abrdn Asia Focus: January 2023 trust update

How it fits in a portfolio

The abrdn Asia Focus trust aims to boost long-term investment growth. It mainly invests in small businesses based across Asian markets. This includes both established and less-developed economies such as Thailand, India, Taiwan and Singapore. The trust could help diversify a global investment portfolio, or the Asian part of a portfolio that’s focused on larger businesses. A combination of younger, smaller businesses with exposure to emerging markets makes the trust a higher-risk option. Periods of volatility should be expected, and a long-term investment horizon is essential.

When investing in closed-ended funds you should be aware the trust can trade at a discount or premium to net asset value (NAV).

Manager

abrdn is home to one of the most experienced teams investing in Asian companies. Hugh Young is now Chairman of Asia Pacific at abrdn, and was instrumental in setting up the group's Asian equities strategy in the late 1980s. We view it positively that he's still a part of the Asia Pacific Equities team, providing mentorship to the wider team.

Young is named as the trust's lead manager, alongside Investment Director Gabriel Sacks. They also have input from other team members, who are collaborative in their investment approach. Over time Young has helped to build a strong team of analysts and portfolio managers around him, and they provide vital support, contributing research and stock ideas. We think their experience counts for a lot when it comes to investing across such a diverse range of economies.

The team is based across the globe, from Singapore and Bangkok to Hong Kong and Kuala Lumpur. This provides excellent access to companies, and insight into what's going on across the region.

Process

Young and his team's investment philosophy is based on 'long-term quality'. They believe most investors underestimate the sustainability of returns that many high-quality companies can make. They aim to find those that can generate long-term growth, which have been overlooked by others, and hold onto them for many years.

The investment process is similar across the group’s Asian portfolios, though the difference with this trust is its focus on exciting, smaller companies. As an investment trust, the managers can also use gearing (borrowing to invest), which increases potential gains when markets rise and losses when they fall, so any use of gearing increases risk.

Companies in good financial health, run by robust and trustworthy management teams are favoured by the team. They often look for a change that could help boost profits in future, such as a new product or change in the use of technology. They sometimes invest in out-of-favour companies that can be bought at a more attractive share price.

Meeting company management is important to the team. While the world is currently a little different, they can typically do this regularly as team members are based throughout Asia. They also like to engage with companies on environmental, social and governance (ESG) issues that could lead to better outcomes for both investors and society over the long run.

Young and the team typically favour businesses that rely on growing consumer wealth, though the trust has at least some exposure to most major sectors. The team invests in a spread of companies from across different sectors and economies. Importantly though, each company should be a leader within its market – for example, the business might offer a specialist product that isn't available elsewhere. Young believes financial strength is particularly important when it comes to smaller companies, as this could help see them through times of crisis.

Over the trust’s last financial year to the end of July 2022, the managers made some changes to the trust’s holdings. They increased the amount invested in China, after seeing some good opportunities at attractive valuations. This included investing in Sinoma Science and Technology, the China-based wind turbine blade producer, with the managers taking a positive view of the firm’s access to resources, capital and research and development capabilities. They also sold-out of some companies where they became less convinced of their long-term prospects, either due to disappointing execution or as a result of a rapidly changing macroeconomic environment. One of the companies sold was Raffles Medical Group. The managers grew concerned about the sustainability of COVID-19-related revenue and expect the company’s earnings to shrink.

Investors should be aware the trust can borrow money to invest with the intention of increasing returns (known as gearing), but this could magnify losses in a falling market and increases risk. At the end of the trust's last financial year in July 2022, gearing stood at 12.1%. The manager can also use derivatives, which if used, adds risk.

Culture

Hugh Young was one of the UK's first investors to build a range of Asian funds. The group has remained committed to investing in Asia ever since and we think this dedication is admirable.

Aberdeen merged with Standard Life in 2017 to become Aberdeen Standard Investments, and recently renamed as abrdn. The Asian Equities team subsequently made some small changes to their investment process, though the core of their philosophy remains intact. We're pleased to see the team has settled and encouraged that they're willing to learn and keep improving what they do.

The broader team is responsible for a range of Asian and emerging markets funds and investment trusts. Each member provides input to the wider franchise, and they're willing to share their knowledge and experience to ensure their best ideas make it into the portfolios.

ESG Integration

Young has always focused on companies with good corporate governance. Environmental and social issues have also become an increasingly important part of this over the years. Overall, the team’s work on ESG related issues has grown over time, though this is not an exclusions-based portfolio, meaning it can invest in any sector.

abrdn is a firm well known for its commitment to ESG. Responsible investing has been part of the business since it set up its Corporate Governance team in 1992 and launched its first ethical fund in 1994. We like that the firm’s policy positions on a range of divisive issues, from plastics and tobacco to palm oil and biodiversity, are easily available on their website. The firm also produces several ESG-related thought leadership articles on a monthly basis, a fortnightly podcast series and a quarterly Active Ownership report. We’re pleased to see that the firm’s commitment to ESG has filtered down to the fund level. abrdn fund managers generally see themselves as owners of businesses, not investors, and stewardship is an important part of their investment processes. The firm exercises all voting rights and engages with management to encourage best practice.

ESG and stewardship factors are included in every stock research note and each firm receives an ESG score, based on its ESG credentials and its ability to manage ESG risks. In fixed income, ESG risks are assessed and priced alongside other credit risks, and the managers encourage action that will reduce these risks. As with equities, each issuer receives an ESG risk rating. All managers have access to a central ESG team, as well as specialist on-desk analysts.

Cost

The trust's annual ongoing charge to July 2022 was 0.88%. Investors should refer to the latest annual reports and accounts and Key Information Document for details of the risks and charging structure.

If held in a SIPP or ISA the HL platform fee of 0.45% per annum (capped at £200 per annum for a SIPP and £45 for an ISA) also applies. Our platform fee doesn’t apply if held in a Fund and Share Account. As investment trusts trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges within any Hargreaves Lansdown account.

Performance

The trust's performance has been excellent since launch in 1995, though past performance isn't a guide to the future. A focus on good-quality, financially sound businesses means we expect the trust to typically hold up better in a falling market but lag a rapidly rising market.

Over the trust’s last financial year to the end of July 2022, the trust delivered a return of -1.65% to investors.

The Indonesian market performed well as it rebounded from COVID-19 restrictions and the trust’s investments here performed well accordingly. AKR Corporindo was one of these better performers with the company benefitting from this part of the commodity cycle. In Vietnam, IT-services business FPT Corp was also a better performer. The company benefitted from other businesses transitioning to the cloud and adapting their systems to newer technologies. The trust’s underweight to China also proved beneficial, with Chinese companies having to deal with multiple economic and regulatory headwinds in the period.

The market rotation away from growth and towards value companies also held back performance with the trust’s technology holdings not immune to this global trend. Taiwanese company Momo.com underperformed despite the underlying business performing well after a strong period as investors moved away from high-growth companies. The trust’s position in John Keells also hurt performance amidst a volatile economic and political environment in Sri Lanka.

There are no guarantees how the trust will perform in future though and investments in small companies based in Asian and emerging markets means performance will be volatile at times. At the time of writing the trust trades at a discount of 11.46% and has a dividend yield of 1.14% although remember yields are variable and aren’t a reliable indicator of future income.

Past performance is not a guide to the future. Source: Lipper IM to 31/12/2022.

Find out more about abrdn Asia Focus including charges

Abrdn Asia Focus Key Investor Information

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