Schroder AsianTR Inv - Final Results
16/03/2023 07:00
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RNS Number : 1264T Schroder Asian Total Retn InvCo PLC 16 March 2023
ANNUAL REPORT AND ACCOUNTS
Schroder Asian Total Return Investment Company plc (the "Company") hereby
submits its final results for the year ended 31 December 2022.
The Company's Annual Report and Accounts for the year ended 31 December 2022
("the 2022 Annual Report") are also being published in hard copy format and an
electronic copy will shortly be available to download from the Company's
website www.schroders.co.uk/satric (http://www.schroders.co.uk/satric) .
Please click on the following link to view the document:
http://www.rns-pdf.londonstockexchange.com/rns/1264T_1-2023-3-15.pdf
(http://www.rns-pdf.londonstockexchange.com/rns/1264T_1-2023-3-15.pdf)
Enquiries:
Kerry Higgins
Schroder Investment Management Limited
Tel: 020 7658 5189
Chairman's Statement
2022 was a difficult year for Asian markets and a disappointing one for the
Company. Russia's unexpected invasion of Ukraine significantly changed global
growth and inflation expectations causing a sell off in equity markets across
the board with technology and semiconductor sectors faring particularly badly
which adversely impacted the Company's performance. China's zero-COVID policy,
maintained until the last month of the year, further depressed economic and
corporate growth expectations within Asia and markets in the region were
particularly hard hit. Our Portfolio Managers reduced positions in technology
stocks most exposed to cyclical slowdown and heightened trade tensions, whilst
utilising derivatives to reduce overall market exposure.
During the year ended 31 December 2022, the Company produced a net asset value
("NAV") total return of -12.7%, under-performing the Reference Index which
fell by 7.1%. The share price total return was
-17.4% as the shares moved from trading at a premium to NAV at the start of
the year to a discount.
However, performance has markedly improved since the beginning of 2023 and
some of the losses from 2022 have been recouped. From 1 January 2023 to 7
March 2023, the NAV has risen by 7.8%, outperforming the Reference Index which
rose by 5.1%.
Further comment on performance and investment policy may be found in the
Portfolio Managers' review.
Earnings and dividends
The revenue return from the portfolio for the year increased by 34.8% to
12.47p per share from 9.25p per share in 2021. The Board has recommended a
final dividend of 11.00p per share for the year ended 31 December 2022, an
increase of 29.4% over the final dividend of 8.50p per share paid in respect
of the previous financial year. Subject to shareholder approval at the annual
general meeting ("AGM"), the dividend will be paid on 11 May 2023 to
shareholders on the register on 11 April 2023.
Promotion, share issuance and discount control
At the start of 2022, the Company's share price continued to trade above NAV
and in the first two months of the year the Company issued 340,000 new shares,
all at a premium to NAV, for a total consideration of £1.7 million (2021:
7,840,000 shares). However, following the Russian invasion of Ukraine in
February 2022, investor sentiment turned negative and Asia, in particular,
performed poorly. Our share rating, together with that of the peer group,
subsequently fell and the Company's share price slipped to a discount to NAV
as investment trust discounts widened across the board.
The Company took steps to ensure that the discount remained within the
Company's target of 5% or less and began to purchase its own shares. During
the eight months ended 31 December 2022, 3,851,448 shares, amounting to 3.5%
of the issued share capital, were repurchased, at an average discount of 5.1%,
for a total consideration of £15.7 million and placed in treasury for future
reissuance at a premium to NAV. The Company's shares traded at an average
discount of 3.9% during the year.
The Company had not bought back its own shares since 2016 and, as I have
previously mentioned, the Board is of the view that good performance supported
by good marketing is the best way to sustain a premium in the long term.
The Company will continue to implement both an issuance and a discount
management policy. Shares will be issued at a moderate premium to NAV and the
discount policy will continue to target a discount to NAV of no more than 5%
in normal market conditions. The Board believes that overall liquidity and the
relative discount to the Company's peers has also to be considered in any
decision to issue and to buy back shares.
The Board will be seeking approval from shareholders to renew the issuance and
buy back authorities at the AGM to be held on 25 April 2023, further details
of which can be found on page 96 of the 2022 Annual Report.
Gearing and the use of derivatives
The Company may use gearing to enhance performance but net gearing will not
exceed 30% of NAV. The Board has agreed a disciplined framework for using
gearing to increase market exposure, based on a number of valuation
indicators.
Gearing was actively utilised by the Portfolio Managers during the year and
ranged between 6.6% at its lowest and 13.4% at its highest. Average debt was
9.3%. Shareholders should be aware that the use of borrowing must be seen in
the context of the use of derivative hedging instruments. For the year up
until the end of September 2022, gearing was largely offset by derivatives
resulting in a neutral net exposure. However, this was reversed in the last
three months of the year when the Company was net long equity markets.
The Board
The Company announced in December 2022 that Mike Holt would be standing down
from the Board and as Chairman of the Audit and Risk Committee at the
completion of the AGM in April 2023 and that Jasper Judd would be appointed as
a non-executive Director and Audit and Risk Committee Chairman designate, with
effect from 1 February 2023. I am delighted to welcome Jasper, who is a
qualified accountant and brings a wealth of experience, to the Board. Jasper
will stand for election to the Board at the AGM in April 2023 following which
he will also take over as Audit and Risk Committee Chairman.
On behalf of the Board, I should like to thank Mike for his invaluable
contribution to the Board over the last nine years and to wish him well for
the future.
Online presentation
There will be a presentation by the Portfolio Managers at 12.00 noon on
Tuesday, 25 April 2023 which will be available to watch online. To sign up to
watch the presentation please click on this link:
https://schroders.zoom.us/webinar/register/WN_1VSXYNFaQliuaR9R3fvhPQ
Details on how to watch the presentation are also available on the Company's
webpage: www.schroders.co.uk/satric.
By using a webinar, I hope more shareholders, and interested parties, will be
able to listen to, and ask questions of, the Portfolio Managers.
AGM
The AGM will be held at 1.00 pm on Tuesday, 25 April 2023 at the Manager's
offices at 1 London Wall Place, London EC2Y 5AU. Any shareholders planning on
attending the AGM will also be able to watch the Portfolio Managers'
presentation at the Manager's offices at 12 noon, prior to the AGM.
All shareholders are encouraged to vote by proxy. Proxy votes can be submitted
electronically through the registrar's portal, by post and also by email.
Details are set out in the Explanatory Notes to the Notice of AGM and on the
Company's webpages.
Outlook
Although equity markets started the year well with a degree of optimism over
the direction of interest rates and inflation this has swiftly abated. Markets
have been unsettled by recent US economic data which may result in greater
than expected rate rises from the US Federal Reserve. Furthermore,
geopolitical tensions continue to hang over the markets. There is mounting
concern over China's lack of condemnation for the Russian invasion of Ukraine.
In addition, US/China relations remain delicate over Taiwan, US sanctions and
US restrictions on technology transfer to Chinese companies. However, the
impact of reopening in China, following the abandonment of their zero-COVID
policy, will have positive implications across the region for both economic
growth and earnings expectations. Asian equity valuations are moderate when
compared both to their historical range and against other regions, with many
attractive opportunities to be found. We have confidence that the considerable
investment experience of our Portfolio Managers, supported by an extensive
team of 39 research analysts on the ground in Asia, puts them in a strong
position to ascertain the most attractive investment opportunities in the
region.
Sarah MacAulay
Chairman
15 March 2023
Portfolio Managers' Review
2022 REVIEW
2022 has undoubtedly been one of the most disappointing years in terms of
performance for your Portfolio Managers. The Company was performing in-line
with Asian regional stock markets until the Russian invasion of Ukraine at the
end of February 2022, after which the Company materially lagged the Reference
Index over the course of the year. The end result was the Company's NAV fell
by 12.7% compared with a fall in the Reference Index of 7.1%. As we move into
2023, your Portfolio Managers have been doing a fair bit of soul-searching.
So, what are some of the key detractors to performance last year, and what
lessons have we learnt?
Detractor #1: Taiwanese and Korean semiconductors
Perhaps unsurprisingly, the Company's large positions in Taiwanese and Korean
semiconductor (foundry and fabless) companies top the year's list of negative
contributors. Stellar contributors to the Company's outperformance in 2020 and
2021, the last year has seen a reversal of fortunes as these very same
holdings handed back a third of the combined alpha that they had generated in
the previous two years. For your Portfolio Managers, the investment thesis
here has always been clear. We are bullish on the longer-term trends of
automation, electric vehicles ("EVs"), Internet of Things ("IoT"), artificial
intelligence ("AI"), cloud migration and digitalisation; we see a structural
uplift in semiconductor demand that underpins the long-term earnings of these
companies and engenders their future shareholder value creation. Being world
leaders in a fast-consolidating industry, the continued investments into
R&D by these firms, as well as the reasonable valuations they trade on,
further boost our conviction in them.
