Schroder AsianTR Inv - Half-year Report
13/09/2023 07:00
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RNS Number : 2154M Schroder Asian Total Retn InvCo PLC 13 September 2023
13 September 2023
Half Year Report
Schroder Asian Total Return Investment Company plc (the "Company") hereby
submits its Half Year Report for the period ended 30 June 2023 as required by
the FCA's Disclosure Guidance and Transparency Rule 4.2.
The Half Year Report is also being published in hard copy format and an
electronic copy of that document will shortly be available to download from
the Company's website www.schroders.co.uk/satric . Please click on the
following link to view the document:
http://www.rns-pdf.londonstockexchange.com/rns/2154M_1-2023-9-12.pdf
(http://www.rns-pdf.londonstockexchange.com/rns/2154M_1-2023-9-12.pdf)
The Company has also submitted its Half Year Report to the National Storage
Mechanism and it will shortly be available for inspection
at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) .
Enquiries:
Kerry Higgins
Schroder Investment Management Limited
Tel: 020 7658 6189
Half Year Report and accounts for the six months ended 30 June 2023
Chair's Statement
Performance
I am pleased to report that over the six-month period to 30 June 2023, both
the Company's NAV total return and the share price total return outperformed
the Reference Index. The NAV produced a positive total return of 2.3%, as did
the share price, whilst the Reference Index produced a negative total return
of 2.5% over the period. It is also extremely pleasing to note that the NAV
has outperformed the Reference Index over a rolling one, three, five and ten
years to 30 June 2023.
The outperformance of the Reference Index over the six-month period can be
primarily attributed to three aspects of the portfolio construction. Firstly,
Taiwanese technology stocks (comprising around 20% of the Company's portfolio)
did well on the strong outlook and improving demand for high end
semi-conductors. Secondly, the Company's 20% relative underweight position in
China provided a significant contribution to performance due to a large
correction in Chinese markets towards the end of the first half of 2023.
Finally, stock selection in Australia made a strong contribution, where our US
housing plays (James Hardie and Reliance Worldwide) performed well after a
difficult 2022.
Further details on the market and portfolio performance may be found in the
Portfolio Managers' Review.
Discount Management
The share price traded below net asset value during the six-month period, with
an average discount of 5.3%. Consequently, the Board made use of its authority
to buy back shares to assist in discount management and to target a discount
of no more than 5% in normal market conditions. During the six-month period to
30 June 2023, a total of 2,167,985 shares were repurchased at an average
discount of 4.9%, for a total consideration of £9.2 million. The shares were
placed into treasury for reissuance at a premium to NAV at a future date.
Since the end of the period, the Company has purchased a further 1,469,588
shares to be held in treasury.
Gearing
The Portfolio Managers continued to actively utilise gearing during the period
with a range of 4.6% at its lowest and 10.3% at its highest, and an average of
7.4%. Average net debt over the six-month period was £30.4 million.
Gearing should be viewed in the context of the use of derivative hedging
instruments and during the period Taiwanese, Korean and Australian puts(1)
were purchased. The Board maintains oversight of the use of gearing and
renewed its £50 million revolving credit facility at the start of July 2023.
Board
The Board continues to review its composition and effectiveness as well as
planning for succession. The Board was delighted to welcome Jasper Judd as a
non-executive Director with effect from 1 February 2023 and Chair of the Audit
and Risk Committee from 25 April 2023 when he succeeded Mike Holt, who stepped
down from the Board at the conclusion of the annual general meeting. Caroline
Hitch will complete her nine-year tenure in February 2024 and will step down
from the Board at the annual general meeting in May next year. The Board will
conduct an executive search to recruit a new non-executive Director at the
beginning of 2024.
Outlook
The outlook for Asian stock markets remains uncertain with the slowdown in
Chinese economic growth, impacted by a muted rebound in consumer confidence in
China post a prolonged COVID lockdown, affecting growth forecasts and
sentiment around the region. Challenging markets however provide ample
opportunities for active managers and the extensive investment experience of
our Portfolio Managers, complemented by a regional research team of 37
analysts, puts them in a strong position to identify attractive stock
opportunities around the region. The team have long term relationships with
the management of many of the Companies in the region and conduct over 2,300
company meetings on an annual basis. Stock selection will continue to be the
critical factor in adding value to the portfolio and securing long term
relative outperformance.
Sarah MacAulay
Chair
12 September 2023
1 A put is an options contract that gives the owner the right, but not the
obligation, to sell a certain amount of the underlying asset, at a set price
within a specific time. The buyer of a put option believes that the underlying
stock will drop below the exercise price before the expiration date.
Portfolio Managers' Review
Performance
The first half of 2023 was a much quieter period for Asian stock markets
(versus 2022) with the Company's Reference Index slightly down in sterling
terms, although in local currencies and US dollar terms it was slightly up.
However, the flat overall performance of the Reference Index did mask some
quite divergent stock market performances across the Asian region.
The most noteworthy performance over the period was the performance of Chinese
stocks. These started the year strongly with the MSCI China Index rising by
almost 20% over the first four weeks of January 2023. However, the realisation
that the end of draconian COVID rules was not some magic panacea likely to
lead to a resurgent Chinese economy and booming stock market caused a sharp
correction from early February 2023, and the MSCI China Index ended the period
down by around 10%. There was a continuous stream of relatively disappointing
economic numbers in China over the first half of the year whether that was
exports, real estate activity, consumer confidence or private sector
investment. These caused many investors to question the long-term sustainable
growth rate of the Chinese economy.
The other big divergent performance in Asia over the period was the
performance of technology stocks in Taiwan and Korea. The information
technology ("IT") sub index within the Company's Reference Index rose by 14%
over the period. With IT stocks forming a large part of the Korean and
Taiwanese stock markets this resulted in these indices being the strongest
performing in Asia over the period, rising by 8% and 13% respectively. Asian
IT stocks did well on the back of hopes that the inventory overhang from the
slowdown in technology demand in 2022 was finally starting to clear, the rally
was then further spurred forward on artificial intelligence ("AI") hopes
following Nvidia's very strong first quarter results in May 2023.
