Aberdeen Standard Asia Focus (AAS) aims to identify market leading businesses in Asia with high and sustainable earnings when they are trading on attractive valuations and invest in them for the long term.
In 2018 the trust implemented a number of changes intended to improve long-term performance, after which it has become more concentrated, increased its weighting to technology companies and reorganised the investment team to be more ruthless with stocks that don’t match up to expectation. Hugh Young has taken more personal control and responsibility for the trust’s portfolio, although he has worked on the team since AAS was launched in 1995, and heads up Asia at Aberdeen Standard.
Over the long term, AAS’s performance has been outstanding. Over ten years, it has more than doubled the average annual NAV total return from the MSCI AC Asia Pacific ex Japan Small Cap Index. However, the trust did underperform in the 2016 and 2017 rally in China and tech-related names. Performance has improved since these changes were made to the process, helped by a change in market dynamics (as we discuss in the Performance section).
Since the changes, which were accompanied by a change of name from Aberdeen Asian Smaller Companies, the discount has been significantly tighter on average, although it is still wide at 11.5%. This is in line with its closest small-cap peer, but wider than the average of the all-cap AIC Asia Pacific sector, which is 7.8%.
Dividend growth has been strong in recent years, and the board does aim to maintain or grow the dividend. However, the yield is relatively low at 1.8%.
The changes made to the process since late 2018 – and which are now almost fully completed – have resulted in a more balanced portfolio, in our view. However, the trust still maintains the traditional characteristics which have served it well over the long term: a focus on quality above all else, and then on buying at attractive valuations. As we understand it, what has really changed has been the appreciation of value in higher growth names, so some loosening of the manager’s definition of value in certain sectors, rather than a weakening of the quality characteristics.
The portfolio still displays highly attractive, resilient characteristics in our view: low leverage, high return on equity and return on assets, and a reasonable level of valuations. The rock-solid balance sheets of the underlying companies should protect the portfolio in any falling market, and should also ensure the companies benefit from operating leverage and the ability to invest in themselves in any rising market. Over the long run we would expect these advantages to lead to good results for shareholders.
Taking a long-term view, we think the discount is attractive as an entry point. Investors have flocked to large caps in Asia in recent years as they have led the market – chiefly internet and tech-related names. This has led small-cap trusts such as AAS to trade on wider discounts than large-cap-focussed trusts. However, we would expect long-run returns to be higher from small caps, although it is hard to pinpoint exactly when the current trend might change.
|The investment process has been highly successful over the long term
||Structural gearing increases the downside risks
|A reinvigorated portfolio, under Hugh Young’s personal control
||Highly active country allocations can lead to large under- or overperformance at times
|Region-wide discount to NAV
||Yield is low