Unfortunately, short term share price performance was not to be. The global
slowdown, particularly in the consumer technology space (computers,
smartphones, televisions etc), has led to a large build up in inventories and
downgrades to earnings forecasts for the Asian technology sector. However,
even after the humbling share price experience of these names, we have seen
little that has fundamentally shaken our confidence in our long term
investment thesis. With hindsight, and being more critical of ourselves, the
lesson learnt here is that we should have been more cognisant that nothing
goes up in a straight line and that even in a structural uptrend, there will
still be mini-booms and busts along the way. This means that we should have
been more ruthless in trimming the Company's positions when the upsides to the
fair values of our names narrowed, particularly at the end of 2021 when an
element of froth entered the market. Lesson here is do not get too caught up
in hubris and be disciplined about trimming stocks as they approach our fair
values.
Detractor #2: Indian stock selection
The second drag to the Company's performance last year was the stock selection
in India. This detraction stems not just from the stocks that were held in the
Company, but also the ones that we did not hold. The Company holds a long-term
position in the Indian IT consulting industry, a traditional Indian stronghold
that benefits from the rapidly-unfolding trends of corporate digital
transformation and IT modernisation. Unfortunately a lull in IT spend by
Western clients last year has put a temporary dent in the project pipelines of
these Indian IT companies. Worried about the Ukraine war and concerned about
an impending recession, some customers have slowed their digital
transformation plans. Given that for most companies these projects are
essential for long-term competitiveness we believe it is only a matter of time
before these projects resume. Even before COVID hit, 92%(1) of companies
surveyed by McKinsey already thought that their business models were in need
of an overhaul given how disruptive an economic force digitalisation had
become. We therefore do not see this near-term cyclical weakness derailing
customers' longer-term technology ambitions and we believe Indian IT companies
are well placed to take market share given their substantial labour cost
advantage and the huge pool of young, well-educated engineers they can draw
from.
What was perplexing to your Portfolio Managers were the parts of the Indian
market that performed strongly in 2022. The Indian consumer sector, where
stocks often trade at bubble like levels, continue to do well despite muted,
and in some cases contracting, earnings. The other perplexing sector was the
Adani group companies, which over the last two years have been on a massive
acquisition spree across industries as diverse as cement and media. This not
only propelled corporate debt to giddying levels but also drove share prices
for the various group companies to stratospheric heights on the back of a
retail driven investor frenzy. At the time of writing (February 2023),
accusations of accounting fraud and share price manipulation have been raised
and this has caused an overdue collapse of this bubble at least.
Detractor #3: US housing-related plays
The last major drag on the Company's performance last year was our holdings in
a few US housing-related plays, particularly power tool giant Techtronic,
window blinds manufacturer Nien Made, fibre cement siding leader James Hardie
and plumbing fittings expert Reliance Worldwide. The poor near term
performance was perhaps not surprising. After all, the average 30-year
mortgage rate in US was only about 3% in mid-December 2021. By December 2022
though, the average rate has already more than doubled to 6.3%. A swing in
interest rates of this magnitude will always cool some demand in the market.
Long-term we remain bullish on the sector. A significant lack of housing
inventory in the country persists, and this means that long-term demand for US
housing remains well-supported. More importantly, our original investment
rationale of these companies being intangible giants who are building
ever-widening economic moats via continual investments into R&D remains
intact. As such, we view the loss of performance here as more of a cyclical
blip than a structural concern.
Hedges, debt and net exposure management
It has not been all bad news for the Company. On the brighter side, our
hedging strategy and net exposure management yielded a positive contribution
of c.20 basis points last year. That said, in a year like the last where the
market has fallen by double-digits, we would normally have expected a better
outcome. This is particularly frustrating as the calls by our hedging and
proprietary valuation models were, by and large, correct over the course of
2022. Unfortunately in this instance we were constrained by the exorbitant
prices demanded on put options through much of the year, which meant that we
were only able to buy hedges cheaply on a few rare days. Put options are
contracts that the Company uses for hedging purposes in order to try and
provide some capital protection if our models indicate that markets could
correct.
The Company was approximately 5% to 10% geared throughout 2022. However until
early October 2022, with the Company's proprietary valuation and hedging
models cautious or neutral on Asian stockmarkets, we sold index futures to
bring the Company's net exposure back to a neutral (100% invested) position.
In October 2022 with Asian stock markets very weak, around the time of the
Party Congress in China, the proprietary gearing indicators flashed BUY so we
took the Company to a 10% geared position by removing all hedges and adding to
stock positions. The Company then remained at c.10% debt from October to the
end of 2022.
Key changes and positioning at end December 2022
The Company had a relatively active 2022, which given the volatility in
markets and the changed economic backdrop was perhaps not altogether
surprising. One key change over the course of the year was a reduction in some
of the Company's technology positions. Given the much sharper cyclical
slowdown than we anticipated, and the rise in trade tensions and trade
barriers imposed on Chinese technology companies in particular, this has we
believe created winners and likely losers. The Company exited all of its
Chinese technology positions as we are worried about oversupply in China and
long-term competitiveness of many companies given US sanctions. In Korea, we
exited SK Hynix which goes into the sharp downcycle weakened by significant
debt after a badly timed acquisition; in the memory space we think Samsung
Electronics will come out of this cycle even more dominant. Elsewhere, we
exited internet stocks Naver and HKTV as we lost confidence in management
teams who seemed more focused on diversification rather than core operations.
Both stocks have fallen sharply since we exited our positions. Worries about
the advancement of state control into ever more sectors in China, and what
that is likely to mean for long term capital allocation (as we explained in
the outlook section), also led us to substantially reduce the Company's China
holdings.
What did we add to? Additions were primarily in two areas. We added to
financial stocks in Singapore and Hong Kong. This was for quite separate
reasons. Singapore is now the wealth management hub for Asia and increasingly
the corporate hub for the region. This will benefit Singapore banks who also
have broad based exposure to recovering ASEAN economies and offer attractive
dividend yields of c.4-5%. In Hong Kong, we primarily added to insurers and HK
Exchange which we expect to benefit from the re-opening of the border with
China. As we explain below, we view Hong Kong stocks as a more attractive way
to play China reopening given the much cheaper valuations. The other market we
added to over the year was Australia which now comprises 17% of the Company's
assets. This was mostly using weakness during the year to add to existing
Australian positions in the healthcare sector and we also added logistics
company Brambles and US housing play Reliance Worldwide to the Company's
holdings.
Current fund strategy - sector and market allocation as at 31 December 2022
Sector/Country (%) Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand United Kingdom United States France Vietnam Cash & Others Grand
Total
Communication Services 1.2 3.4 - 0.8 - - - - 1.4 - - - - - - - 6.9
Consumer Discretionary 1.5 1.6 - - - - - 2.9 - 3.6 1.7 - 2.5 1.8 0.5 - 16.1
Consumer Staples - - - - - - - - 0.7 - - - - - 1.1 - 1.8
Energy - - - - - - - - - - - - - - - - -
Financials 1.4 - 6.3 4.5 2.2 - - - 6.7 - - 1.1 - - - - 22.2
Banks - - 1.4 4.5 2.2 - - - 5.0 - - - - - - - 13.0
Diversified Financials - - 1.8 - - - - - 1.7 - - - - - - - 3.5
Insurance 1.4 - 3.2 - - - - - - - - 1.1 - - - - 5.7
Healthcare 5.5 - - 1.6 0.4 - - - - - - - - - - - 7.5
Industrials 2.4 0.9 2.9 - - - - 1.1 - 3.4 - - - - - - 10.8
Information Technology - - - 5.5 - 8.3 - - 1.5 15.3 - - - - - - 30.6
Materials 4.9 - - - - - - - - - - 1.9 - - - - 6.8
Real Estate - - 3.4 - - - - - - - - - - - - - 3.4
Utilities - - - - - - - - - - - - - - - - -
Cash - - - - - - - - - - - - - - - -8.7 -8.7
Derivatives - - - - - - - - - - - - - - - - -
Collective Investments - - - 2.7 - - - - - - - - - - - - 2.7
Grand Total 17.0 5.9 12.6 15.0 2.7 8.3 - 4.1 10.3 22.3 1.7 3.0 2.5 1.8 1.6 -8.7 100.0
Fund Positioning in % Stocks (%) Hedges (%)* Net Long (%)
Strategic hedges - Notional - - -
Tactical hedges - Notional - - -
Total Exposure - Notional 108.7 - 108.7
Strategic hedges - Delta-adjusted - - -
Tactical hedges - Delta-adjusted - - -
Total Exposure - Delta-adjusted 108.7 - 108.7
Cash -8.7 - -
*As at 31 December 2022 there were no hedges.
