Following the market trends referenced in my half-year report, Asian small caps continued to show their resilience and outpace their larger peers over the full year despite turbulent times geopolitically. The MSCI AC Asia ex Japan Small Cap Index delivered a total return of 14.1% in sterling terms, outperforming the MSCI AC Asia ex Japan Index, which rose by 7.6%.

Across small cap markets in Asia, we saw a sharp divergence in performance. At one end was India (28.1% of portfolio), the best performer by a large margin. A buoyant economy, growth in the corporate sector and substantial foreign capital inflows drove strong gains in the domestic market. There was an element of election jitters as Prime Minister Narendra Modi won a third term in office at the polls but had to settle for a coalition government with his allies. This proved short-lived, however, with investors quickly pushing the market to new all-time highs within days.

Another solid performer was Taiwan (14.4% of portfolio), as the technology-heavy market benefited from expectations of a trough in the semiconductor cycle and the rapid advance of artificial intelligence (AI) and related applications.

Investment Performance

Against this backdrop, on a total return basis, your Company’s net asset value (NAV) rose 7.9% in sterling terms for the 12 months ended 31 July 2024, while the share price rose 8.8%. Over the long term, your Company’s NAV has averaged annual growth of 11.9% since inception, an outstanding level of sustained performance, and reflective of your Manager’s ability to invest in hand-picked smaller companies in Asia that are difficult to access for UK investors.

Despite the relative underperformance, absolute returns have been reasonable relative to a broader peer group of Asian funds, and your Manager maintains a preference for more diversified exposure to the region versus the small cap index which has become increasingly concentrated across fewer markets. Stock selection has been largely positive, particularly in markets like India, where your Company’s holdings across a broad swathe of sectors have benefited from the healthy economic backdrop and good management, such as real estate developer Prestige Estates, energy holding Aegis Logistics and healthcare group Vijaya Diagnostic Centre.

Your Company’s off-benchmark exposure to Vietnam has also added value, primarily driven by FPT Corp, a diversified technology group with a fast-growing software outsourcing business and led by an entrepreneurial management team. More broadly, Vietnam is rising up fast as an alternative supply chain option amid geopolitical uncertainty, with foreign direct investments (FDI) pouring into higher technology sectors, especially automotive and electronics. Less positively, the Company’s lack of exposure to certain sub-segments of the Taiwanese technology and utilities space cost performance in relative terms, as did weaker performance from a few of the holdings in China and Singapore. You can read more about this in the Investment Manager’s Review.

Dividend and Reserves

In total, four interim dividends have been declared in respect of the financial year ended 31 July 2024 amounting to 6.42p per Ordinary 5p share (2023: 6.41p). In addition, continuing strength of dividend generation from the portfolio has allowed the Board to declare a special interim dividend of 1.0p (2023: 2.25p) in respect of the year ended 31 July 2024 which will be paid on 20 December 2024 to shareholders on the register on the record date of 22 November 2024 (ex-dividend date 21 November 2024). This special dividend brings the total distribution for the year to 7.42p (2023: 8.66p) representing a yield of 2.7% based upon the share price at the time of writing of 280.0p.

The Board’s strategy is to maintain the progressive dividend policy of the last 25 years (including with the flexibility to pay dividends out of capital reserves where merited in the future) in order to provide shareholders with a regular level of income alongside capital growth prospects. Following payment of the four interims for the year to 31 July 2024, there remains well over a year’s worth of revenue reserve to cover the Ordinary dividend.

Share Capital Management and Gearing

In line with the general trend across the investment trust sector, the Company’s shares have continued to trade at a stubbornly wide discount to NAV. The Company’s share price to NAV discount was flat over the year, opening and closing at 15%. During the period the shares have traded at an average discount of 16.1%, which remains higher than the long-term average. I would note that while the discount is wide, some of your Company’s peers are trading at similar discount levels, likely reflecting a more cautious stance by UK investors towards Asian small cap equities.

Your Board is very mindful of the negative impact of large discounts to NAV to shareholders but also share price volatility. The Board increased the pace of buybacks during the year, purchasing 2,850,000 shares (2023: 500,000) in total, 1.8% of the Company’s issued shares (excluding Treasury shares). A further 2,372,500 shares have been purchased since the end of the financial year to date.

