Performance Review
Over the 12-month period to 31 July 2024 it has been a tale of two halves for Asian small caps as they traded within a narrow range in the first six months before gathering pace to finish the year on a strong note. The MSCI AC Asia Ex Japan Small Cap Index (the "benchmark") returned 14.1% in sterling terms over the period whilst your Company's net asset value ("NAV") and share price, both in total return terms, increased by 7.9% and 8.8%, respectively.
Various key macroeconomic and political themes influenced investor sentiment and market movements, such as China's slowdown, global recession concerns, US monetary policy and geopolitics, including the conflict in the Middle East.
Through the uncertainty and volatility witnessed, your Company's portfolio posted positive absolute returns, a testament to the quality and resilience of the underlying holdings. The initial months proved challenging, due to unfavourable country allocation effects, but performance saw a significant improvement in the second half, led primarily by strong stock selection in India.
Looking at the key drivers of performance, we would naturally highlight India, where the small cap market was exceptionally buoyant, rising by 50% over the year. This market strength came at a time when the stars appeared to have aligned for the country. GDP growth has been averaging 6-7% annually.
Political stability counts, too. While the result of the general election in India came as a surprise to many, Prime Minister Narendra Modi secured a third term in office, this time with a coalition government. The new government's first budget presented in July showed that fiscal prudence was high on the agenda, with a continued focus on infrastructure development, albeit with some moderation in the pace of growth. There also appeared to be efforts to plug gaps in the economy around consumption, rural demand and employment - all of which was generally well received.
We remain positive on India, as we have been since the inception of the Company almost 30 years ago, with the country representing a sizeable 27% of the portfolio at year-end, our highest country weighting. The small-cap benchmark, however, has an even higher allocation to India at 34%. While our relatively lighter exposure to India proved costly, this was more than compensated for by the strong performance of our holdings across a range of sectors. Notably, six of the portfolio's top ten stock performers this year came from India, examples include Prestige Estates, Aegis Logistics and Vijaya Diagnostic Centre.
The other key area to highlight is Taiwan, a market that is well represented in the small cap index. With global equity investors fixated on Nvidia and the rise of artificial intelligence (AI), this technology-heavy market did well. Indeed, Taiwanese corporates have benefited from both a cyclical upturn in semiconductor pricing and strong incremental demand for advanced chips. Throughout this, we have been bullish on technology, and the semiconductor sector specifically, although we have been highly selective, focusing our interest on businesses that we feel are true leaders in their field with clear and defensible business moats. As a result, we have averaged a significantly lower allocation to Taiwan over the year compared to the small-cap benchmark, which weighed on relative performance.
Elsewhere, we also saw gains from the off-benchmark exposure that the Company has to Vietnam, which was about 7% of the portfolio as of end-July 2024. The country is seeing foreign direct investments pour into higher technology sectors, especially automotive and electronics as some multinational corporations seek to reduce their reliance on China and mitigate geopolitical risks. Here, the software service company, FPT, continued to deliver impressive earnings.
In South Korea, our lighter than benchmark exposure and stock picks were positive for performance. The domestic market lagged the region, as weak export demand and disappointing domestic economic growth weighed on capex and corporate earnings. In terms of our holdings, Korea Shipbuilding & Offshore Engineering (KSOE), which we had initiated during the year, performed well.Portfolio Activity
We have continued to focus on earnings visibility and cashflow generation to ensure that the portfolio remains fundamentally strong and resilient amid the challenging environment, with very disparate performance across markets and sectors.
In China, for instance, we have shifted our exposure towards more consumer-oriented stocks which we believe have a positive long-term growth outlook despite subdued consumer spending at this point in time. This included introducing Proya Cosmetics and Tongcheng Travel to the portfolio. To fund these new positions, we exited other mainland holdings with more challenged earnings, such as Joinn Laboratories and Sinoma Science & Technology.Elsewhere, in India, we have increased our country exposure as a result of strong idea generation from the team and a positive outlook for growth. We participated in the IPO of Bharti Hexacom, a subsidiary of Bharti Airtel, as it is a pure domestic player in the Indian telecom sector with operations in Rajasthan and the North-East region. The market is close to a duopoly, with Bharti Hexacom holding a 43.5% market share. We also invested in JB Chemicals, Pharma and 360 One WAM.