Source: Schroders.
INVESTMENT OUTLOOK
At the beginning of the Chinese Lunar New Year your Portfolio Managers
normally write a detailed investment update that summarises how we are
approaching investment in the Asian region and where we see the best
opportunities and sometimes the biggest potential pitfalls. The update below
is a summary version of the report. It is in several sections and parts were
written by each of the Portfolio Managers and by Tom Clough who has recently
joined the Company's investment team. It principally covers an update on our
investment views on China, valuations and the Company's quant models, the
importance of dividends, the technology outlook, and the Company's financials
exposure.
Before we delve into details what does the Year of the Rabbit potentially
herald? - according to Google:
"The rabbit is the symbol of longevity, peace, and prosperity in Chinese
Culture, thus 2023 is predicted to be a year of hope."
Well let's hope this prediction comes true at least!
SECTION ONE
China update
We wrote extensively on China in our last interim report but post the 20th
National Congress in October 2022, and the c.50% rise in the MSCI China over
the three months to end January 2023, we felt an update was in order. In
particular given the current volte face in views from many stockmarket
commentators, and the sensationalism that is coming from the financial press
and much of the stockbroking community, we try and provide a more fundamental,
sober and longer term investment view on the Chinese equity market.
Clearly since the interim report there have been some major policy changes -
principally the dramatic and overnight abandonment of zero-COVID policies and
a change to put the economy as the focus of policy over, for the short-term at
least, ideology.
This has caused your Portfolio Managers to take some time out for a period of
reflection and discussion. Chart 2 of the 2022 Annual Report has the questions
we have been asking ourselves (and ones we think all investors in Asia need to
think about given the importance of China in our investment universe).
Chart 2: China - Key questions investors to think about
- Do we think the Chinese economy has turned a corner despite the unpredictable
and chaotic COVID strategy?
- Do we think there will a strong post-COVID recovery in the Spring, and which
sectors will lead this?
- What has been reflected in valuations?
- Do we think President Xi has had a genuine change of heart with respect to
China's long term economic and foreign policy settings?
- In essence is China reopening a cyclical "trade" or a major structural change?
In the China section of this report we will try and tackle each of these
questions in turn. Dealing with the first question - has the Chinese economy
turned a corner despite the short term chaos? On this we are positive - the
end of zero-COVID is good news for the Chinese economy, good news for the
Asian economy and should be good news for the global economy.
At the time of writing lots of data points around Chinese New Year travel and
consumer spending are being released and it is quite clear that we are seeing
a dramatic rebound in certain sectors from very depressed levels. Chart 3 of
the 2022 Annual Report shows just how depressed levels were and the extent of
the pick up even by mid-January.
The other bit of good news (for the economy at least) is because the reopening
was rapid and completely uncontrolled it looks like main COVID waves should be
over by mid-February 2023 (Chart 4 of the 2022 Annual Report). With Omicron
much milder, as evidenced by the end of zero-COVID elsewhere in Asia, we
expect fatality rates are likely to be relatively low in China, though clearly
given suppression of information we will never know the real fatality rate.
So, the answer to the first question in Chart 2 of the 2022 Annual Report is
unequivocally yes - zero-COVID was causing serious economic weakness and was
effectively untenable so reopening is good news for the economy. The second
question is more interesting. Where is recovery likely to be strongest, and
where could it disappoint?
After the traumatic zero-COVID policies of 2022, which led to a sharp fall in
consumer confidence, we expect to see a good rebound in consumer spending. We
expect to see a repeat of the pattern from 2020/21 so retail sales in China
should rebound to c.10% after a flat 2022 (Chart 5 of the 2022 Annual Report),
however we also expect recovery will be uneven. High unemployment levels and
rising Gini coefficients are likely to mean the rebound in consumption from
the highest earners and white collar workers is strongest, whereas rural and
mass consumption we think could disappoint. Looking at the second graph in
Chart 6 of the 2022 Annual Report it is also the case that whilst goods
consumption is slightly below trend it is not dramatically so, whereas travel,
catering, "experiences" spending is very depressed. So similar to the West and
the rest of Asia we expect the "revenge" consumption will be focused in very
set areas and be driven by higher earners.
We are more cautious about the recovery potential for other areas of the
Chinese economy and see scope for disappointment. The outlook for the
manufacturing and export sector looks difficult with end demand weak,
inventories in many sectors high, and in some areas excess capacity (Chart 6
of the 2022 Annual Report). We expect this part of the economy to
substantially lag and earnings from many export and manufacturing companies to
disappoint.
The key swing factor for the Chinese economy and whether the recovery will be
stronger than we currently expect is the property market. Our views here are
mixed. As Chart 7 of the 2022 Annual Report shows Chinese property investment
is a large part of GDP and has been running at very elevated levels since the
early 2000s. Whilst we would expect Chinese property sales to now stabilise we
do not think a return to the bubble days of 2015-2020 is likely, particularly
as we have been told many times by President Xi that property is for living in
not speculation.
There are several key factors that we believe make a sustained and large
rebound in property prices and volumes unlikely. As shown in Chart 8 of the
2022 Annual Report there is a huge backlog of uncompleted properties waiting
to be finished - will ready buyers step up whilst many are still waiting years
for uncompleted properties? Secondly whilst there may be plenty of cash and
bank deposits in China the household debt level (principally) mortgages is
already high (Chart 8 of the 2022 Annual Report) as are home ownership rates.
And this is even before we start talking about long-term demographics (Chart 9
of the 2022 Annual Report).
On a more positive note, we do think a return of consumer confidence,
government measures to stabilise the finances of property developers so
unfinished properties can be completed, and the availability of
financing/lower mortgage rates should help to see a pick up in property
activity from current depressed levels. What we do not see however is property
as a structural driver of growth and recovery in China; longer term the
importance of property within the Chinese economy will shrink.
Returning to the second question in Chart 2 of the 2022 Annual Report, we
expect to see a good pick up in consumer spending that is likely to be focused
on travel, restaurants and "experiences". With no furlough schemes in China
and high unemployment levels amongst youth and blue collar workers we think
the recovery will be stronger amongst the mid and high end consumer groups and
recovery in some areas could well disappoint.
So this leads us on to the key question - given we invest in stocks not
economies - what is reflected in current valuations in China?
Chart 10 of the 2022 Annual Report has the current price-earnings ratio
("PER") of the MSCI China; it is exactly in line with it's long-term average
so to claim the market is cheap versus history you have to expect a repeat of
the Chinese internet bubble in 2020/21 (more on this later). Interestingly,
the hedging models we use within the Company's processes also have a cautious
reading on China with valuations relatively high (versus history) and business
cycle indicators very negative (admittedly some of these will change post
reopening).
As highlighted earlier, we do believe we are going to see a good recovery in
certain parts of the Chinese economy and this should lead to a strong earnings
rebound for some companies. However, after being widely talked up and sharp
market moves, is the good news reflected in share prices? We will leave
readers to judge for themselves but Chart 11 of the 2022 Annual Report has the
current valuations for a selection of genuine reopening plays in the consumer,
transport and leisure sectors in China. As can be seen, even on 2023 P/Es and
assuming an aggressive EPS recovery, these stocks are expensive.
Fundamentally, we believe Chinese stocks exposed to the consumer/reopening are
now, in the main, fully priced.
The counter argument we have had to our caution on Chinese equities at current
levels is that internet stocks are still cheap and a good way to play
reopening. We disagree with this on both counts.
Firstly, are internet stocks a reopening play? As highlighted earlier whilst
there is likely to be significant demand for travel and experiences (so this
might help travel and hotel booking websites) for e-commerce and food delivery
we would expect a slowdown, or a potential reversal of recent trends in China.
Chart 12 of the 2022 Annual Report shows GRAB, which is ASEAN's largest food
delivery platform, revenues. After ASEAN economies reopened GRAB's delivery
revenues stalled and actually shrank despite food delivery penetration in
ASEAN being very much lower than China. The second chart shows the performance
of the main Asian (ex-China) internet stocks and how they have performed on
reopening. Chart 13 of the 2022 Annual Report also shows the current
e-commerce penetration of key categories in China, after years of strong
growth key e-commerce categories look very well penetrated to us. Could a
return of travel and "experiences" lead to a reversal in market share for
e-commerce in China?
The key positive for the Chinese internet sector is the authorities in Beijing
do seem to be moving back to more predictable policy making. So the sudden and
often unpredictable regulatory onslaught on the sector appears to be easing.
