abrdn Asia Focus investment trust: November 2023 update

How it fits in a portfolio

abrdn Asia Focus seeks to grow income and capital over the long term by investing in high-quality businesses across Asia (including higher risk emerging markets) which can be bought at attractive valuations. Its bottom-up approach means it can look quite different from the index but still provides broad exposure to the region through countries like India, Indonesia, Taiwan, and China.

The managers' focus on higher risk smaller companies sets it apart from many of its peers who tend to focus on larger businesses. It could work well alongside one of these or add diversification to a growth orientated portfolio.

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

Hugh Young, the trust’s longstanding manager and Chairman of Asia Pacific at abrdn announced he will be retiring at the end of 2023. Young was instrumental in setting up the group's Asian equities strategy in the late 1980s and although it’s a shame to see him leave the team, it’s only natural after such a successful career for him to call it time.

The trust will be left in the capable hands of its remaining three managers: Gabriel Sacks and Flavia Cheong who have been co-managers since January 2022 and Xin-Yao Ng who was appointed earlier this year. All three have worked with Young for several years.

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

Process

The 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.

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. This investment process is similar across the group’s Asian portfolios, though the difference with this trust is its focus on exciting, smaller companies.

This whittles a large universe down to a final portfolio of around 60. Their bottom-up approach means the portfolio can look quite different to the index. For example, the managers invest more than their benchmark – known as being ‘overweight’ - in countries like Indonesia and Vietnam. In contrast, they invest a lot less in countries like India and Taiwan. That said, both countries collectively account for almost 30% of the trust. Sector wise, they find most opportunities within technology, industrials, and healthcare.

The managers invested in several new companies that met their criteria over the past year such as Taiwanese company, Sinbon Electronics which has applications across several markets including green energy and healthcare. Attractive valuations in China also presented opportunities like Autohome, the online automobile platform which the managers believe could benefit from increased consumption as the Chinese economy gets back into gear.

To make way for these purchases several companies left the portfolio. Notable sales included Pacific Basin Shipping (Based in Hong Kong) due to concerns about the future visibility of its market. Douzone Bizon, the South Korean company was also sold due to the lack of certainty around its growth trajectory.

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. Net gearing at the end of July 2023 stood at 12.1% and the trust has a maximum limit of 25%.

Culture

Aberdeen merged with Standard Life in 2017 to become Aberdeen Standard Investments, and subsequently 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 group has remained committed to investing in Asia ever since and we think this dedication is admirable.

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

abrdn is a firm well known for its commitment to Environmental, Social and Governance (ESG) investing. 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 frequent ESG-related thought leadership articles, a podcast series and an annual Stewardship 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. abrdn fixed income managers can invest in bonds issued by companies with a poor ESG risk rating, but require greater compensation via the credit spread. All managers have access to a central ESG team, as well as specialist on-desk analysts.

The company runs several exclusions-based and impact funds, which take their commitment to society, the environment, and other thematic investment goals a step further.

Cost

The trust's ongoing annual charge in the year to July 2023 was 0.92%. 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% (capped at £200 for a SIPP and £45 for an ISA) per annum 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.

Performance

Hugh Young has managed the trust since it launched in 1995 which is rare to see. Over this time, he’s delivered exceptional returns to long-term shareholders and much more than the benchmark. Remember past performance isn't a guide to the future. A focus on good-quality, financially sound businesses means we would expect the trust to typically hold up better in a falling market but lag a rapidly rising one.

Over its last financial year (to end of July 2023), the trust’s net asset value (NAV) increased by 8.29%* versus 8.03% for the MSCI AC Asia ex Japan Small Cap Index. The share price also rose by 7.27%.

The rise of artificial intelligence over the year was supportive for their investments in technology, particularly within Taiwan and Korea. In fact, Korea was home to the leading contributor to performance, Park Systems Corporation. The company manufactures atomic force microscopy systems, a powerful tool with a large addressable market. Other noteworthy performers included Taiwanese firm, Sunonwealth Electric Machine Industry and Indonesian bank, Bank OCBC NISP.

It wasn’t plain sailing for all their investments though. China and Hong Kong were headwinds for performance, with economic uncertainty and a wounded property sector impacting sentiment. Notable detractors included Chinese life sciences company JOINN Laboratories and Sinoma Science & Technology.

There are no guarantees how the trust will perform in future though and investments in smaller 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 -14.63% and has a dividend yield of 2.46% although 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 31/10/2023.