Article from Investment Trust Newsletter May 2024.  For full access to all articles and back copies, please SUBSCRIBE HERE.

SCHRODER ASIAN TOTAL RETURN INVESTMENT COMPANY 

(ATR, 438p)

Amid all of the excitement in the US about NVIDIA and the use of its computer chips to power the AI revolution, we thought it was worth looking a bit further back along the supply chain to the semiconductor manufacturers.  This market sector is dominated by Taiwan Semiconductor Manufacturing Company (TSMC), followed by Samsung, and we noted from a report in the trade news source Investment Week that Scottish Mortgage Trust (SMT, 829.1p) has bought back into TSMC for the first time in a decade.  We also know that TSMC and Samsung are the two largest holdings in the £445m Schroder Asian Total Return portfolio, managed by Robin Parbrook and King Fuei Lee.  We took the chance to catch up with Robin a couple of weeks ago, for the first time in five years.  

We remember from our write-up in 2019 that Robin was highly aware of the disconnect in Asia between GDP growth and stockmarket performance, in China in particular.  He is a bottom-up style investor, focused on individual companies and their prospects, and agnostic both about where the companies are listed (although he has views on different economies in the region) and about whether their returns are delivered through capital growth or through dividends.  The trust has been a good performer over time, currently ranked second out of six in the AsiaPacific sector in NAV terms over one, three, and five years.  It yields 2.6% and the shares trade on a discount of 7.1% that is narrower than the sector average of 10.8%, reflecting the trust’s standing.

The large exposure to semiconductors is a key feature, and part of the trust’s considerable exposure to information technology, around a third of the overall portfolio.  Tencent is the third largest holding at 3.5% of assets, but Chinese companies account for only 8.2% of the total, which is a considerable regional underweight.  There is, quite deliberately, more in Indian companies (including HDFC Bank and ICICI Bank) and also in Australia, perhaps an underappreciated market in the region.  Robin says that this trio – Taiwan, India and Australia – have been the best-performing markets in the region, and the most capitalist.  This is ultimately why he is cautious about investing in China, because capital is not allocated efficiently and the leadership does not really believe in capitalism and the free market system.  He says there are some great companies in China, but too many systemic problems to make it a larger proportion of the trust overall.  Elaborating on this viewpoint, the managers have written in detail on the subject of their concerns about China.  The country has a target for 5% annual GDP growth, but the managers say this has not been backed by any significant measures to boost flagging consumer confidence or to support and stabilise the struggling property sector.  They see weak property markets as a long-term problem along with growing bad debts in the banking system, and feel that China’s new focus on export-led growth is likely to run into major problems with further deflationary pressure, trade wars, protectionism, and growing international tension.  They say “our conviction rises to limit our China exposure to a few sectors outwith the direct remits of state policy”, adding, rather menacingly, “the long-term derating of Chinese equities may continue.”

One additional issue that tends to recur in any discussion about China is what weighting to give to the risk of a military attack on Taiwan.  Any such move could really destabilise global markets in a big way.  At the same meeting with Robin Parbrook, another speaker was Sir Sebastian Wood, a former British ambassador to China, and he gave his view on this vital question.  He said that an attack on Taiwan seems unlikely because the US is committed to defending Taiwan, in which case this would become a major war between the superpowers.  China has no appetite for that, in spite of the widespread belief in China that Taiwan should be a part of the country.

In great contrast to the high-profile politics and economic challenges faced by China, Robin and his team like to invest in a much quieter, frequently overlooked, market that is not always included in Asia-Pacific remits.  Robin says that Australia is genuinely full of good companies, many of which pay good dividends.  As the name of the trust confirms, ATR is all about total returns and is not obsessed with growth.  Schroder’s analysis shows that across the region companies with higher dividend payout ratios have a positive correlation with better corporate governance, yet high-yielding markets like Australia, Singapore, and Hong Kong are the least preferred by sell-side analysts at present.

Across the sector, Robin says that valuation indicators look fairly neutral – neither cheap nor expensive – although India is an outlier, where the excellent macroeconomic backdrop is matched by elevated valuations.  There are reasons to be careful now, but Robin says he would buy on a correction, and sees the whole geopolitical environment in India as favourable.  Turning to the stocks in the trust, the rise of artificial intelligence is a key theme, and this is intensive for both logic chips (made by TSMC, 11.3% of assets) and for memory chips (made by Samsung, 7.5% of assets), both key holdings in the trust.  The managers are wary of chasing other AI stocks though, as they feel that the market enthusiasm is not always warranted.  Other large holdings include DBS Bank, previously known as the Development Bank of Singapore, the Indian financial services provider HDFC Bank, the Taiwanese semiconductor chip company MediaTek, the Hong Kong insurance company AIA, and Bank Madiri in Indonesia.

ATR’s share price has come down from its recent peak of 460p, and is trading on a 7.1% discount to net assets that reflects its good track record.  We feel the trust represents a good balance between risk and reward in this sector and that it makes a sensible addition to a global portfolio.