There also appears to be a concerted effort underway by the authorities to try
and revive confidence in Chinese stockmarkets and to attract back foreign
investors, so the "techlash" is probably over.
There are however two sides to this. State control looks set to increase in
coming years as all key internet platforms sell small stakes to Government
entities via so called "Golden Shares". These golden shares effectively give
the state overall control of companies via the right to appoint board
directors and senior management and to veto important decisions and set
investment priorities. There is little doubt in our mind who will be in charge
of major strategic decisions at the large Chinese internet stocks going
forward.
This is of course happening across many sectors in China as state money funds
start ups in areas considered a key priority by the authorities in Beijing. As
noted in the Economist in its 26 November 2022 issue, of the 38 largest
initial public offerings in China in the first nine months of 2022, which
raised US$34bn, around 22% of the proceeds came from state entities. To grow
and be successful in China in many sectors you clearly need to be part of the
"Party Plan". For foreign shareholders the party plan may not be the best -
our experience over 35 years of investing is that state owned or controlled
companies tend not to invest well regardless of which country they operate in
- as Chart 14 of the 2022 Annual Report shows, experience in other sectors in
China doesn't fill us with confidence that golden shares will be very "golden"
for investors.
So, going back to the key questions on China from Chart 2 of the 2022 Annual
Report we think reopening is now fully reflected in Chinese equity valuations
and with the state continuing to advance (and Adam Smith's invisible hand in
retreat) the current rebound and policy reset has not led to a major
structural change in our investment views.
So how is the Company positioned in China? Optically from Chart 15 of the 2022
Annual Report the portfolio looks to have a low weighting in China at c.6%.
This is however deceptive. The Company has 13% in Hong Kong stocks, most of
which are exposed to China reopening - whether they are shopping mall
operators, insurers, or domestic Hong Kong stocks which will benefit from the
reopening of the border with China. The Company also has exposure to China
reopening and travel through it's holdings in LVMH, Las Vegas Sands and
Prudential PLC. So, in summary, whilst we remain structurally cautious on
Chinese equities for the reasons outlined above the Company does have exposure
to China reopening but this is mostly via stocks listed on other stockmarkets
where valuations are more attractive.
Chart 15: Different ways to skin a rabbit - we have exposure to a consumer
rebound in China but not
via stocks classified as "China" by MSCI
Current strategy - sector and market allocation as at 31 December 2022
Sector/Country (%) Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand United Kingdom United States France Vietnam Cash & Others Grand
Total
Communication Services 1.2 3.4 - 0.8 - - - - 1.4 - - - - - - - 6.9
Consumer Discretionary 1.5 1.6 - - - - - 2.9 - 3.6 1.7 - 2.5 1.8 0.5 - 16.1
Consumer Staples - - - - - - - - 0.7 - - - - - 1.1 - 1.8
Energy - - - - - - - - - - - - - - - - -
Financials 1.4 - 6.3 4.5 2.2 - - - 6.7 - - 1.1 - - - - 22.2
Banks - - 1.4 4.5 2.2 - - - 5.0 - - - - - - - 13.0
Diversified Financials - - 1.8 - - - - - 1.7 - - - - - - - 3.5
Insurance 1.4 - 3.2 - - - - - - - - 1.1 - - - - 5.7
Healthcare 5.5 - - 1.6 0.4 - - - - - - - - - - - 7.5
Industrials 2.4 0.9 2.9 - - - - 1.1 - 3.4 - - - - - - 10.8
Information Technology - - - 5.5 - 8.3 - - 1.5 15.3 - - - - - - 30.6
Materials 4.9 - - - - - - - - - - 1.9 - - - - 6.8
Real Estate - - 3.4 - - - - - - - - - - - - - 3.4
Utilities - - - - - - - - - - - - - - - - -
Cash - - - - - - - - - - - - - - - -8.7 -8.7
Derivatives - - - - - - - - - - - - - - - - -
Collective Investments - - - 2.7 - - - - - - - - - - - - 2.7
Grand Total 17.0 5.9 12.6 15.0 2.7 8.3 - 4.1 10.3 22.3 1.7 3.0 2.5 1.8 1.6 -8.7 100.0
Fund Positioning in % Stocks (%) Hedges (%)* Net Long (%)
Strategic hedges - Notional - - -
Tactical hedges - Notional - - -
Total Exposure - Notional 108.7 - 108.7
Strategic hedges - Delta-adjusted - - -
Tactical hedges - Delta-adjusted - - -
Total Exposure - Delta-adjusted 108.7 - 108.7
Cash -8.7 - -
*As at 31 December 2022 there were no hedges.
Source: Schroders. For illustrative purposes only and should not be viewed as
a recommendation to buy or sell.
SECTION TWO
1. WHAT OUR MODELS ARE SAYING ABOUT ASIA IN 2023
As we enter the year 2023, our models, on aggregate, are feeling rather mixed
about the prospects of Asian markets.
Specifically, our models anticipate some challenges for the region in the
coming year. One major concern is that, based on the leading indicators we
track, the earnings environment for Asia looks lacklustre. This is attributed
to a variety of factors, including a deteriorating global economic outlook,
weak export growth, a still-tight monetary policy stance, and lethargic
earnings expectations. Together, our indicators suggest that earnings growth
for Asian companies will remain sluggish until at least the second half of the
year, which creates a challenging domestic environment for regional markets.
Meanwhile, the mounting indebtedness of some Asian countries since the Global
Financial Crisis ("GFC") also represents a longer-term worry. With the
exception of India and Indonesia where total-debt-to-GDP has stayed largely
flat, most Asian countries have seen their gearing ratios rise significantly
over the last two decades. This is clearly bad news as it renders the region
vulnerable to any macroeconomic shock, and places a large economic burden on
future generations.
Thankfully, our models also identify some mitigating positive factors in the
near-term. Firstly, investor sentiment towards the region appears to be at a
low point. After reaching a peak of 17% of total market capitalization in
2014, overseas investors have been pulling their money out of the region,
bringing the proportion of foreign holdings back to levels seen three decades
ago. Historically, this has been a strong and reliable contrarian indication
for the region, and bodes well for Asian equity markets in the near-term.
Secondly our top down and bottom up valuation indicators as highlighted below
whilst off recent lows (or buy territory) to more neutral levels are still
indicating Asian equities are offering reasonable value. These are the
indicators we use to help determine the level of gearing to use in the Company
and with both flagging "buy" in October 2022 we moved the Company to c.10%
debt position at the time.
The combination of these negative and positive factors hopefully explain our
mixed views on markets. In October 2022 valuations were cheap and we could see
good opportunities but after a 25% rise in Asian markets over the following
three months the obvious undervaluaton has gone. With put option pricing
slowly retreating from previous elevated levels, the Company is currently
unhedged. However, if opportunities arise to purchase some protection at a low
cost, we will certainly consider doing so.
2. CONSENSUS VIEWS AND WHERE WE STAND
When one looks at Asian markets today, what are some of the key consensus
views? To answer that, your Portfolio Managers surveyed the year-end research
of the main sell-side Asian strategists based in major US and European broking
houses.
Key consensus view #1: Overweight China
Overwhelmingly, the most consensus call today is going overweight China. With
the exception of one broker who is sitting on an equal-weight call, everybody
seems to have hopped aboard the China bandwagon, and for exactly the same
reasons. It is about playing the reopening trade as the country exits its
zero-COVID policy. As highlighted earlier, valuations for the fundamentally
attractive Chinese equities are high and we think the reopening "trade" from
here is more than reflected in stock prices. Whenever your Portfolio Managers
hear the whole market singing from the same hymn sheet, it is always a large
cause for concern. Putting aside the question of whether the stated reasons
prove to be ultimately correct, one must seriously wonder if these potential
positives are not already well priced in.
Key consensus view #2: Underweight Taiwan
If China is the most favoured country by the sell-side at this point in time,
then sitting across the straits is a much unloved Taiwan which more than half
the strategists are bearish on while another fifth are sitting on the fence.
The reasons for this scepticism are two-fold. The first concern is related to
the current slowing domestic aggregate demand outlook which, combined with the
ongoing global export weakness, is threatening the country's near-term
economic prospects. The second and more significant worry is the ongoing
correction in the tech inventory cycle that is still not showing any signs of
bottoming out. That is not new news though, and one that is certainly
well-recognised by global investors. After all, the cumulative net foreign
flows into Taiwan equities has been deep in negative territory for over two
years. This has driven the market's risk-love indicator, a contrarian
indicator with a reasonable track record, into the panic zone. Meanwhile, on
any valuation measure, the market is close to, if not already at, the bottom
of its historical trading range. Indeed, our own analysts are now pointing to
an abundance of Taiwanese stocks that are offering positive upsides to their
fair values. For the brave, the market is a fertile hunting ground for
long-term investment opportunities.
