Capturing the opportunity in Asia’s dynamic smaller companies

Hugh Young, Gabriel Sacks and Flavia Cheong,
Investment Managers, Aberdeen Standard Asia Focus PLC

• The Asian smaller companies sector has been a fertile place to invest as recovery has emerged across the region.
• Aberdeen Standard Asia Focus has made changes to ensure it captures emerging opportunities in the region’s key markets.
• The Trust has also broadened its appeal to retail investors with a changed dividend policy, 5-yearly tender offer and lower fee.

Since the start of the economic recovery in Asia, the region’s smaller companies sector has seen significant growth. It has benefited not only from economic recovery, but from the ability of dynamic companies to renew and regenerate in the face of some vast challenges. It has also been the best place to capture some of the structural shifts accelerated by the pandemic – e-commerce, digitisation or agile working.

However, the sector is constantly shifting and at Aberdeen Standard Asia Focus, we need to be alert to those shifts to ensure we give ourselves the broadest opportunity set. With that in mind, the Trust has made a number of changes.

China innovation

The first consideration has been China. China was weak in 2021 and the Trust’s relatively light position in the region was a benefit. However, there can be no doubt that much of the region’s most exciting innovation is emerging from China.

To date, the Trust’s relatively low market capitalisation cut-off has prevented wholesale investment in Chinese smaller companies, which tend to be large simply because everything in China is on a bigger scale. We have removed the $1.5bn market capitalisation limit to accommodate more investment in China and, to some extent, in India as well as to be able to invest more in our ‘winners’.

We have hired a native Mandarin speaker, Neil Sun, to help us analyse the opportunity-rich ‘A’ shares market in China. At the same time, Flavia Cheong joins the Trust as a co-lead manager, alongside Gabriel Sacks and Hugh Young. As head of Asia-ex Japan equities at abrdn, Flavia brings a wealth of experience and breadth of perspective that should help dissect the range of small cap opportunities across Asia.

Early stage companies

Initial public offerings (IPOs) have provided a range of opportunities in recent years. The IPO market has been particularly fertile in India, where a number of high growth technology companies have come to market. We were an anchor investor in Indian consumer intelligence platform Affle a few years ago and that is now amongst our top 10 holdings; we also participated in another four new issues in 2021. The IPO market has proved a good route to invest in India’s growing mobile penetration and digitisation trends as the country establishes itself as a major technology hub. We were also an early investor in momo, the Taiwanese equivalent of Amazon, which has risen 10x on our initial investment only a few years ago.

The investment trust structure allows us the flexibility to invest in these early stage companies. It also allows us to invest in markets where there may be less liquidity, but where there are higher growth companies, such as Vietnam. With this in mind, we have been extending our analyst coverage of private companies to uncover new areas of interest.

The importance of dividends

Technology is now the largest overall sector weighting in the Trust. However, 2021 showed the importance of a balance of sectors. There were times when high growth companies were in favour and other periods when more traditional companies were preferred. For example, 2021 was a strong year for Pacific Basin Shipping, which did well as trade resumed. The Trust has proved relatively defensive, capturing less of the downside as markets have fallen, while still participating in the growth of Asian markets over the period. This is how the Trust has been designed and is an important tenet of the abrdn process.

Dividend payments are an important part of this defensiveness. They increase the appeal of the Trust for shareholders, but also provide some security of return during turbulent times.

Encouraging participation

The Trust has also made changes to ensure that retail investors can participate fully in the growth of Asian smaller companies. The 5:1 share split should allow investors to buy in smaller chunks, while a performance-linked tender offer will be triggered if the Trust underperforms the MSCI Asia ex Japan Small Cap index over five years. The Board believes this should help address the discount to NAV on the Trust.

A final change is a reduction in the running costs for the Trust with an amended, tiered management fee. Currently set at 0.96% of market capitalisation, this will drop to 0.85% for the first £250 million, 0.6% for the next £500 million and 0.5% at £750 million and above.

The Asian smaller companies market allows investors to capture ‘new’ Asia – its innovation and structural changes. The Trust has been re-invigorated to ensure that it is in the best possible position to harness these opportunities and for the broadest possible range of investors to benefit.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

Aberdeen Standard Asia Focus Online Shareholder Presentation - January 2022

In advance of the AGM, in order to provide certainty, whilst encouraging and promoting interaction and engagement with our shareholders, the Board held an interactive Online Shareholder Presentation on Wednesday 19 January 2022. At the presentation, shareholders received updates from the Chairman and Manager, followed by an interactive question and answer session.

https://aberdeen-asset.kulu.net/view/4MdhJGKa6sBfe8Qn88dQxu#/

Important information

Risk factors you should consider prior to investing:

• The value of investments, and the income from them, can go down as well as up 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.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• The Company invests in smaller companies which are likely to carry a higher degree of risk than larger companies.
• 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.
• Specialist funds which invest in small markets or sectors of industry are likely to be more volatile than more diversified trusts.
• 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:

Issued by Aberdeen Asset Managers Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Authorised and regulated by the Financial Conduct Authority in the UK. An investment trust should be considered only as part of a balanced portfolio.

Find out more at www.asia-focus.co.uk or by registering for updates. You can also follow us on social media: Twitter and LinkedIn.

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