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 Commentary: As of 30th June 2018

Market summary

Asian equities were generally weak on poor sentiment in Q2, with global trade concerns serving to increase risk aversion in the market. The MSCI AC Asia Pacific ex Japan Index has underperformed MSCI AC World over the quarter.

ASEAN[1]markets were among the weakest index countries while Korea also fell sharply. This was despite positive developments with regards to peace on the Korean peninsula; an Inter-Korea Summit in April saw leaders from the South and North pledge to agree to a formal end to the war between the two sides. US President Trump subsequently met with North Korean leader Kim Jong-un in Singapore in June. In Malaysia, the market declined after the unexpected election victory of Mahathir Mohamad’s Harapan alliance ended the ruling coalition’s 60 years in power. Taiwan also underperformed with technology names leading the market lower.

India, which had underperformed by a wide margin in Q1, and China held up better than the wider index. In China, the central bank cut the reserve requirement ratio for banks by a total of 1.25% over the quarter to encourage lending and support growth. However, a combination of slowing domestic growth momentum and global trade uncertainty contributed to weakness later in the quarter and the currency depreciated relative to the US dollar. Australia outperformed the regional equity market amid the risk-off environment over the quarter.

[1] The Association of Southeast Asian Nations (ASEAN) is a regional grouping that promotes economic, political, and security cooperation among its ten members: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam.

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Investment outlook

Recent politics and protectionism with escalating trade tensions between US and China have taken centre stage as key drivers of markets and investor sentiment amidst a sense of heightened uncertainty. Even with the first set of tariffs having taken effect, our base case remains that a wide ranging, very destructive trade war is not in anyone’s interest. The real risk to Asian earnings remain hard to gauge at this point. As long term investors, we have not made dramatic changes to our strategy in light of current market uncertainty and portfolio turnover remains low.

Valuations in Asia, after looking a little frothy at the end of 2017, looked much more reasonable at the beginning of 2018 and we are now back in line with the long-term average P/E (price to earnings – a measurement of valuation) in Asia. In terms of where we see the best value in absolute terms and versus history, it is banks, technology, insurance and capital goods that rank best, whereas consumer staples, healthcare and retail look very expensive to us , particularly when we consider some of the headwinds faced by consumer and retail names in Asia.

We are also turning more cautious in Taiwan on both the outlook for the technology sector and more domestically-exposed companies due to the high earnings expectation of the market. This resulted in us trimming the fund’s Taiwan technology and industrial names in Taiwan and rotated into some existing names in China and Hong Kong. In addition, following the sharp falls in markets, we are now relooking at opportunities in Indonesia and the Philippines, and the latter in particular looks interesting as the domestically-oriented companies turned more upbeat despite headwinds from weaker domestic currencies and rising oil prices remain.

Quarterly overview

The fund gained 3.1% (in GBP terms) in Q2, compared to the reference index which returned 2.4%. Performance was largely driven by stock-specific factors, with the disappointments from continued profit-taking in the technology space which had seen strong outperformance last year. Our marginal exposure to ASEAN also helped performance as these markets have been weak.

Our long-time overweight in China Lodging (renamed Huazhu) continued to deliver strong results on the back of the solid domestic economy. Integrated textile company Shenzhou International also saw share price advance as its process automation was well positioned to benefit from the trend of quicker turnaround in the apparel industry.

In terms of capital protection, the portfolio’s hedges were a drag over the quarter, mainly due to the puts in markets that held up relatively well versus the rest of the region. However, we remain cautious on near-term downside risks and therefore continue to maintain moderate put positions in the fund.

he fund delivered good GBP returns in the fourth quarter and outperformed the index. Over the quarter, the fund’s leading country contributor by far was strong stock selection in China where our holdings in the consumer discretionary and IT sectors outperformed significantly. Selection and our underweight in Taiwan was a lesser contributor.

Meanwhile, among the fund’s top detractors over the quarter was our overweight and stock selection in Hong Kong, where our holdings in real estate and industrials detracted. Another detractor was our underweight in Korea.

On the sector front, consumer discretionary and information technology were the top contributors while healthcare was the leading detractor.

Discrete yearly performance (%)

	Q3/2017 - Q3/2018	Q3/2016 - Q3/2017	Q3/2015 - Q3/2016	Q3/2014 - Q3/2015	Q3/2013 - Q3/2014
Share price	8.2	31.1	45.3	-2.7	8.6
Net Asset Value	6.2	24.5	37.7	0.7	9.8
Reference Index	4.9	16.8	37.7	-8.4	5.8

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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