A contrarian portfolio
So where does that leave us? The world has clearly entered 2023 with two key
consensus views, namely going overweight China and underweight Taiwan. In our
view, these views are already well reflected in current share prices. When
your Portfolio Managers cast our sights over longer investment horizons, we
actually find limited stock opportunities in China and a plethora of them in
Taiwan. This is why even though China comprises almost a third of the
reference Asian stock universe, Chinese names barely account for a tenth of
our portfolio. Meanwhile, for Taiwan and to a lesser degree Singapore, our
Company has considerable exposures to both markets despite them being equally
unloved by the stockbroking community.
3. THE POWER OF INVESTING FOR DIVIDENDS IN ASIA
When will the Fed be done with its rate hikes? Does the spectre of recession
push global central banks into monetary loosening mode soon? As global
investors grapple with the future direction of travel of global interest
rates, it is sometimes worth reminding ourselves that regardless of where
interest rates go, a core investment truth remains: Dividends are an important
part of equity investing in Asia.
The long-term case for investing for dividends in Asia
It is no secret that stock markets are generally obsessed with share price
appreciation. As tales of multi-baggers abound in Asia, many an investor has
been seen chasing pipe dreams. Yet when one takes a step back and decomposes
the region's equity performances, one will be surprised to learn that in
reality almost three-quarters of Asia's long-run equity returns have
historically come from dividends, and it will be harebrained to ignore this
major component of total returns. Just consider the experiences of Singapore
and Korea. Compatriots in the now-defunct Four Asian Tigers club, both
countries were known for their rapid economic growth rates in the 90's which
propelled the economies from agrarian societies of the 1960s into the
industrialised nations that they are today. Both their stock markets have also
delivered almost identical price returns over the last 35 years. And yet this
is where the similarities end. Generally viewing the notion of paying
dividends as a sign of failure, Korean corporates have largely kept their
payout ratios unchanged over the last two decades even as their Singaporean
counterparts steadfastly raised theirs. This has seen companies from the Lion
City deliver a whopping 690% dividend return to their investors over
1988-2022, a figure that easily dwarfs the 345% from the Land of the Morning
Calm. For investors hoping to take a leaf our of the history books, focusing
on dividends is clearly key.
Higher dividends = Higher earnings growth
Doubters however balk at this notion. Why bother with boring dividends in a
vibrant place like Asia, they ask? After all, only companies which have run
out of growth opportunities pay dividends. Aren't dividend-paying companies
really just dull, slow-growing companies? Contrary to this belief, companies
that pay high dividends are neither low-growth nor boring. Because corporate
managers have better information about their future prospects and loathe
cutting dividends, they often only pay high dividends if they are confident
that their future earnings are robust enough to sustain the payout. This
explains why companies that pay high dividends today are routinely also the
ones registering the fastest earnings growth tomorrow. Academics call this
phenomenon the "dividend-signalling effect". As such, for investors seeking to
benefit from the Asian economic growth story, focusing on high-payout
companies is definitely key.
Higher dividends = Better corporate governance
In a region riddled with corporate governance pitfalls, focusing on dividends
has the added benefit of keeping investors away from potential disasters.
Companies reduce the temptation to waste money on value-destroying investments
when they return excess cash to shareholders. They also subject themselves to
more stringent levels of stakeholder scrutiny when they next tap the markets
for funds. Meanwhile, focusing on dividends also helps investors avoid
companies with "fake" earnings because dividends can only be paid out of real
earnings and real cash flows. As a result, Asian companies that pay high
dividends are frequently also those with high corporate governance standards.
Our strong belief in the importance of dividends is perhaps most clearly
reflected in our portfolio. Every single stock that we hold, with the
exception of two, pays dividends today. And of the two that are not doing so
at this time, one of them is expected to start paying out soon. It also
explains why we traditionally have disproportionately more of our portfolio in
the markets of Australia, Hong Kong and Singapore, and less in China and
Korea. After all, these markets do stand at opposite ends of the region's
dividend payout spectrum.
In your Portfolio Managers' view, given how big a component of long-term
equity returns dividends have historically been any investor who is looking
for fast-growing companies with strong corporate governance in Asia will do
well to pay heed to them.
SECTION THREE
1. TECHNOLOGY OUTLOOK
As we highlighted earlier our technology holdings and semi-conductors stocks
in particular were a key detractor to 2022 performance. However, we continue
to be bullish on their long-term outlook given digitalisation and the
competitive positioning of the companies we own in our portfolio. Even more so
given they have given up all their COVID gains.
2023 will be a difficult year for technology demand amid a continued slowdown
in consumer demand. Your Portfolio Managers don't know whether a US recession
will or won't occur but we expect some technology sectors like personal
computers (PCs) will see ongoing weakness amid strong pull-forward in demand
during the COVID years.
Our portfolio is positioned towards three key technology themes:
1. Beneficiaries of structural demand - particularly in
servers and artificial intelligence (AI);
2. Balance sheet strength;
3. Further consolidation within the semi-conductor supply
chain
Within foundry we remain of the view that there has been a structural shift
eastwards in the ability to fabricate leading edge nodes. As data from Credit
Suisse shows, TSMC now enjoys nigh on monopolistic positioning in 7nm and 5nm
with a similar market share expected in 3nm.
As we move into the era of "high performance compute" as TSMC calls it (code
words for servers and artificial intelligence) they are very well placed to
extract high returns. AMD continues to take market share away from Intel
(partly because TSMC can fabricate their chips at leading edge versus Intel's
in-house fabrication being a generation behind) and they will almost
exclusively capture the growing market for artificial intelligence given
Nvidia uses TSMC as a sole supplier for leading edge GPUs.
Memory is another area where we think there is likely to be market share
shifts. Memory companies highlight why balance sheets are all important at
this point of the cycle. DRAM (where memory companies make their profits) is
currently going through a severe correction where heightened inventory means
there is zero demand elasticity even as prices reach cash cost.
Samsung Electronics - the lowest cash cost producer - could well break its own
internal record of never posting more than three consecutive quarters of
operating losses.
The difference between this cycle and the last correction in 2018 is that
Samsung's key Korean competitor has been on a buying spree, spending c$10bn in
M&A and giving investors c$3bn in dividends they with hindsight could ill
afford. Micron and Samsung have been better corporate stewards resisting
acquisitions at the top of the cycle and returning $4bn and $43bn in capital
to shareholders.
It is no surprise to your Portfolio Managers which company (SK Hynix) has had
to cut utilisation rates first. With a very high level of fixed costs the unit
economics of memory worsen materially once utilisation rates reduce - this
cycle is likely to leave SK Hynix a weaker long-term competitor.
To summarise, we believe at an aggregate level that 2023 will be a year of
inventory digestion and we expect continued pockets of weakness in consumer
demand (PCs in particular). Your Portfolio Managers' view however is that we
are approaching the nadir of bad news, which is why we remain heavily weighted
in TSMC and Samsung Electronics which we believe will come out of this cycle
in a stronger competitive position. Looking further forward we continue to be
bullish on the increase in silicon content and the high returns on capital
that a consolidated Asian supply chain can provide, which given reasonable
valuation is why the portfolio remains significantly exposed to the sector.
2. ASEAN AND BANKING
On the topic of banking, we thought we would end the report with an update on
how we are thinking about our ASEAN and Indian exposure. The Company is
positioned in best in-class Indian, Indonesian and Singaporean banks. Your
Portfolio Managers continue to be recommended Thai banks by brokers as the
natural China re-opening trade and we don't doubt that Chinese consumers will
return to Thailand for their holidays.
However, Thai banks typically exhibit higher credit losses than peers and
naturally find it difficult to lend into an indebted economy (see chart
earlier in Section 2 of the 2022 Annual Report). We note that even when
tourism was booming from 2016-2019 credit loss ratios were markedly higher
than peers.
We prefer to have our banking exposure in countries that generate superior
return on assets through their fee and commission income (e.g. Singapore
banks) or those where there is a long runway for credit expansion and select
banks taking market share whilst underwriting risk better than peers (India
and Indonesia). This informs our positioning in Singaporean, Indonesian and
Indian banks.
CONCLUDING REMARKS
Well done to any reader who has managed to read the whole report; the perils
of having three separate authors (the Portfolio Managers and Tom Clough who
has recently joined the Company's investment team) penning their thoughts mean
updates tend not to be short. Hopefully the report provides a broad update on
our investment views as we enter the Year of the Rabbit. Key messages are we
are moderately optimistic on prospective returns, China reopening however
looks more than reflected in valuations, we are happy to stick with our
technology positions and see selected opportunities in financials and consumer
names. Capital allocation, the importance of dividends and long-term return on
invested capital are however the key determinants of the Company's holdings.