Elsewhere there was little of great note in the region. Indian stocks started
the year weak, but then rebounded as investors switched out of China given the
better long-term prospects for growth in India. Thai stocks sold off on a
resurgence of political worries post elections that, whilst relatively
conclusive, led to an impasse as establishment factions tried to block the
more populist parties taking power. Australia also ended the period flat with
resource stocks and financials slightly weaker and more globally/US focused
companies like Brambles and James Hardie outperforming. In general, across
Asia businesses more domestically focused (real estate, utilities, consumer
staples) underperformed whilst companies more exposed to the global economy
and US economy in particular outperformed as investor worries about the risk
of global recession eased.
For the Company it was, relatively at least, a good period for performance
with the NAV rising by 2.3% over the first half of 2023. Outperformance
relative to the Reference Index came from three areas. Firstly, our Taiwanese
technology stocks which are around 20% of the Company's NAV. In particular the
portfolio's largest holding Taiwan Semiconductor Manufacturing ("TSMC") did
well on the back of the strong outlook for demand for high end semiconductors
where the company has a virtual monopoly on production. Other long-term Taiwan
technology holdings such as ASE, Chroma ATE and Voltronic Power Technology
also performed strongly on the back of the improving outlook for demand. The
second big contribution to performance came from China. Relative to the
Reference Index the Company is approximately 20% underweight China/Hong Kong
stocks, so the big correction towards the end of the first half of 2023 was
positive for relative performance. The final major positive was stock
selection in Australia where our US housing plays (James Hardie and Reliance
Worldwide) performed well after a difficult 2022.
The first half of 2023 was not a particularly active period for changes to
portfolio holdings. However, after a busy corporate visit programme in the
region we added two new names in the Philippines (consumer stock Century
Pacific Food and BDO Bank) and used the slight pull back in the first quarter
of 2023 to add ICICI Bank in India. Elsewhere, the main changes of note were
to add to our China weightings into the weakness towards the end of the
period. Whilst we remain cautious on the long-term outlook for Chinese stock
markets several of our favoured names came down to attractive levels and we
added to Tencent, Yum China, Hong Kong Exchanges, Swire Pacific B and started
new positions in NetEase, Galaxy Entertainment, Shenzhou International and New
Oriental Education. Purchases were funded from the sale of three of our
Association of Southeast Asian Nations ("ASEAN") domestic stocks where the
outlook, we think, has become more difficult due to competition, and we
trimmed LVMH and Las Vegas Sands which had reached our fair values during Q2
2023. We also used the strength in IT stocks towards the end of the first half
of the year to trim our technology stocks in Taiwan and software and service
companies in India.
We actively deployed gearing over the first half of 2023. The Company ended
2022 with a 10% gearing level as our gearing indicators were relatively
positive. After the sharp rally at the beginning of the year our gearing
indicators moved back to neutral so we reduced gearing to 5%, which is where
it finished the period. The hedging models used within the Company, which aim
to provide an element of capital preservation, began the year positive and so
we started 2023 with no hedging in place. The models turned more cautious
(from positive to neutral) in May 2023 and with signs of excessive optimism
seeping into the technology sector, in particular in Taiwan, we bought a small
position in puts on the Taiwanese, Korean and Australian indices towards the
end of the period.
Overall, as we write in early August 2023, we are moderately upbeat on Asian
stock markets. We remain structurally cautious on China but, with investor
expectations having had a significant reset, valuations now look more
reasonable and we can selectively find interesting opportunities. The
Schroders Asian research team is also finding plenty of interesting stock
level opportunities across the region so we expect to remain fully invested.
The key note of caution outside the usual tail risks (Ukraine war, US-China
tensions, Taiwan risks etc) is the high level of domestic retail participation
and increasing irrational moves that have become prevalent in AI and electric
vehicle ("EV") related stocks in Taiwan and Korea. The Company is avoiding
overhyped AI and EV stocks but outside of these sectors we are generally
comfortable with the outlook for prospective investment returns in Asia.
What does an Asia ex China asset class look like?
For a change we will not discuss the merits and mostly pitfalls of investing
in China, we covered this in some detail in the 2022 annual report and our
views have not changed since then. But for those wanting a quick recap:
The advancement of the state in China is making many sectors difficult to
invest in and there are structural reasons why Chinese economic growth will be
slow (excessive debt, demographics, real estate bubble bursting). For the
stockmarket specifically irrational capital allocation based on state
priorities not Adam Smith's invisible hand, questionable application of
property rights and excessive investment in "strategic" industries is
resulting in poor return on invested capital ("ROIC"). The combination of
these factors will we believe result in weak overall Chinese stock markets
unless we have a major structural change in policy direction, which we see as
unlikely at the current time. However, we do not see the stockmarket as
uninvestible, there are some excellent companies in China. During the recent
sell down we have added to existing holdings and introduced several new names.
For the Company however the China exposure remains a large structural
underweight versus the Reference Index.
Instead, as investors increasingly question their long-term exposure to
Chinese equities and by implication to Asian equities as an asset class, we
thought it would be worthwhile to highlight what our Asian ex China investment
universe actually consists of and where we see the best opportunities given
this is where the bulk of the Company's assets are invested. The breakdown of
the Reference Index is shown in Chart 1, excluding China we believe the
Reference Index is probably best explained as three separate asset classes:
1. Developed Asian stockmarkets - Reference Index weight 25%
For better or worse, MSCI classifies Australia, New Zealand, Hong Kong, and
Singapore as "developed" stockmarkets. In this instance we would actually
agree with MSCI. All are well-regulated stock markets operating in countries
with relatively mature, wealthy economies with functioning property rights,
good regulation, effective governments, and stable politics (we give Hong Kong
the benefit of doubt here).
2. Taiwan and Korean technology and industrials - Reference
Index weight 19%
Taiwan and Korea together are around 27% of the Reference Index but this is
heavily weighted in technology and industrial stocks. The rest of the Taiwan
and Korean stock markets are predominantly very mature banks and utility
stocks, which especially in Korea we view as structurally
unattractive/uninvestible due to continuous government interference.
3. The hope part: India and ASEAN stock markets - Reference
Index weight 20%
We call this the "hope" part because if we take out China from our universe,
this would be the main reason most investors, we assume, would invest in Asia
i.e. to capture all those rising middle classes and economic development of
the world's fastest growing region - well that is the spiel that most fund
managers' marketing teams give them!