We will continue to oversee the judicious use of share buy backs. The shares bought back in this reporting period were at an average discount to NAV of 15.5%, supporting the twin aims of reducing the volatility of any discount whilst modestly enhancing the NAV for continuing shareholders.

The Company’s net gearing at 31 July 2024 was 10.4% (2023: 12.1%) with the debt provided by the £30m Loan Notes and the £36.6 million Convertible Unsecured Loan Stock (“CULS”), redeemable in 2025. As at 22 October 2024, the latest practicable date, the net gearing stood at 11.9%. As we approach the maturity of the CULS, scheduled for 31 May 2025 the Board, in conjunction with the Manager and advisers, is reviewing the current level of gearing, alongside opportunities for repaying or converting the CULS, and will update shareholders closer to the time. In the event that suitable opportunities are not available the Board expects to repay the CULS using the proceeds of sales across the portfolio.

Board Evolution

In my half-year statement, I had welcomed two new Board members, Lucy Macdonald who replaced Randal Dunluce, the Earl of Antrim who stepped down from the Board at the last AGM in December 2023, and Davina Curling who joined with effect from 1 March 2024 as Senior Independent Director.

Both Lucy and Davina bring considerable investment management experience to the Board, and I am glad to report that both have settled in well and are already contributing their insights to the Board.

Shareholder Engagement and Annual General Meeting

The Company's Annual General Meeting is scheduled for 11:00 a.m. on 6 December 2024. In line with best practice the voting on all business at the AGM will be conducted by way of a poll which will be administered on the day by the Company’s registrar. The AGM will be preceded by a short presentation from the management team and following the formal business there will be a light shareholder buffet lunch and the opportunity to meet the Directors. In addition to the usual ordinary business being proposed at the AGM, as special business the Board is seeking to renew the authority to issue new shares and sell treasury shares for cash at a premium without pre-emption rules applying and to renew the authority to buy back shares and either hold them in treasury for future resale (at a premium to the prevailing NAV per share) or cancel them. I would encourage all shareholders to support the Company and lodge proxy voting forms in advance of the meeting, regardless of whether they intend to attend in person.

In light of the significant take up from shareholders at the online presentation held in November 2023, in advance of the AGM, the Board has decided to hold another interactive Online Shareholder Presentation which will be held at 11:00 a.m. on Monday 18 November 2024. During the presentation, shareholders will receive updates from myself and the Manager and there will be the opportunity for an interactive question and answer session where we will endeavour to answer as many questions as time allows. Following the online presentation, shareholders will still have time to submit their proxy votes prior to the AGM and I would encourage all shareholders to lodge their votes in advance in this manner. Full registration details can be found at abrdn.com/aas.

Outlook

Despite the ongoing global geopolitical and macroeconomic uncertainty, Asian small cap companies remain replete with opportunities for discovering high quality companies that are often overlooked.

Economic, political, and monetary policy news in the US will be significant. Expectations of US rate cuts are rising, which typically lead to US dollar weakness. This supports currencies and equities in Asia as the US-Asia yield differential narrows. In addition, lower US interest rates generally result in lower borrowing costs globally. In Asia, smaller companies have historically benefited more than larger ones from such a rate-cutting cycle as risk appetite returns to equities and the region, while companies have more room to borrow to expand and invest in their businesses. These investments help support corporate earnings and share prices.

I remain confident that Asian smaller companies will continue to thrive and flourish over the longer term and that your Company continues to be well-positioned to unlock this potential and, with it, very welcome sustainable long-term returns.

Read the full article in the annual report here.

Investment objective

The Company aims to maximise total return to shareholders over the long term from a portfolio made up predominantly of quoted smaller companies in the economies of Asia excluding Japan. 

Cumulative performance (%)

Discrete performance (%)

Total return; NAV cum income, with net income reinvested, GBP. Share price total return is on a mid-to-mid basis.
Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value.

[A] Including current year revenue

Source: abrdn Investments Limited and Morningstar.
Past performance is not a guide to future results

Important Information

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. The company is authorised and regulated by the Financial Conduct Authority in the UK.

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