Asia Dragon Trust (DGN), formerly Edinburgh Dragon Trust, aims to identify well-managed, world-class businesses in Asia and buy them when they are on attractive valuations. The management team at Aberdeen Standard Investments, headed by Adrian Lim and Pruksa Iamthongthong, take a long-term approach to investing. They aim to be an active, engaged shareholder, encouraging good corporate governance and alignment with other ESG goals.
The trust performed strongly following implementation of a number of changes to the process in 2017 and 2018, which saw it increase exposure to IT and China, as discussed in the Performance section. However, in 2020 it has lagged the index slightly in the recovery from the pandemic, thanks largely to its exposure to countries which have struggled to control it.
In the aftermath of the coronavirus crash, Adrian and Pruksa have taken the opportunity to buy high-quality companies they had previously coveted but found too expensive. This has increased their weighting to information technology and e-commerce, and the portfolio has some large single stock positions in Tencent, TSMC and Samsung (together 28.3% of the portfolio). However, the portfolio retains balancing exposures with the bottom-up process leading the managers to a diverse set of companies from across the region (as discussed under Portfolio).
The managers tell us they are wary about the immediate future for the Asian economies, because of the impact of the lockdowns and a possible resurgence of the virus. However, they think their focus on quality and resilient earnings could prove a relative advantage. DGN’s shares are trading on a discount of 13.4% to NAV, wider than the five-year average and the sector average.
DGN is an attractive core Asia holding, in our view. In 2020 the dispersion of returns within markets, including Asian markets, has been extreme, with technology, e-commerce and China outperforming considerably following the emergence of the pandemic. DGN has benefitted from these themes, but it also maintains exposure to other areas which have not kept up and which could do better when the wind changes. The unusual nature of the recent sell-off has been such that this includes more cyclical sectors and also more defensive sectors. In our view this diversification is attractive at this point in time, when valuations in the fashionable sectors are looking expensive and the economic impact of the earlier lockdowns is starting to be felt.
The portfolio has seen an unusual flurry of activity in the aftermath of the pandemic as Adrian and Pruksa took advantage of the crash in valuations to pick up exposure to high-quality companies at attractive prices. This is a tangible outcome of the refinements made to the process in 2017 and 2018 which have made DGN a more flexible proposition.
This discount of 13.4% is wider than the five-year average and the sector average. In our view this reflects the strong momentum trade and concentration of flows into limited areas of the market. The current share price could well prove to be a good entry point into a portfolio with more defensive qualities which may come back into favour.
|The revamped strategy has led to a period of significant outperformance
||The discount has been stubbornly wide
|Deep resources and highly experienced management, with the joint lowest OCF in the peer group
||Structural gearing, although modest, can increase downside risks (while helping on the upside)
|The quality approach should ordinarily lead to outperformance in rocky markets
||Large positions in three stocks could increase volatility|