Chart 1: Country and sector breakdown of the MSCI AC Asia Pacific ex Japan
Index
Australia China Hong Kong India Indonesia Korea Malaysia New Zealand Philippines Singapore Taiwan Thailand Total
Communication Services 0.3 5.6 0.1 0.4 0.2 0.7 0.1 0.1 0.0 0.5 0.3 0.2 8.5
Consumer Discretionary 0.9 8.1 0.3 1.6 0.1 1.1 0.1 - 0.0 0.1 0.3 0.1 12.7
Consumer Staples 0.9 1.6 0.1 1.4 0.2 0.3 0.2 - 0.0 0.1 0.2 0.2 5.2
Energy 0.9 0.9 - 1.7 0.1 0.2 0.0 - - - 0.0 0.3 4.0
Financials 5.2 4.6 2.7 3.7 1.1 0.9 0.5 - 0.2 1.5 2.0 0.1 22.5
Banks 3.8 2.9 0.3 1.9 1.1 0.6 0.5 - 0.2 1.4 1.2 0.1 14.0
Financial Services 0.8 0.5 0.7 1.5 - 0.1 - - - 0.1 0.2 0.0 4.1
Insurance 0.6 1.2 1.7 0.3 - 0.2 - - - - 0.5 - 4.5
Health Care 1.7 1.6 - 0.7 0.0 0.6 0.1 0.2 - - 0.0 0.2 5.0
Industrials 0.9 1.6 0.7 0.9 0.1 1.3 0.1 0.1 0.2 0.4 0.4 0.2 7.0
Information Technology 0.3 1.8 - 1.8 - 5.7 0.0 - - 0.0 10.7 0.1 20.4
Materials 4.1 0.9 - 1.2 0.1 1.0 0.1 - - - 0.7 0.2 8.5
Real Estate 0.9 0.9 1.2 0.1 - - - - 0.1 0.5 0.0 0.1 3.7
Utilities 0.2 0.7 0.5 0.5 - 0.1 0.1 0.1 0.0 - - 0.2 2.4
Total 16.3 28.3 5.5 14.0 1.9 11.8 1.3 0.5 0.6 3.1 14.9 1.8 100.0
Source: Factset, Schroders, June 2023
1. Developed Asian stock markets
Of the 25% of our Reference Index that is classified as developed Asian stock
markets, Australia/New Zealand is by far the biggest constituent at c.17%
(with Hong Kong at 5% and Singapore at 3%). Clients regularly question why we
have Australia in our Reference Index given it is "boring" and "mature",
unlike high-growth, developing Asia. We do not view Australia either as an
economy or stock market as boring or mature - it is a well-regulated economy,
with stable politics and relatively positive demographics (Chart 2 of the Half
Year Report - progressive immigration policies mean the Australian working age
population profile is better than most Asian countries). We would expect
Australia gross domestic product ("GDP") growth on current policies to outpace
many Asian countries, including China longer-term unless there is a major
change in the current policy trajectory.
It is also the case that the Australian stock market has been the best
performing in Asia over the very long-term (total return in USD),
significantly outperforming the most commonly used Asian benchmark (MSCI AC
Asia ex Japan) that excludes Australian stocks. Hong Kong and Singapore also
stack up reasonably well particularly on a risk-adjusted basis as both are
less volatile than other Asian indexes.
So, how are the developed Asian indexes made up - what stocks and sectors are
heavily weighted? By far the biggest constituent of the developed Asian
indices is financials at c.10% of the overall 25%, materials then make up 4%,
real estate 3% and healthcare 2%. This of course does not sound terribly
compelling. But banks in developed Asia generally offer good stable dividend
yields, in well-regulated, oligopolistic markets whether that is Australia,
Hong Kong or Singapore. Other financials like AIA Group (listed in Hong Kong)
are an attractive regional proxy on rising insurance penetration particularly
for health and life policies. Singapore banks meanwhile are benefitting from
the rise of Singapore as the wealth management hub of Asia, and all three
large Singapore banks have strong ASEAN footprints so should benefit economic
growth in the broader region.
Whilst we admit none of the banks in developed Asia are "exciting", as Chart 4
shows, the major banks in Australia, Hong Kong and Singapore are
moderately-valued with what we believe should be high and rising dividend
yields. Investors should also remember c. 70% of long-run returns in Asia have
come from reinvesting dividends (Chart 5 of the Half Year Report) and this is
one of the key reasons why the high-yielding developed Asian stock markets are
attractive.
Chart 4: Banks in developed Asia may be "boring" and "safe" but these are
merits, while current valuations are attractive
FY2023E FY2023E 5Y total return (USD)
PER (x) Dividend
Yield (%)
Australia
ANZ 10.5 6.4 4.5
CBA 17.5 4.2 59.8
NAB 11.8 5.9 17.9
Westpac 10.5 6.4 11.6
Hong Kong
BOC HK 7.5 7.0 19.4
Hang Seng Bank 11.9 5.5 31.9
Singapore
DBS 9.1 5.2 67.9
OCBC 8.6 5.9 47.2
UOB 8.9 5.5 43.3
MSCI AC Asia Pacific ex Japan 15.6 2.7 14.8
Source: Refinitiv, Factset, Schroders, July 2023
Referring to Chart 5 of the Half Year Report, this also shows the attraction
of a stock market like Singapore. Price returns in Singapore have been similar
to Korea over the long term, but total returns are much stronger as Singapore
companies generally have much higher payout ratios than Korean companies who
often view paying dividends as a sign of failure (or lack of imagination) and
instead invest their corporate cash flows poorly. The importance of dividends
and the attractions of the developed Asian stock markets can also be
highlighted in Chart 6 of the Half Year Report - where it can be seen on the
left-hand chart there is a strong positive correlation between payout ratios
and subsequent earnings per share ("EPS") growth and also a strong correlation
between payout ratios and corporate governance (shown on the right-hand
chart).
As of end-June 2023, the Company had c. 37% exposure to developed Asian stock
markets (16% Australia, 12% Hong Kong, 9% Singapore). This is because we see
substantial bottom-up value in all three stock markets. None have performed
particularly well short-term as they lack hyped-up AI or EV plays and instead,
they have mostly solid, steady companies paying good dividends. As Chart 7 of
the Half Year Report shows, all three developed Asian markets currently look
reasonable or cheap (the green diamond) versus their long-term trading range
(the blue bars).
Where do we see the best opportunities in developed Asia? Outside of the
selected financials like Singapore banks and AIA Group as discussed earlier,
the Company has c. 6.5% in Australian material stocks, principally BHP Group
and Rio Tinto. Whilst we are not bullish on commodity-intensive Chinese real
estate, we still like the long-term outlook for both stocks. As highlighted in
Chart 8 of the Half Year Report, the switch to decarbonise the economy along
with onshoring of production outside of China will be resource-intensive. As
Chart 8 of the Half Year Report also highlights, capital discipline in the
industry has been much better, and both BHP and Rio Tinto are paying large and
progressive dividends, so we are happy to maintain exposure even though we are
not particularly bullish on iron ore prices.