Robin Parbrook and Lee King Fuei
15 March 2023
Past performance is not a guide to future performance and may not be repeated.
The value of investments and the income from them may go down as well as up
and investors may not get back the amounts originally invested.
The securities shown above are for illustrative purposes only and are not to
be considered a recommendation to buy or sell.
Strategic Report
Principal and emerging risks and uncertainties
The Board, through its delegation to the Audit and Risk Committee, is
responsible for the Company's system of risk management and internal controls
and for reviewing its effectiveness. The Board has adopted a detailed matrix
of principal risks affecting the Company's business as an investment trust and
has established associated policies and processes designed to manage and,
where possible, mitigate those risks, which are monitored by the Audit and
Risk Committee on an ongoing basis. This system assists the Board in
determining the nature and extent of the risks it is willing to take in
achieving the Company's strategic objectives. Both the principal risks and
uncertainties and the monitoring system are also subject to regular, robust
review. The last review took place in March 2023. Following this review, the
Board added geopolitical and political risk and ESG and climate change risk to
the list of principal risks.
During the year, the Board also discussed and monitored a number of risks that
could potentially impact the Company's ability to meet its strategic
objectives. The Board received updates from the Portfolio Managers, Company
Secretary and other service providers on emerging risks that could affect the
Company. The Board was mindful of the following emerging risks during the
year: an escalation or expansion of the conflict in Ukraine; heightened
tensions in the US-China relationship, especially relating to Taiwan and to
potential further US and European sanctions; and the continuing risk of a
global recession.
Risk and Mitigation and management
Although the Board believes that it has a robust framework of internal
controls in place this can provide only reasonable, and not absolute,
assurance against material financial misstatement or loss and is designed to
manage, not eliminate, risk.
Actions taken by the Board and, where appropriate, its committees, to manage
and mitigate the Company's principal risks and uncertainties are set out in
the table below.
Risk Mitigation and management
Geopolitical and political
Geopolitical risk results from threats to normal relationships between The Board recognises that the potential for mitigation is likely to be
countries or regions that create uncertainty and disruption to economies and limited. However, geopolitical and political risk is closely monitored and
financial markets. This includes regional tensions, trade wars, economic considered by the Board and Manager.
sanctions and conflict.
At each Board meeting the Manager reports on geopolitical and political
Currency rates and borrowings drawn down by the Company, as well as markets challenges including military and diplomatic events and changes to
generally, may be affected by geopolitical developments and stockmarket legislation. These factors are also evaluated and assessed as part of stock
volatility or illiquidity arising from geopolitical developments could selection, asset allocation and the regular assessment of the portfolio. The
adversely affect valuations. Manager also remains in close communication with investee companies throughout
the year in respect of these factors.
Changes to public policy in the US, UK, or in the Asia Pacific region, could
also impact the Company in the future. In conjunction with the Manager, the Board continues to assess the potential
consequences of geopolitical and political risk for the Company's future
activities.
Strategic
The Company's investment objectives may become out of line with the The appropriateness of the Company's investment remit is periodically reviewed
requirements of investors, resulting in a wide discount of the share price to and the success of the Company in meeting its stated objectives is monitored.
underlying NAV per share.
The share price relative to NAV per share is monitored and the use of buy back
authorities is considered on a regular basis.
The marketing and distribution activity is actively reviewed.
Proactive engagement with shareholders.
The Company's cost base could become uncompetitive, particularly in light of The ongoing competitiveness of all service provider fees is subject to
open ended alternatives. periodic benchmarking against their competitors.
Annual consideration of management fee levels.
Investment management
The Manager's investment strategy, if inappropriate, may result in the Company Review of: the Manager's compliance with its agreed investment restrictions,
underperforming the market and/or peer group companies, leading to the Company investment performance and risk against investment objectives and strategy;
and its objectives becoming unattractive to investors. relative performance; the portfolio's risk profile; and whether appropriate
strategies are employed to mitigate any negative impact of substantial changes
in markets.
Annual review of the ongoing suitability of the Manager is undertaken.
Financial and currency
The Company is exposed to the effect of market and currency fluctuations due The risk profile of the portfolio and appropriate strategies to mitigate any
to the nature of its business. A significant fall in regional equity markets negative impact of substantial changes in markets are discussed with the
or substantial currency fluctuation could have an adverse impact on the market Manager.
value of the Company's underlying investments.
The derivative strategy employed by the Manager is subject to review by the
Board.
The Board considers the overall hedging policy on a regular basis.
The Company's operating expenses comprise predominantly variable costs, which
would fall pro-rata in the event of a market downturn.
Custody
Safe custody of the Company's assets may be compromised through control The depositary reports on safe custody of the Company's assets, including
failures by the depositary. cash, and portfolio holdings are independently reconciled with the Manager's
records.
Review of audited internal controls reports covering custodial arrangements.
An annual report from the depositary on its activities, including matters
arising from custody operations is received.
Gearing and leverage
The Company utilises credit facilities. These arrangements increase the funds Gearing is monitored and strict restrictions on borrowings imposed: gearing
available for investment through borrowing. While this has the potential to continues to operate within pre-agreed limits so as not to exceed 30% of net
enhance investment returns in rising markets, in falling markets the impact asset value.
could be detrimental to performance.
The Board oversees the Manager's use of derivatives.
Accounting, legal and regulatory
In order to continue to qualify as an investment trust, the Company must Service providers give regular confirmation of compliance with relevant laws
comply with the requirements of Section 1158 of the Corporation Tax Act 2010. and regulations.
Breaches of the UK Listing Rules, the Companies Act or other regulations with Shareholder documents and announcements, including the Company's published
which the Company is required to comply, could lead to a number of detrimental annual report, are subject to stringent review processes.
outcomes.
Procedures established to safeguard against disclosure of inside information.
Service provider
The Company has no employees and has delegated certain functions to a number Service providers are appointed subject to due diligence processes and with
of service providers, principally the Manager, depositary and registrar. clearly documented contractual arrangements detailing service expectations.
Failure of controls, and poor performance of any service provider, could lead
to disruption, reputational damage or loss.
Regular reports are provided by key service providers and the quality of their
services is monitored. The Directors also receive presentations from the
Manager, depositary and custodian, and the registrar on an annual basis.
Review of annual audited internal controls reports from key service providers,
including confirmation of business continuity arrangements and IT controls,
and follow up of remedial actions as required.
Cyber
The Company's service providers are all exposed to the risk of cyber attacks. Service providers report on cyber risk mitigation and management at least
Cyber attacks could lead to loss of personal or confidential information or annually, which includes confirmation of business continuity capability in the
disrupt operations. event of a cyber attack.
In addition, the Board received presentations from the Manager, depositary and
custodian, and the registrar on cyber risk.
ESG and climate change
The failure of the Manager to identify ESG issues, including the impact of The Manager's strong ESG policies, including those relating to climate change,
climate change, could impact shareholder returns due to valuation issues in which have been adopted by the Company, are fully integrated into the
investee companies and the Company's shares becoming less attractive to investment process, as set out in the Strategic Report.
investors.
Investments are valued at fair value and reflect market participants' views of
ESG and climate change risk on the Company's portfolio investments.
The Manager regularly reports to the Board on ESG and climate change matters,
including engagement with investee companies. Any investor feedback is also
taken into consideration by the Board.
Risk assessment and internal controls review by the Board
Risk assessment includes consideration of the scope and quality of the systems
of internal control operating within key service providers, and ensures
regular communication of the results of monitoring by such providers to the
audit and risk committee, including the incidence of significant control
failings or weaknesses that have been identified at any time and the extent to
which they have resulted in unforeseen outcomes or contingencies that may have
a material impact on the Company's performance or condition.
No significant control failings or weaknesses were identified from the audit
and risk committee's ongoing risk assessment which has been in place
throughout the financial year and up to the date of this report. The Board is
satisfied that it has undertaken a detailed review of the risks facing the
Company.
A full analysis of the financial risks facing the Company is set out in note
22 to the accounts on pages 90 to 95 of the 2022 Annual Report.
Viability statement
The Directors have assessed the viability of the Company over the five year
period ending 31 December 2027, taking into account the Company's position at
31 December 2022 and the potential impact of the principal and emerging risks
and uncertainties it faces for the review period. This is further detailed in
the Chairman's Statement, Portfolio Managers' Review and principal and
emerging risks and uncertainties sections of this report. The Directors have
assessed the Company's operational resilience and they are satisfied that the
Company's outsourced service providers will continue to operate effectively.
