Focussing on long-term growth with smaller Asian companies

  • Asia is the dynamic growth region
  • Many companies focused domestically, riding the mega trend of consumer consumption
  • Greater growth potential than large cap

This has been a challenging year for investors in Asian equities. Stock markets in the region have slumped amid fears of a US-China trade war, slowing growth in China, and in the face of a stronger US dollar and rising interest rates.

But despite recent market woes, Asia continues to offer a compelling long-term growth story for investors, says Hugh Young, lead manager of Aberdeen Standard Asia Focus investment trust (formerly called Aberdeen Asian Smaller Companies). Even with China slowing, Asia is still the fastest growing region in the world. An expanding and increasingly prosperous middle class is driving local consumption growth. And as
trade increases within the region, Asia is becoming less dependent on exports to the rest of the world. With more than 30 years of experience of investing in Asian equities, Young is a veteran of market volatility in the region and points out that over the long term, market pullbacks in Asia have often proved to be excellent buying opportunities for investors.

He has just taken on responsibility for day-to-day investment decisions at Aberdeen Standard Asia Focus. Under its new name, the trust continues to invest in smaller Asian companies, while the number of portfolio holdings is being reduced to about 60 (down from 80) with 30 core investments, giving a more concentrated portfolio of best-in-class small-caps. In addition, the management fee has been reduced from 1% to 0.96%.

Small is bountiful
Smaller Asian companies have a number of potential attractions for tapping into the region’s growth story, says Young. With many of these companies focussed on domestic markets, he argues they offer a “comparatively safe harbour from the problems of trade disputes and currency fluctuations”. This helped the trust’s portfolio hold up better in the recent turmoil than larger companies more closely tied to global supply and distribution chains.

Smaller companies also offer higher growth potential and tend to be cheaper than larger Asian firms, he says. They are more likely to be taken over – which can deliver a premium exit price for shareholders.

Importantly, there is also less investment research available on them – many smaller companies in Asia are not covered by analysts.* This provides an opportunity for an investment manager like Aberdeen Standard which does its own in-depth research to unearth small-cap gems that the market has under-priced.

Finding the right opportunities
Aberdeen Standard Asia Focus invests in established smaller companies rather than start-ups, and has flexibility to invest in more substantial businesses with stock market values of up to US$1.5billion.

Young looks for quality companies with robust balance sheets – overall, the companies in the trust’s portfolio are sitting on 8% net cash. These are cautiously run businesses which are “extremely resilient”, he says, so that while the trust’s portfolio may lag the market in “momentum-driven run-ups”, it tends to outperform in the downturns.

With many smaller companies in Asia family-run or with a major overseas shareholders, finding those with good corporate governance and that treat minority shareholders fairly are also key considerations.

Aberdeen Standard’s substantial on-the ground presence in Asia – nearly 50 investment professionals based in offices across region, with Young in Singapore – gives the trust a significant advantage in its search for attractive investments, providing deeper local knowledge and better access to company managements.

Playing the megatrend of consumption growth
Many of the companies that the trust invests in offer exposure to Asia’s megatrend of rising domestic consumption. By contrast, it has little exposure to export-led businesses that rely on low labour costs, which
it sees as a much less sustainable proposition.

Among the portfolio’s biggest holdings is Indonesia’s Bank OCBC NISP, a play on long-term growth as demand for consumer credit grows in a country where many people have not had bank accounts. The lender,
a subsidiary of Singapore-based OCBC Bank, is very conservatively managed, says Young.

The trust has also invested in companies capitalising on the rapid adoption of technology in Asia and high levels levels of mobile phone and internet penetration. Taking advantage of recent share price falls, it bought into Momo, the Taiwanese online retailer and a subsidiary of Taiwan Mobile. With a 30% share of the domestic market, Momo is Taiwan’s biggest business-to-consumer (B2C) e-commerce company. A strong market position is supported by its edge in delivery times and service quality following recent logistical investment, says Young.

Looking beyond the short term
While further market falls cannot be ruled out, Young says that share valuations in Asia have already dipped below historical averages and offer a discount to global markets.

Smaller Asian companies are a more specialist but potentially highly rewarding investment in this inherently dynamic region. Aberdeen Standard Asia Focus investment trust, with its bottom-up strategy of selecting a diversfied and quality portfolio using in-depth, first-hand research, offers a well-resourced way to gain exposure and tap into Asia’s long-term growth story.

*Source: Aberdeen Standard Investments

Important information
Risk factors you should consider prior to investing:
• The value of investments and the income from them can fall and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
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• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid offer spread can widen.
• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Other important information:

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