The other area in Australia where the Company has substantial investments is
health care where we have c. 6.5% exposure across four names. Historically,
Australia has had a strong cluster of innovative health care companies.
Several we think are globally attractive as they operate in sectors where
technology and aging populations are likely to drive substantial growth in
their addressable market. All the names we hold are the leading players in a
growing area of healthcare - Chart 9 of the Half Year Report shows the example
of ResMed which is the global leader in sleep apnea management, a historically
poorly-diagnosed and treated health issue where rapid progress in technology
should lead to better patient outcomes.
Wrapping up on developed Asian markets - why do we hold 12% in Hong Kong?
Isn't Hong Kong a value trap as it gets squeezed by China on one side and
Singapore on the other? We do not think this is the case. The Hong Kong
economy may take time to reinvent itself, but Hong Kong has survived far
greater challenges in the past. The stock market meanwhile has some well-run
companies that offer good exposure to Chinese reopening, trading at attractive
valuations and often with good dividend yields whether this is Swire Pacific,
Hong Kong Exchanges, or Macau gaming plays. As Chart 10 of the Half Year
Report shows Macau is rebounding strongly and with companies having reduced
costs the turnaround in profitability should be strong particularly for those
players focused on the mass market like Galaxy Entertainment and Sands China.
So, to sum up - the Australian, Hong Kong and Singapore stock markets we
believe offer an attractive mix of opportunities for the total return
investor. Growth stocks may be more limited but high dividends, strong
corporate governance and reasonable valuations make this a place where we
continue to find plenty of good long-term investment opportunities,
particularly in companies that offer exposure to regional growth with less
governance and political risks.
2. Taiwan and Korean technology stocks
As highlighted earlier, Korean and Taiwan stocks are weighted at around 27% of
our Reference Index and this is heavily skewed towards technology stocks.
Chart 11 of the Half Year Report has the split of the Company as at end-June
2023, where over 30% of the portfolio is invested in technology stocks
principally in Korea and Taiwan.
Chart 11: Schroder Asian Total Return Investment Company - Portfolio
positioning (June 2023)
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 4.1 0.9 0.7 6.8
Consumer Discretionary 1.8 3.6 1.3 2.0 4.1 2.3 1.4 0.7 17.0
Consumer Staples 0.9 1.0 0.2 2.1
Energy --
Financials 1.5 5.4 5.8 2.5 1.1 6.2 22.3
Banks 0.6 5.8 2.5 1.1 4.5 14.4
Diversified Financials 1.6 1.6 3.2
Insurance 1.5 3.2 4.7
Healthcare 5.2 1.8 7.0
Industrials 2.5 2.0 1.3 2.1 8.0
Information Technology 3.0 9.0 1.2 17.2 30.5
Materials 4.6 1.8 6.3
Real Estate 3.1 3.1
Utilities --
Cash -6.0 -6.0
Derivatives -2.0 -2.8 5.0 0.1
Collective Investments 2.8 2.8
Grand Total 14.7 7.6 11.7 14.3 2.5 6.2 -- 5.3 9.1 23.4 -- 1.8 2.3 1.4 0.9 -1.1 100.0
Fund Positioning in % Stocks (%) Hedges (%) Net Long (%)
Strategic hedges - Notional --
Tactical hedges - Notional -13.0
Total Exposure - Notional 105.9 -13.0 92.9
Strategic hedges - Delta-adjusted --
Tactical hedges - Delta-adjusted -4.8
Total Exposure - Delta-adjusted 105.9 -4.8 101.0
Cash -6.0
Source: Schroders, June 2023
Since inception, the Company has had a significant exposure to technology
stocks in Korean and Taiwan because we believe these are the amongst the best
stocks in Asia, ones that are using their comparative advantages (clustering
effect, well educated workforces, strong government support, deep supply chain
integration) to grow market share in an industry that whilst clearly cyclical,
has strong secular growth dynamics as semiconductor usage continues to grow.
The biggest individual position in the portfolio remains TSMC. As Chart 12 of
the Half Year Report shows, we believe that TSMC is well positioned to
dominate high end semiconductors, and the movement towards AI applications
should only enhance TSMC's strong competitive position. The company remains a
key long-term position in the portfolio.
That said, the Taiwanese tech sector is not just about TSMC. There are a large
number of attractive, often niche, specialists players in the technology
space. Often these are mid-sized companies that have a high market share in
defined niches whether that is Chroma ATE in system level test equipment,
Advantech in industrial/embedded personal computers, Sinbon in cabling,
Sporton in testing and certification, or semiconductor design houses like
Mediatek, Realtek and Novatek who benefit from having the world's largest
semiconductor foundries sitting on their doorstep. As Chart 13 of the Half
Year Report shows, Mediatek (whilst facing challenges at the moment due to the
slowdown in smartphone demand) has grown market share in the key segments in
which it operates. Like many Taiwanese stocks, it also has a high dividend
yield with a forecast yield of c. 8%1. This is one of reasons the Company has
substantial exposure to Taiwan - good corporate governance, combined with
interesting companies operating in industries with strong secular drivers.
Business trips to Taiwan are usually the most illuminating of the visits we
make in the region.
Korea is a bit different. Our exposure to Korea technology is primarily to
memory names (Samsung Electronics) and EV batteries. Korean technology tends
to be dominated by the Samsung group and unlike Taiwan, we do not find a long
list of interesting mid-cap niche players with strong technology and
comparative advantages. Corporate governance and payout ratios in Korea (back
to Chart 6 of the Half Year Report) are a marked contrast to Taiwan. Korean
technology stocks tend to operate in more commoditised areas and more cyclical
areas, often ones that face more threat from Chinese competition. That said,
the Company has a significant position in Samsung Electronics, because (as
Chart 14 of the Half Year Report shows) we think in the memory space at least
we are seeing inventories finally clearing and a better revenue outlook. As
the middle graph in Chart 14 of the Half Year Report also demonstrates share
prices tend to follow revenues and not profitability in this sector.