The Board believes that a period of five years reflects a suitable time
horizon for strategic planning, taking into account the investment policy,
liquidity of investments, potential impact of economic cycles, nature of
operating costs, dividends and availability of funding. In its assessment of
the viability of the Company, the Directors have considered each of the
Company's principal and emerging risks and uncertainties detailed on pages 52
to 54 of the 2022 Annual Report and in particular the impact of a significant
fall in regional equity markets on the value of the Company's investment
portfolio.
In preparing these financial statements the Directors have considered the
impact of the Company's emerging risks as set out on page 52 of the 2022
Annual Report, and have concluded that there was no further impact to be taken
into account as investments are valued based on market pricing. In line with
FRS102 investments are valued at fair value, which for the Company are quoted
bid prices for investments in active markets at the statement of financial
position date and therefore reflect market participants' views of emerging
risks on the investments held.
The Directors considered the beneficial tax treatment the Company is eligible
for as an investment trust. If changes to these taxation arrangements were to
be made it would affect the viability of the Company to act as an effective
investment vehicle.
The Directors reviewed a stress test in which the Company's NAV dropped by 50%
and noted that, based on the assumptions in the test, the Company would
continue to be viable over a five year period.
The Directors have also considered the Company's income and expenditure
projections and the fact that the Company's investments comprise readily
realisable securities which can be sold to meet funding requirements if
necessary. Based on the Company's processes for monitoring operating costs,
the Board's view that the Manager has the appropriate depth and quality of
resource to achieve superior returns in the longer term, the portfolio risk
profile, limits imposed on gearing, counterparty exposure, liquidity risk and
financial controls, the Directors have concluded that there is a reasonable
expectation that the Company will be able to continue in operation and meet
its liabilities as they fall due over the five year period of their
assessment.
Going concern
The Directors have assessed the principal and emerging risks and uncertainties
(including whether there are any emerging risks) and the matters referred to
in the viability statement. The Directors noted the Company's portfolio is
comprised of liquid stocks, and the Company's operating expenses are
predominantly variable costs, which would fall pro-rata in the event of a
severe market downturn. Based on the work the Directors have performed, they
have not identified any material uncertainties relating to events or
conditions that, individually or collectively, may cast significant doubt on
the Company's ability to continue as a going concern for the period assessed
by the Directors, being the period to 31 March 2024 which is at least 12
months from the date the financial statements were authorised for issue.
By order of the Board
Schroder Investment Management Limited
Company Secretary
15 March 2023
Statement of Directors' Responsibilities
The Directors are responsible for preparing the annual report, and the
financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have prepared the financial
statements in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising Financial Reporting
Standard (FRS) 102 "The Financial Reporting Standard applicable in the UK and
Republic of Ireland" and applicable law). Under company law the Directors must
not approve the financial statements unless they are satisfied that they give
a true and fair view of the state of affairs of the Company and of the return
or loss of the Company for that period. In preparing these financial
statements, the Directors are required to:
- select suitable accounting policies and then apply them
consistently;
- make judgements and accounting estimates that are
reasonable and prudent;
- state whether applicable UK Accounting Standards,
comprising FRS 102, have been followed, subject to any material departures
disclosed and explained in the financial statements;
- notify the Company's shareholders in writing about the
use of disclosure exemptions in FRS 102, used in the preparation of the
financial statements; and
- prepare the financial statements on a going concern
basis unless it is inappropriate to presume that the Company will continue in
business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements and the Directors'
Remuneration Report comply with the Companies Act 2006. They are also
responsible for safeguarding the assets of the Company and hence for taking
reasonable steps for the prevention and detection of fraud and other
irregularities.
The Manager is responsible for the maintenance and integrity of the webpage
dedicated to the Company. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
Each of the Directors, whose names and functions are listed on pages 56 and
57 of the 2022 Annual Report, confirm that to the best of their knowledge:
- the financial statements, which have been prepared in
accordance with United Kingdom Generally Accepted Accounting Practice (United
Kingdom Accounting Standards and applicable law), give a true and fair view of
the assets, liabilities, financial position and net return of the Company;
- the Strategic Report contained in the report and
accounts includes a fair review of the development and performance of the
business and the position of the Company, together with a description of the
principal and emerging risks and uncertainties that it faces; and
- the annual report and accounts, taken as a whole, is
fair, balanced and understandable and provides the information necessary for
shareholders to assess the Company's position and performance, business model
and strategy.
On behalf of the Board
Sarah MacAulay
Chairman
15 March 2023
Income Statement
for the year ended 31 December 2022
2022 2021
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains on investments held at fair value through profit or loss - (86,397) (86,397) - 35,882 35,882
Net gains/(losses) on derivative contracts - 9,487 9,487 - (7,881) (7,881)
Net foreign currency losses - (5,341) (5,341) - (502) (502)
Income from investments 16,278 63 16,341 12,195 3,338 15,533
Other interest receivable and similar income 34 - 34 84 - 84
Gross return/(loss) 16,312 (82,188) (65,876) 12,279 30,837 43,116
Investment management fee (809) (2,427) (3,236) (913) (2,740) (3,653)
Performance fee - - - - (133) (133)
Administrative expenses (720) - (720) (793) - (793)
Net return/(loss) before finance costs and taxation 14,783 (84,615) (69,832) 10,573 27,964 38,537
Finance costs (300) (903) (1,203) (122) (352) (474)
Net return/(loss) before taxation 14,483 (85,518) (71,035) 10,451 27,612 38,063
Taxation (1,017) 1,129 112 (642) (1,110) (1,752)
Net return/(loss) after taxation 13,466 (84,389) (70,923) 9,809 26,502 36,311
Return/(loss) per share 12.47p (78.13)p (65.66)p 9.25p 24.99p 34.24p
The "Total" column of this statement is the profit and loss account of the
Company. The "Revenue" and "Capital" columns represent supplementary
information prepared under guidance issued by The Association of Investment
Companies. The Company has no other items of other comprehensive income, and
therefore the net return/(loss) after taxation is also the total comprehensive
income/(loss) for the year.
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the year.
Statement of Changes in Equity
for the year ended 31 December 2022
Called-up Capital
share Share redemption Special Capital Revenue
capital premium reserve reserve reserves reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
At 31 December 2020 5,047 74,075 11,646 29,182 344,467 19,131 483,548
Issue of shares 392 38,929 - - - - 39,321
Net return after taxation - - - - 26,502 9,809 36,311
Dividend paid in the year - - - - - (7,435) (7,435)
At 31 December 2021 5,439 113,004 11,646 29,182 370,969 21,505 551,745
Issue of shares 17 1,652 - - - - 1,669
Repurchase of the Company's own shares into treasury - - - - (15,742) - (15,742)
Net (loss)/return after taxation - - - - (84,389) 13,466 (70,923)
Dividend paid in the year - - - - - (9,275) (9,275)
At 31 December 2022 5,456 114,656 11,646 29,182 270,838 25,696 457,474
Statement of Financial Position
at 31 December 2022
2022 2021
£'000 £'000
Fixed assets
Investments held at fair value through profit or loss 499,305 600,002
Current assets
Debtors 517 667
Cash at bank and in hand 5,161 2,876
Derivative financial instruments held at fair value through profit or loss - 182
5,678 3,725
Current liabilities
Creditors: amounts falling due within one year (47,509) (50,142)
Derivative financial instruments held at fair value through profit or loss - (730)
(47,509) (50,872)
Net current liabilities (41,831) (47,147)
Total assets less current liabilities 457,474 552,855
Non current liabilities
Deferred taxation - (1,110)
Net assets 457,474 551,745
Capital and reserves
Called-up share capital 5,456 5,439
Share premium 114,656 113,004
Capital redemption reserve 11,646 11,646
Special reserve 29,182 29,182
Capital reserves 270,838 370,969
Revenue reserve 25,696 21,505
Total equity shareholders' funds 457,474 551,745
Net asset value per share 434.60p 507.24p
The accounts were approved and authorised for issue by the Board of Directors
on 15 March 2023 and signed on its behalf by:
Sarah MacAulay
Chairman
Registered in England and Wales as a public company limited by shares.
