Current portfolio positioning
SDP had 57 holdings at end October 2021, spread across a range of countries and sectors, as set out in Exhibits 2 and 3. The most notable feature of Exhibit 2 is the portfolio’s marked underweight to China, which has increased significantly over the past year. This shift has been motivated in part by concerns about ongoing regulatory risk, which, as discussed above, has the potential to further undermine profitability, especially in e-commerce and fintech. These sectors are also characterised by increasing competition, which will further erode profits. The increasing underweight to China also reflects a lack of attractive stocks in this market compared to other Asian markets. In the meantime, the trust’s increased underweight to mainland China over the past year is partially offset by a sizable, but diminishing, overweight to Hong Kong. The portfolio’s overweight to Singapore has increased and it now has small overweights to South Korea and India (from a previous underweight). It is slightly underweight Taiwan.
These moves are part of a general portfolio shift away from Northern Asia, towards India and South-East Asia, where the managers see more attractive long-term growth opportunities, at more attractive valuations. In addition, they have opened an exposure to Thailand and have added to an out of index position in Vietnam, via Vietnam Enterprise Investments, a closed-ended investment trust listed on the London Stock Exchange. This position now numbers among SDP’s top 10 holdings (Exhibit 4). The managers’ search for companies with exposure to Asian demand also accounts for longer-standing positions in ASML, a Dutch semiconductor manufacturer, BHP, an Australian metals and mining company, and Prada, the Italian luxury fashion house.
Exhibit 2: Portfolio geographic exposure at 31 October 2021 (% unless stated)
|
Portfolio end-Oct 2021 |
Portfolio end-Oct 2020 |
Change (pp) |
MSCI Ac Asia Ex Japan |
Active weight vs Benchmark (pp) |
China |
19.1 |
31.2 |
-12.1 |
39.6 |
-20.5 |
Taiwan |
16.4 |
13.0 |
3.5 |
16.8 |
-0.4 |
South Korea |
15.8 |
14.6 |
1.2 |
13.9 |
1.9 |
India |
14.3 |
9.5 |
4.7 |
13.7 |
0.6 |
Hong Kong |
13.1 |
16.7 |
-3.7 |
7.3 |
5.8 |
Singapore |
7.2 |
4.9 |
2.4 |
2.9 |
4.3 |
United Kingdom |
4.6 |
3.1 |
1.5 |
0.0 |
4.6 |
Netherlands |
2.5 |
1.5 |
1.0 |
0.0 |
2.5 |
PAC |
1.9 |
0.0 |
1.9 |
0.0 |
1.9 |
Thailand |
1.7 |
0.0 |
1.7 |
1.9 |
-0.2 |
Indonesia |
1.6 |
1.8 |
-0.2 |
1.7 |
-0.1 |
Other |
1.8 |
3.6 |
-1.8 |
2.3 |
-0.5 |
|
100.0 |
100.0 |
|
100.0 |
|
Source: Schroder AsiaPacific Fund, Edison Investment Research
At a sectoral level, the trust is significantly overweight information technology. The global appetite for digitalisation is likely to keep growing and this trend, combined with an associated demand for data processing and storage, will continue to benefit companies in these sectors. The portfolio is underweight healthcare, materials, consumer staples and consumer discretionary, where the managers believe valuations look either fair or excessive across the Asian region. They also fear growth rates and profits in some sectors may slow due to supply chain concerns and inflation pressures.
Exhibit 3: Portfolio sector exposure at 31 October 2021 (% unless stated)
Sector |
Portfolio weight end-Oct 2021 |
MSCI AC Asia ex-Japan |
Active weight vs benchmark (pp) |
Information technology |
30.9 |
23.3 |
7.7 |
Financials |
19.0 |
18.9 |
0.1 |
Consumer discretionary |
16.2 |
16.9 |
-0.7 |
Communications services |
10.3 |
10.6 |
-0.3 |
Industrials |
4.4 |
6.0 |
-1.6 |
Real estate |
3.8 |
3.9 |
-0.1 |
Materials |
3.0 |
5.2 |
-2.2 |
Energy |
2.5 |
3.0 |
-0.5 |
Healthcare |
2.5 |
4.8 |
-2.3 |
Consumer staples |
0.9 |
4.9 |
-4.0 |
Other |
6.5 |
2.6 |
3.9 |
Total |
100.0 |
100.0 |
|
Source: Schroder AsiaPacific Fund, Edison Investment Research
The recent tightening of government regulations across many areas of the Chinese economy has triggered some portfolio activity, to limit losses and as a precaution against the possibility of further restrictions. For example, late last year, the managers trimmed positions in Chinese giants Tencent, an internet content and information company, and Alibaba, an e-commerce platform, although these two companies remain among SDP’s top four holdings. The crackdown on private tutoring companies had a substantial adverse impact on SDP’s position in New Oriental Education, which operates in this sector, and the managers decided to close the position, realising a loss. However, subsequent to this sale, the stock weakened much more, justifying the exit, even though the decision to sell was painful at the time.