We should however highlight a near-term note of caution on the Asian
technology sector. With froth seeping into EV and battery names (as well as
anything with a supposed AI angle), we would be cautious about chasing stocks
at current levels, and for the Company have been trimming positions in those
technology holdings which have exceeded our fair values. As Chart 15 of the
Half Year Report shows, whilst inventories may have peaked, they remain
elevated and the current rally in some technology stocks, in particular those
ramped on AI hype, looks overdone.
We are also cautious on EVs and most battery-related names in China and Korea.
A lot of capital is being deployed in this space and it has become "strategic"
for almost all countries to have a thriving EV and battery industry. This we
believe should lead to large excess overcapacity in an industry where the
technology barriers are substantially less than semiconductors and the
products are increasingly generic. As Chart 16 of the Half Year Report
highlights, we have literally hundreds of EVs brands and start-ups, and we
increasingly worry the battery industry, where we have recently reduced our
exposure, is likely to become mostly commoditised too. The reality is the
hardware in an EV is much simpler and more generic than in a combustion engine
car - it is the software that will be most likely to differentiate the vehicle
- but will many customers really pay for software, we have our doubts……
So, to sum up - we believe Korean and in particular Taiwanese technology
stocks are an attractive long-term investment area. We own key bellwether
stocks like Samsung Electronics and TSMC which we believe have sustainable
comparative advantages in a consolidated industry (semiconductors) with strong
secular growth. In Taiwan we also find interesting opportunities in the
mid-cap technology space in companies with strong niches and often these
companies pay high dividend yields. Longer-term, we are happy with our Asian
technology positions, but we are currently trimming some holdings where froth
and hype around AI and EVs has pushed share prices above fair value.
3. The hope part: India and ASEAN stock markets
For investors less familiar with Asia, if you asked what a benchmark for an
Asia ex China fund looked like, we suspect they would assume it was mostly
India and ASEAN stocks. As highlighted in Chart 1, this is clearly not the
case. India is a meaningful part of the Reference Index at 14% whilst ASEAN
stock markets (when referring to ASEAN for purposes of this note we are
excluding Singapore) are only c. 5.5% of the Reference Index.
ASEAN stock markets have shrunk massively in the Asian universe over the last
20 years, becoming something of a sideshow. As Chart 17 of the Half Year
Report shows, over the last ten years the ASEAN stock markets have not
performed, broadly speaking they are flat in aggregate over the period.
What is the reason for the weak returns and going forward can we get more
excited? The Company has around 8% in ASEAN stock markets across five stocks:
two banks (one in Indonesia and one in the Philippines), and in the
Philippines two consumer stocks and a port operator. So, it would be fair to
say we are not finding huge stock opportunities in the ASEAN region. This
partly reflects the make-up of the ASEAN stockmarkets. As Chart 18 of the Half
Year Report shows, for the larger, liquid stocks they are heavily-weighted
towards banks, commodities and utilities. For obvious reasons we are not
terribly interested in oil, gas and cement stocks, so this narrows our
universe down to a relative limited range of stocks, primarily the banks.
What of the outlook for ASEAN economies and stock markets? To us it feels like
a mixed bag, economies are probably not completely stuck in a middle income
trap but there are significant challenges to drive stronger growth. As Chart
19 of the Half Year Report shows, educational attainment in India and the
ASEAN region, whilst improving on the United Nations Development Programme's
("UNDP's") Education Index, has a long way to go to catch up with developed
Asia, and 50% of children in the region still only get primary-level
schooling.
Chart 19: Educational attainment improving in ASEAN and India but still
lagging developed peers significantly - and many children lose out
UNDP's Human Development Report - Education Index (Percentile), and
Educational development (right- hand chart)
Educational development
2000 2019 No Schooling or primary (%) Secondary (%) Post Secondary / Tertiary (%)
Australia 0.90 0.92 US 4 51 45
Singapore 0.65 0.92 Korea 14 45 41
Hong Kong 0.69 0.88 Malaysia 26 53 21
South Korea 0.79 0.87 SA 28 59 13
Malaysia 0.62 0.73 Turkey 39 41 20
Thailand 0.52 0.68 Brazil 40 43 17
Philippines 0.57 0.68 Philippines 41 39 20
China 0.48 0.66 Indonesia 49 41 10
Indonesia 0.52 0.65 Thailand 53 27 20
Vietnam 0.47 0.63 India 62 27 11
India 0.38 0.56
Source: UNESCO Institute of Statistics Source: Macquarie, February 2022
Other indicators also suggest economies in ASEAN face hurdles to significantly
accelerate growth. The transparency international surveys of corruption
perceptions suggest little relative improvement in the region outside of
Vietnam, whilst the Heritage Foundation Economic Freedom Index also indicates
large gaps in policy-making remain to create dynamic capitalist economies in
ASEAN countries (admittedly the Heritage Foundation is a US conservative think
tank and may be biased however, stock markets without functioning capitalism
and strong property rights etc don't work as any frontier fund investor
knows).
Chart 20: Are ASEAN economies failing to achieve potential due to corruption
and economic policy settings?
Corruption Perceptions Index Economic Freedom Index
2012 2022 2023
(Out of 176) (Out of 180) (Out of 176)
Singapore 5 5 Singapore 1
Hong Kong 14 12 Taiwan 4
Australia 13 13 Australia 13
Taiwan 37 25 South Korea 15
South Korea 45 31 Malaysia 42
Malaysia 54 61 Indonesia 60
China 80 65 Vietnam 72
Vietnam 123 77 Thailand 80
India 94 85 Philippines 89
Thailand 88 101 India 131
Indonesia 118 110 China 154
Philippines 105 116
Source: Transparency International Source: Heritage Foundation
Going back to stock markets in ASEAN, they face a lack of dynamism too. As
Chart 21 of the Half Year Report shows, New Economy (technology, internet
etc.) stocks are a very small part of the indexes in ASEAN, and R&D
spending relative to GDP is very low. This has tended to mean both the
economies in the ASEAN region and stock markets exhibit a lack of dynamism
which limits their potential. As mentioned in Chart 18 of the Half Year
Report, this is not all bad as the ASEAN stock markets can be quite defensive
but for your portfolio managers if we want to be defensive, we would prefer to
buy the high-yielding stocks listed in the developed Asian stock markets as
discussed earlier.
