and added Chinese telecommunications group Huawei to a trade blacklist. China countered with retaliatory tariffs on US goods. Both countries subsequently agreed to a truce and will resume trade negotiations following a meeting between their leaders at the G20.

Investment outlook

Against this backdrop and following a strong Q1, the Trust continued to advance over the quarter and was ahead of the MSCI AC Asia ex Japan (NDR) index despite the macro uncertainties amid rekindled trade tensions as trade talks broke down in May. Our key positions across the developed markets in Asia such as Australia and Hong Kong continued to add value to the portfolio. Sector-wise, our exposure to the insurance and healthcare space were the key contributors to performance. Our hedges have marginally detracted as the broader market advanced over the quarter.

Quarterly overview

At the individual stock level, some of our core holdings continued to add value to the portfolio amid a more volatile macro backdrop over the quarter. Among the key contributors was leading power tool maker Techtronics. The company rebounded strongly after a sharp correction in May, helped by increased optimism over US-China trade talks ahead of the Group of 20 summit, given its significant exposure to the US market. Hong Kong-based regional insurer AIA also saw share price surge on the back of its longer-term growth potential as China continues opening up the insurance market to international players. This would potentially allow AIA to expand its China footprint. In India, our core holding in leading private sector bank HDFC Bank continued to climb on the back of strong operating results and investor optimism over incumbent Prime Minister Modi and it BJP’s landslide victory in national elections. Meanwhile the detractors, some of our consumption-related holdings in China such as Huazhu Group and Alibaba have offset some gains as investors grappled with the re-escalated trade war and the generally weaker domestic growth outlook.

With markets rallying towards the end of Q2 on hopes of better macro environment while earnings growth outlook remains uncertain, we have turned a little more cautious in our positions. We have therefore been taking some profits where share prices are trading close to or beyond fair value and have gradually added some scope for capital preservation to the portfolio in view of the still-weak earnings outlook.

Discrete yearly performance (%)

	Q2/2018 - Q2/2019	Q2/2017 - Q2/2018	Q2/2016 - Q2/2017	Q2/2015 - Q2/2016	Q2/2014 - Q2/2015
Share price	4.3	17.0	46.3	13.1	12.6
Net Asset Value	5.3	13.4	32.7	15.8	13.1
Reference Index	4.6	7.8	28.6	5.6	7.9

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.

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