Company registration number: 02153093
Cash Flow Statement
for the year ended 31 December 2022
2022 2021
£'000 £'000
Net cash inflow from operating activities 11,019 7,996
Investing activities
Purchases of investments (151,044) (224,921)
Sales of investments 165,507 174,268
Net cash flows on derivative instruments 8,938 (6,386)
Net cash inflow/(outflow) from investing activities 23,401 (57,039)
Net cash inflow/(outflow) before financing 34,420 (49,043)
Financing activities
Dividends paid (9,275) (7,435)
Interest paid (1,122) (451)
Net bank loans drawn down 18,237 -
Issue of shares 1,669 39,321
Repurchase of the Company's own shares into treasury (15,451) -
Net cash (outflow)/inflow from financing activities (5,942) 31,435
Net cash inflow/(outflow) in the year 28,478 (17,608)
Cash at bank and in hand at the beginning of the year (23,107) (5,205)
Net cash inflow/(outflow) in the year 28,478 (17,608)
Exchange movements (210) (294)
Cash at bank and in hand at the end of the year 5,161 (23,107)
Dividends received during the year amounted to £16,365,000 (2021:
£16,218,000) and deposit interest receipts amounted to £31,000 (2021:
£84,000).
Notes to the Accounts
1. Accounting Policies
Schroder Asian Total Return Investment Company plc ("the Company") is
registered in England and Wales as a public company limited by shares. The
Company's registered office is 1 London Wall Place, London EC2Y 5AU.
The accounts are prepared in accordance with the Companies Act 2006, United
Kingdom Generally Accepted Accounting Practice ("UK GAAP"), in particular in
accordance with Financial Reporting Standard (FRS) 102 "The Financial
Reporting Standard applicable in the UK and Republic of Ireland", and with the
Statement of Recommended Practice "Financial Statements of Investment Trust
Companies and Venture Capital Trusts" (the "SORP") issued by the Association
of Investment Companies in July 2022. All of the Company's operations are of a
continuing nature.
The accounts have been prepared on a going concern basis under the historical
cost convention, as modified by the revaluation of investments and derivative
financial instruments held at fair value through profit or loss. The Directors
believe that the Company has adequate resources to continue operating to 31
March 2024, being at least 12 months from the date of approval of these
accounts. In forming this opinion, the Directors have taken into
consideration: the controls and monitoring processes in place; the Company's
level of debt and other payables; the low level of operating expenses,
comprising largely variable costs which would reduce pro rata in the event of
a market downturn; and that the Company's assets comprise cash and readily
realisable securities quoted in active markets. In forming this opinion, the
Directors have also considered any potential adverse consequences of the COVID
pandemic and climate change on the viability of the Company. Further
consideration of Directors' considerations regarding this are given in the
Chairman's Statement, Portfolio Managers' Review, Going Concern Statement,
Viability Statement and under the Principal and Emerging Risks and
Uncertainties heading on page 52 of the 2022 Annual Report.
In preparing these financial statements the Directors have considered the
impact of climate change on the value of the listed investments that the
company holds. As the portfolio consists of listed equities, which are valued
using quoted bid prices for investments in an active market, then fair value
reflects market participants view of climate change risk.
The accounts are presented in sterling and amounts have been rounded to the
nearest thousand.
The accounting policies applied to these accounts are consistent with those
applied in the accounts for the year ended 31 December 2021.
No significant judgements, estimates or assumptions have been required in the
preparation of the accounts for the current or preceding financial year.
2. Income
2022 2021
£'000 £'000
Income from investments:
Overseas dividends 15,480 11,214
Overseas special dividends 735 971
Stock dividend 63 10
16,278 12,195
Other interest receivable and similar income
Interest received from HMRC on corporation tax recovered - 84
Deposit interest 34 -
34 84
16,312 12,279
Capital:
Special dividend allocated to capital 63 3,338
3. Investment management fee and performance fee
2022 2021
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment management fee 809 2,427 3,236 913 2,740 3,653
Performance fee - - - - 133 133
809 2,427 3,236 913 2,873 3,786
The bases for calculating the investment management and performance fees are
set out in the Report of the Directors on pages 58 and 59 of the 2022 Annual
Report and details of all amounts payable to the Manager are given in note 19
on page 89 of the 2022 Annual Report.
4. Dividends
Dividends paid and declared
2022 2021
£'000 £'000
2021 final dividend of 8.5p (2020: 7.1p), paid out of revenue profits(1) 9,275 7,435
2022 2021
£'000 £'000
2022 final dividend proposed of 11.0p (2021: 8.5p), to be paid out of revenue 11,579 9,246
profits(2)
(1) The 2021 final dividend amounted to £9,246,000. However the amount
actually paid was £9,275,000 due to share issues after the accounting date
but prior to the dividend Record Date.
(2) The proposed final dividend amounting to £11,579,000 (2021: £9,246,000)
is the amount used for the basis of determining whether the Company has
satisfied the distribution requirements of Section 1158 of the Corporation Tax
Act 2010. The revenue available for distribution by way of dividend for the
year is £13,466,000 (2021: £9,809,000).
5. (Loss)/return per share
2022 2021
£'000 £'000
Revenue return 13,466 9,809
Capital (loss)/return (84,389) 26,502
Total (loss)/return (70,923) 36,311
Weighted average number of shares in issue during the year 108,005,903 106,058,048
Revenue return per share 12.47p 9.25p
Capital (loss)/return per share (78.13)p 24.99p
Total (loss)/return per share (65.66)p 34.24p
6. Called-up share capital
2022 2021
£'000 £'000
Allotted, called-up and fully paid:
Ordinary shares of 5p each:
Opening balance of 108,774,651 (2021: 100,934,651) shares 5,439 5,047
Issue of 340,000 (2021: 7,840,000) new shares 17 392
Repurchase of 3,851,448 (2021: nil) shares into treasury (193) -
Subtotal of 105,263,203 (2021: 108,774,651) shares 5,263 5,439
3,851,448 (2021: nil) shares held in treasury 193 -
Closing balance(1) 5,456 5,439
(1) Represents 109,114,651 (2021: 108,774,651) shares of 5p each, including
3,851,448 (2021: nil) held in treasury.
During the year, a total of 340,000 new shares were issued to the market to
satisfy demand, at an average price of 490.9p per share, for a total
consideration of £1,669,000.
During the year, the Company repurchased 3,851,448 of its own shares, nominal
value £193,000, to hold in treasury, representing 3.5% of the shares
outstanding at the beginning of the year. The total consideration paid for
these shares amounted to £15,742,000. The reason for these purchases was to
seek to manage the volatility of the share price discount to NAV per share.
7. Net asset value per share
2022 2021
Total equity shareholders' funds (£'000) 457,474 551,745
Shares in issue at the year end 105,263,203 108,774,651
Net asset value per share 434.60p 507.24p
8. Transactions with the Manager
Under the terms of the Alternative Investment Fund Manager Agreement, the
Manager is entitled to receive management, secretarial and performance fees.
Details of the basis of these calculations are given in the Directors' Report
on pages 58 and 59 of the 2022 Annual Report. If the Company invests in funds
managed or advised by the Manager, any fees earned by the Manager are rebated
to the Company. The management fee payable in respect of the year ended 31
December 2022 amounted to £3,236,000 (2021: £3,653,000) of which £799,000
(2021: £966,000) was outstanding at the year end.
No performance fee (2021: £133,000) is payable in respect of the year, and
nil (2021: 133,000) was outstanding at the year end.
The secretarial fee payable for the year amounted to £75,000 (2021: £75,000)
of which £19,000 (2021: £19,000) was outstanding at the year end.
No Director of the Company served as a Director of any company within the
Schroder Group at any time during the year.
9. Related party transactions
Details of the remuneration payable to Directors are given in the Directors'
Remuneration Report on page 67 of the 2022 Annual Report and details of
Directors' shareholdings are given in the Directors' Remuneration Report on
page 68 of the 2022 Annual Report. Details of transactions with the Manager
are given in note 19 of the 2022 Annual Report. There have been no other
transactions with related parties during the year (2021: nil).
10. Status of announcement
2021 Financial Information
The figures and financial information for 2021 are extracted from the
published Annual Report and Accounts for the year ended 31 December 2021 and
do not constitute the statutory accounts for that year. The 2021 Annual Report
and Accounts have been delivered to the Registrar of Companies and included
the Report of the Independent Auditors which was unqualified and did not
contain a statement under either section 498(2) or section 498(3) of the
Companies Act 2006.
2022 Financial Information
The figures and financial information for 2022 are extracted from the Annual
Report and Accounts for the year ended 31 December 2022 and do not constitute
the statutory accounts for the year. The 2022 Annual Report and Accounts
include the Report of the Independent Auditors which is unqualified and does
not contain a statement under either section 498(2) or section 498(3) of the
Companies Act 2006. The 2022 Annual Report and Accounts will be delivered to
the Registrar of Companies in due course.
Neither the contents of the Company's webpages nor the contents of any website
accessible from hyperlinks on the Company's webpages (or any other website) is
incorporated into, or forms part of, this announcement.
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