Of the four ASEAN stock markets, we are currently more optimistic on Indonesia
and the Philippines. Malaysia and Thailand both appear to be stuck in classic
middle income traps, with poor policy-making and politics in Thailand in
particular messy. Neither stock market has much bottom-up attraction at the
current time. Indonesia is the most interesting market. Policy-making and
stability has generally improved under President Jokowi and the country should
undoubtedly benefit from the "green" transition given its exposure to key
commodities like nickel. Upcoming elections in 2024 are key but we are hopeful
we will see a continuation of current better policies. We are likely to use
any dips in the market on election worries to add to our weighting in
Indonesia.
The Philippines is also interesting - a country where for the last 30 years it
has been one step forward, one step backward (on a good day). Expectations
after years of disappointment are low but President Marcos has surprised us by
mostly doing very little himself and by appointing relatively well-qualified
people to key ministries. Whether this is enough to get the country growing
faster than its current c. 5% GDP growth rate remains to be seen but with
overseas remittances strong and the business process outsourcing sector (BPO)
still resilient there is plenty of potential from a low base. A reasonable
education system, improving infrastructure, expanding broadband network should
be supportive of growth in both the Philippines and Indonesia.
This is why we continue to like well-run retail-focussed banks in the
lower-income Asian countries (India, Indonesia and Philippines). As Chart 22
of the Half Year Report shows, financial penetration in all three countries is
low (the Philippines is not shown on the chart but has a similar credit to GDP
as India) and, unlike countries like China and Korea, they have not seen a
rapid growth in bank credit/GDP over the last ten years. With the rollout of
digital platforms and now high penetration of smartphones in the region, the
ability to reach more customers and raise financialisation is strong. With
young, increasingly better-educated populations we 0.79are hopeful the
Indonesian and Philippines economies and stock markets can do better over the
next te0n years (versus the last ten years) - assuming the politicians and
policymakers do not mess up.
India we do however view somewhat differently from the ASEAN economies and
stock markets. On current policy settings the potential for an acceleration in
the sustainable growth rates is high. India has a young population, and many
structural dynamics are in its favour - whether that is better infrastructure
provision, improved educational attainment, digitalisation of the economy
(Chart 23 of the Half Year Report), stronger property rights and bankruptcy
laws, rising financialisation and urbanisation as mortgages become widely
available (Chart 24 of the Half Year Report).
India also has the potential to benefit from the shift of manufacturing out of
China. Historically this has not happened due to poor infrastructure,
horrendous red tape and random application of tax laws. To date, the primary
beneficiaries of the movement of manufacturing out of China have been Vietnam,
Mexico and Eastern Europe. New tax rates and scale advantages, and potentially
better application of laws could potentially now mean India does realise some
of its potential - though the process is likely to be gradual as red tape and
infrastructure as ever in India remain challenging.
The problem for stock market investors in India is the potential and the
positives above have been widely discussed and at current stock market
valuations (back to Chart 7 of the Half Year Report) are broadly we believe
priced in. Yes, we think the Indian economy can now grow at a higher
sustainable pace but we expect there will be road bumps and disappointments on
the way. Stock markets can be fickle creatures and there is no automatic
correlation between GDP growth and stock market returns. As highlighted above
we do like financials in lower income Asian countries and as Chart 26 of the
Half Year Report shows, we think both HDFC Bank and ICICI Bank are
structurally well placed in India and trade at reasonable valuations.
The Company also has exposure to Indian health care and two
technology/internet stocks focussed on travel and recruitment. We also have
many stocks on our Indian watchlist and will look for opportunities to add on
dips but want to maintain our valuation discipline - we struggle in particular
with valuations for some of the consumer staple names operating in
well-penetrated categories like shampoo, detergents, toothpaste, biscuits etc.
On the other hand India, unlike ASEAN stock markets, has an interesting
selection of internet start up and technology companies this makes the
universe more dynamic and for incumbent companies creates the threat of
significant disruption. Your portfolio managers are increasingly focussed on
the need to dedicate more of our investment time to the Indian stock market.
So to sum up on the "hope" markets, it is really only the Indian stock market
that offers significant exposure to the growth of emerging Asia. Indonesia and
the Philippines, whilst having potential to accelerate their growth rates, are
too small in stock market terms (both size and breadth of markets) to form a
large part of the portfolio. Malaysia and Thailand on the other hand offer
little investment attraction at the current time given current policy settings
and stock market valuations.
Conclusion
We hope this provides a reasonably comprehensive run down of the Asia ex China
investment universe. In the view of your portfolio managers it is not a
homogenous investment area but really three quite distinct asset classes. All
three have long-term investment attractions whether it be for more income
focused investors or growth investors. What investors should be aware of is
that the Asia ex China investment universe is diversified and at best only a
partial play on rapidly rising or developing emerging Asian economies - which
outside India, Vietnam and possibly Indonesia we would question is really
happening.
Lee King Fuei and Robin Parbrook
12 September 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.
Investment Portfolio as at 30 June 2023
Investments are classified by the Portfolio Manager in the country of listing,
except where noted. Stocks in bold are the 20 largest exposures to companies,
which by value account for 53.8% (30 June 2022: 54.4% and 31 December 2022:
54.2%) of total investments and derivative financial instruments.