At the end of 2020 and in 2021, the managers also closed or took partial profits on positions in several growth stocks that had performed well during the year, including Delta Electronics, a Taiwanese electrical components supplier, and Shenzhou, a Chinese garment manufacturer. They also sold out of 51job, a Chinese employment services company that was subject to a takeover bid. At the same time, the managers trimmed profitable holdings in Samsung Electronics, a South Korean semiconductor company, and in TSMC, a Taiwanese semiconductor supplier, but they have since begun adding back to these positions in information technology, including Samsung and some of the Taiwanese names, following declines in their share prices. Samsung and TSMC are now the portfolio’s largest positions. A position in SK Hynix, a South Korean semiconductor producer, was also closed due to its high valuation, and as with Samsung and TSMC, its price has since declined to a more attractive level and the managers may re-invest soon.
Exhibit 4: Top 10 holdings (as at 31 October 2021)
Company |
Country |
Main area of business |
Portfolio weight % |
30 October 2021 |
30 October 2020* |
Taiwan Semiconductor Manufacturing |
Taiwan |
Semiconductors |
9.2 |
8.4 |
Samsung Electronics |
South Korea |
Semiconductors |
8.9 |
9.2 |
Tencent Holdings |
China |
Internet content & information |
4.8 |
9.1 |
Alibaba Group Holding |
China |
E-commerce |
4.2 |
9.1 |
HDFC Bank |
India |
Financials |
3.2 |
3.1 |
Sea Ltd |
Singapore |
Gaming & Multimedia |
3.1 |
2.1 |
Reliance Industries |
India |
Oil & gas |
2.5 |
N/A |
AIA Group |
Hong Kong |
Financials |
2.5 |
3.3 |
ASML Holdings |
Netherlands |
Semiconductors |
2.5 |
N/A |
Vietnam Enterprise Investments |
Vietnam |
Various, incl banks & real estate |
2.4 |
N/A |
Top 10 (% of holdings) |
|
|
43.3 |
51.2 |
Source: Schroder AsiaPacific Fund, Edison Investment Research. Note: *N/A where not in the Top 10 holdings at end-Oct 2020.
These portfolio sales have funded top-ups to existing positions and the acquisition of several new names. The managers’ confidence in the outlook for IT stocks saw them add to a position in MediaTek, another Taiwanese semiconductor manufacturer. As part of the shift in favour of South-East Asian stocks, they bought Singapore Exchange, a high moat business, which they believe has room to grow outside its core equity business, including in areas such as information and index and consulting services. The acquisition of Hong Kong Exchange was motivated by a correction in the share price and, in part, due to its attraction as a listing venue for Chinese companies. The portfolio has also acquired or increased positions in several South-East Asian regional banks, including Indonesia’s Bank Mandiri and Thailand’s Kasikornbank. The managers see value in these banks after pressure from low rates and COVID-19 concerns drove their share prices down to attractive levels, and they expect earnings to improve as economic activity gathers momentum.
Another new holding consistent with the move away from Northern Asia is Reliance Industries. This company is known as an oil and gas producer, but it also operates in many other sectors, including grocery and retail stores, online news and entertainment and financial services, and SDP’s managers believe some of these businesses have very long growth runways, which will be supported by the company’s digital platform. Reliance is now a top 10 holding. They have also added to a position to Maruti Suzuki, a car manufacturer, motivated by a wish to increase exposure to the Indian auto sector, where penetration is presently low, but growing rapidly. The managers view this company as one of India’s best auto producers, with good long-term potential.
Annualised portfolio turnover is presently around 31%, slightly below the average of 36% over the past five calendar years. The company does not currently hold any unlisted companies.