Meanwhile, we introduced a new holding in Korea that we believe is well placed to ride on the decarbonisation trend in the shipping industry. Korea Shipbuilding & Offshore Engineering (KSOE) owns Hyundai Heavy Industry (80%), Samho Heavy Industry (100%), and Hyundai Mipo Dockyard (43%). Together, they form the world's largest shipbuilding company with a 17% global market share.We also added a new consumer holding in the Philippines, a large market with an improving economy as inflation stabilises and global interest rates drop. Century Pacific Food, the largest canned food company locally, caters to mass and premium markets across marine, meat, plant-based, and milk segments.
We funded the above by reducing smaller and more illiquid positions in which we had lower confidence.
Outlook
Recent volatility across markets reinforces the extent to which macroeconomic, political and policy concerns continue to affect investor sentiment. Technology stocks are among those which have borne the brunt of the volatility, although investor hopes appear to wax and wane based mostly on Nvidia's announcements. Global recession fears persist amid worries over whether the US Federal Reserve can engineer a soft landing for the US economy, while the consumer outlook remains weak in China. Geopolitics simmer in the background, with the upcoming presidential election in the US still deadlocked and tensions in the Middle East escalating.
In such a still-uncertain backdrop, there are some potential tailwinds. In September, the Federal Reserve cut interest rates by 50 basis points, suggesting a turning point in global monetary conditions. With the West leading in policy easing, we are moving into a rate cutting cycle in Asia too, that is likely to boost Asian currencies and allow more room for governments to support economic growth. This will benefit smaller companies because of their more domestic exposure. A lower rate environment also means lower funding costs for smaller companies, allowing them to pursue growth more efficiently.
Looking ahead, Asian smaller companies are forecast to deliver outsized earnings growth of around 41% in 2024, bouncing back strongly from a negative 2023. This growth significantly outpaces their larger counterparts, with large caps expected to see about 19% earnings growth and world equities around 7%. It is noteworthy that small cap companies are not only delivering earnings but are forecast to lead in earnings growth until 2025. Valuations are also on our side, with Asian smaller companies still cheap relative to their US counterparts, trading at a relative discount of about 24% to US small caps.
More broadly, micro, small, and medium-sized enterprises (MSMEs) remain important drivers of growth across developing Asia, accounting for an average 97% of all enterprises, 56% of the workforce, and 28% of a country's economic output. In effect, these companies are the backbone of Asian economies.
As a result, we see much potential in Asian smaller companies, and our portfolio of well-researched Asian small caps offers a unique investing opportunity. The portfolio is concentrated, high-conviction and highly differentiated, with an active share of close to 97%.
Cumulative performance (%)
| as at 30/09/24 | 1 month | 3 months | 6 months | 1 year | 3 years | 5 years | Since BM Change 31/7/21 | |
|---|---|---|---|---|---|---|---|---|
| Share Price | 285.0p | 2.2 | 1.7 | 9.0 | 15.0 | 9.4 | 51.9 | 18.4 |
| Diluted NAV[A] | 345.0p | 4.1 | 1.3 | 9.9 | 15.0 | 18.4 | 56.8 | 21.7 |
| Composite Benchmark | 2.4 | 0.5 | 8.2 | 14.3 | 16.6 | 65.4 | 19.6 |
Discrete performance (%)
| 30/09/24 | 30/09/23 | 30/09/22 | 30/09/21 | 30/09/20 | |
|---|---|---|---|---|---|
| Share Price | 15.0 | 3.2 | (7.9) | 42.4 | (2.5) |
| Diluted NAV[A] | 15.0 | 7.3 | (4.1) | 34.6 | (1.6) |
| Composite Benchmark | 14.3 | 11.7 | (8.7) | 33.0 | 6.6 |
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.
Source: abrdn Investments Limited and Morningstar.
Past performance is not a guide to future results.
Important information
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.
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 abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG, authorised and regulated by the Financial Conduct Authority in the UK.
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