£'000 %
TAIWAN
Taiwan Semiconductor Manufacturing 42,883 9.0
Mediatek 8,288 1.7
Chroma ATE 7,905 1.7
Voltronic Power Technology 7,336 1.5
Merida Industry 7,206 1.5
Advantech 6,733 1.4
Nien Made Enterprise 6,616 1.4
ASE Technology 6,313 1.3
United Micro Electronics 5,246 1.1
Eclat Textile 4,415 0.9
Sporton International 2,284 0.5
TOTAL TAIWAN 105,225 22.0
AUSTRALIA
CSL 8,537 1.8
BHP Billiton(1) 7,871 1.7
Aristocrat Leisure 7,810 1.6
ResMed 7,763 1.6
Cochlear 6,923 1.5
Medibank Private 6,603 1.4
Reliance Worldwide 6,147 1.3
Seek 5,350 1.1
Brambles 5,150 1.1
Orica 4,714 1.0
James Hardie Industries 4,361 0.9
Incitec Pivot 3,472 0.7
TOTAL AUSTRALIA 74,701 15.7
INDIA
Schroder India Equity Fund(2) 12,787 2.7
HDFC Bank 11,267 2.4
Apollo Hospitals Enterprise 8,117 1.7
Housing Development Finance 7,678 1.6
ICIC Bank 6,978 1.5
Infosys (ADR)(3) 6,824 1.4
Tata Consultancy 4,968 1.0
MakeMyTrip 4,028 0.8
Info Edge 3,907 0.8
Mphasis 1,734 0.4
TOTAL INDIA 68,288 14.3
HONG KONG (SAR)
AIA 14,457 3.0
Swire Pacific 9,899 2.1
Techtronic Industries 8,897 1.9
Hong Kong Exchanges and Clearing 7,090 1.5
Galaxy Entertainment 5,742 1.2
Hang Lung 4,008 0.8
BOC Hong Kong 2,732 0.6
TOTAL HONG KONG (SAR) 52,825 11.1
SINGAPORE
DBS 13,775 2.9
Singapore Exchange 7,376 1.5
United Overseas Bank 6,578 1.4
Venture 5,548 1.2
Sheng Siong 4,483 0.9
Sea (ADR)(3) 3,036 0.6
TOTAL SINGAPORE 40,796 8.5
SOUTH KOREA
Samsung Electronics 34,697 7.3
Samsung SDI 5,860 1.3
TOTAL SOUTH KOREA 40,557 8.6
MAINLAND CHINA
Tencent Holdings(4) 15,613 3.3
Shenzhou International Group(4) 5,926 1.2
Yum China(3,4) 6,425 1.4
New Oriental Education (ADR)(3) 3,472 0.7
NetEase(4) 2,775 0.6
New Oriental Education & Technology(4) 193 0.1
TOTAL MAINLAND CHINA 34,404 7.3
PHILIPPINES
Wilcon 8,797 1.8
International Container Terminal Services 5,952 1.3
BDO Unibank 4,790 1.0
Century Pacific Food 4,040 0.8
TOTAL PHILIPPINES 23,579 4.9
INDONESIA
Bank Mandiri 11,172 2.3
TOTAL INDONESIA 11,172 2.3
UNITED KINGDOM
Rio Tinto 7,910 1.7
TOTAL UNITED KINGDOM 7,910 1.7
FRANCE
LVMH 6,240 1.3
TOTAL FRANCE 6,240 1.3
UNITED STATES
Las Vegas Sands 6,236 1.3
TOTAL UNITED STATES 6,236 1.3
VIETNAM
Mobile World Investment 3,089 0.6
Vietnam Dairy Products 972 0.3
TOTAL VIETNAM 4,061 0.9
TOTAL INVESTMENTS(5) 475,994 99.9
DERIVATIVE FINANCIAL INSTRUMENTS
Index Futures
Korean Stock Exchange Put Option
342.5 August 2023 239 0.1
S&P ASX 200 Put Option 7175 July 2023 138 -
Korean Stock Exchange Put Option
327.5 August 2023 107 -
TOTAL INDEX FUTURES 484 0.1
TOTAL INVESTMENTS AND DERIVATIVE FINANCIAL
INSTRUMENTS 476,478 100.0
(1) Listed in the UK.
(2) Open-ended collective investment fund.
(3) Listed in the USA.
(4) Listed in Hong Kong (SAR)
(5) Total investments comprise the following
£'000
Equities 449,875
American Depositary Receipts (ADR) 13,332
Collective investment fund 12,787
Total investments 475,994
Interim Management Report and Directors' Responsibility Statement
Principal risks and uncertainties
The principal risks and uncertainties with the Company's business fall into
the following categories: geopolitical and political; strategic; investment
management; financial and currency; custody; gearing and leverage; accounting,
legal and regulatory; service provider; cyber and ESG and climate change. A
detailed explanation of the risks and uncertainties in each of these
categories can be found on pages 52 to 54 of the Company's published annual
report and accounts for the year ended 31 December 2022.
These risks and uncertainties have not materially changed during the six
months ended 30 June 2023. However, the Board undertook a review of principal
and emerging risks for the Company while reviewing these accounts. The
Directors noted that geopolitical risk and climate change risk in particular
continue to develop and will be reported on in the next annual report as
appropriate.
Going concern
Having assessed the principal risks and uncertainties, and the other matters
discussed in connection with the viability statement as set out on page 55 of
the published annual report and accounts for the year ended 31 December 2022,
the Directors consider it appropriate to adopt the going concern basis in
preparing these accounts.
Related party transactions
There have been no transactions with related parties that have materially
affected the financial position or the performance of the Company during the
six months ended 30 June 2023.
Directors' responsibility statement
The Directors confirm that, to the best of their knowledge, this set of
condensed financial statements has been prepared in accordance with United
Kingdom Generally Accepted Accounting Practice ("UK GAAP") and with the
Statement of Recommended Practice, "Financial Statements of Investment Trust
Companies and Venture Capital Trusts" issued in July 2022 and that this half
year report includes a fair review of the information required by 4.2.7R and
4.2.8R of the FCA's Disclosure Guidance and Transparency Rules.
Income Statement
(Unaudited) (Unaudited) (Audited)
For the six months For the six months For the year
ended 30 June 2023 ended 30 June 2022 ended 31 December 2022
Revenue Capital Total Revenue Capital Total Revenue Capital Total
Note £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Gains/(losses) on investments held at fair value through profit or loss - 5,786 5,786 - (97,381) (97,381) - (86,397) (86,397)
Net (losses)/gains on derivative contracts - (1,718) (1,718) - 5,578 5,578 - 9,487 9,487
Net foreign currency gains/(losses) - 2,187 2,187 - (4,838) (4,838) - (5,341) (5,341)
Income from investments 8,113 - 8,113 8,787 - 8,787 16,278 63 16,341
Other interest receivable and similar income 119 - 119 - - - 34 - 34
Gross return/(loss) 8,232 6,255 14,487 8,787 (96,641) (87,854) 16,312 (82,188) (65,876)
Investment management fee (383) (1,150) (1,533) (417) (1,250) (1,667) (809) (2,427) (3,236)
Administrative expenses (424) - (424) (432) - (432) (720) - (720)
Net return/(loss) before finance costs and taxation 7,425 5,105 12,530 7,938 (97,891) (89,953) 14,783 (84,615) (69,832)
Finance costs (342) (1,026) (1,368) (87) (260) (347) (300) (903) (1,203)
Net return/(loss) before taxation 7,083 4,079 11,162 7,851 (98,151) (90,300) 14,483 (85,518) (71,035)
Taxation 3 (648) (133) (781) (570) 1,130 560 (1,017) 1,129 112
Net return/(loss) after taxation 6,435 3,946 10,381 7,281 (97,021) (89,740) 13,466 (84,389) (70,923)
Return/(loss) per share 4 6.18p 3.79p 9.97p 6.68p (89.04)p (82.36)p 12.47p (78.13)p (65.66)p
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 period.
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the period.
Statement of Changes in Equity
For the six months ended 30 June 2023 (Unaudited)
Note Called-up Share Capital Special Capital Revenue Total
share premium redemption reserve reserves reserve £'000
capital £'000 reserve £'000 £'000 £'000
£'000 £'000
At 31 December 2022 5,456 114,656 11,646 29,182 270,838 25,696 457,474
Repurchase of the Company's
own shares into treasury - - - - (9,254) - (9,254)
Net return after taxation - - - - 3,946 6,435 10,381
Dividend paid in the period 5 - - - - - (11,432) (11,432)
At 30 June 2023 5,456 114,656 11,646 29,182 265,530 20,699 447,169
For the six months ended 30 June 2022 (Unaudited)
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 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 - - - - (1,838) - (1,838)
Net (loss)/return after taxation - - - - (97,021) 7,281 (89,740)
Dividend paid in the period 5 - - - - - (9,275) (9,275)
At 30 June 2022 5,456 114,656 11,646 29,182 272,110 19,511 452,561
For the year ended 31 December 2022 (Audited)
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 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 5 - - - - - (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
(Unaudited) (Unaudited) (Audited)
30 June 30 June 31 December
2023 2022 2022
Note £'000 £'000 £'000
Fixed assets
Investments held at fair value through profit or loss 475,994 490,426 499,305
Current assets
Debtors 5,839 6,877 517
Cash at bank and in hand 15,968 4,975 5,161
Derivative financial instruments held at fair value
through profit or loss 484 1,723 -
22,291 13,575 5,678
Current liabilities
Creditors: amounts falling due within one year (50,983) (51,440) (47,509)
Net current liabilities (28,692) (37,865) (41,831)
Total assets less current liabilities 447,302 452,561 457,474
Non current liabilities
Deferred taxation (133) - -
Net assets 447,169 452,561 457,474
Capital and reserves
Called-up share capital 6 5,456 5,456 5,456
Share premium 114,656 114,656 114,656
Capital redemption reserve 11,646 11,646 11,646
Special reserve 29,182 29,182 29,182
Capital reserves 265,530 272,110 270,838
Revenue reserve 20,699 19,511 25,696
Total equity shareholders' funds 447,169 452,561 457,474
Net asset value per share 7 433.74p 416.45p 434.60p
Registered in England and Wales
Company registration number: 02153093
Cash Flow Statement
(Unaudited) (Unaudited) (Audited)
For the For the For the
six months six months year
ended ended ended
30 June 30 June 31 December
2023 2022 2022
Note £'000 £'000 £'000
Net cash inflow from operating activities 8 3,662 4,104 11,019
Net cash inflow from investment activities 28,854 11,709 23,401
Dividends paid (11,432) (9,275) (9,275)
Interest paid (1,365) (330) (1,122)
Net bank loans drawn down - 18,237 18,237
Repurchase of the Company's own shares into treasury (8,615) (1,838) (15,451)
Issue of shares - 1,669 1,669
Net cash inflow in the period 11,104 24,276 28,478
Reconciliation of net cash flow to movement in net debt
Net cash inflow in the period 11,104 24,276 28,478
Net bank loan drawn down - (18,237) (18,237)
Exchange movements 2,187 (4,838) (5,341)
Changes in net funds arising from cash flows 13,291 1,201 4,900
Net debt at the beginning of the period (40,987) (45,887) (45,887)
Net debt at the end of the period (27,696) (44,686) (40,987)
Represented by:
Cash at bank and in hand 15,968 1,024 5,161
Bank loans (43,664) (45,710) (46,148)
Net debt (27,696) (44,686) (40,987)
Notes to the Accounts
1. Financial Statements
The information contained within the accounts in this Half Year report has not
been audited or reviewed by the Company's auditor.
The figures and financial information for the year ended 31 December 2022 are
extracted from the latest published accounts of the Company and do not
constitute statutory accounts for that year. Those accounts have been
delivered to the Registrar of Companies and included the report of the
auditors which was unqualified and did not contain a statement under either
section 498(2) or 498(3) of the Companies Act 2006.
2. Accounting policies
Basis of accounting
The accounts have been prepared in accordance with United Kingdom Generally
Accepted Accounting Practice, in particular with Financial Reporting Standard
104 "Interim Financial Reporting" and with the Statement of Recommended
Practice "Financial Statements of Investment Trust Companies and Venture
Capital Trusts" issued by the Association of Investment Companies in July
2022.
All of the Company's operations are of a continuing nature.
The accounting policies applied to these accounts are consistent with those
applied in the accounts for the year ended 31 December 2022.
3. Taxation
(Unaudited) (Unaudited) (Audited)
Six months ended Six months ended Year ended
30 June 2023 30 June 2022 31 December 2022
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Irrecoverable overseas tax 648 - 648 570 - 570 1,017 - 1,017
Provision for overseas capital gains tax - 133 133 - (1,130) (1,130) - (1,129) (1,129)
Taxation 648 133 781 570 (1,130) (560) 1,017 (1,129) (112)
The Company's effective corporation tax rate is nil, as deductible expenses
exceed taxable income.
4. (Loss)/return per share
(Unaudited) (Unaudited)
Six months Six months (Audited)
ended ended Year ended
30 June 30 June 31 December
2023 2022 2022
£'000 £'000 £'000
Revenue return 6,435 7,281 13,466
Capital return/(loss) 3,946 (97,021) (84,389)
Total return/(loss) 10,381 (89,740) (70,923)
Weighted average number of shares in issue during the period 104,131,132 108,960,402 108,005,903
Revenue return per share 6.18p 6.68p 12.47p
Capital return/(loss) per share 3.79p (89.04)p (78.13)p
Total return/(loss) per share 9.97p (82.36)p (65.66)p
5. Dividend paid
(Unaudited) (Unaudited)
Six months Six months (Audited)
ended ended Year ended
30 June 30 June 31 December
2023 2022 2022
£'000 £'000 £'000
2022 dividend paid of 11.0p (2021: 8.5p) 11,432 9,275 9,275
No interim dividend has been declared in respect of the year ending
31 December 2022 (2021: nil).
6. Called-up share capital
(Unaudited) (Unaudited)
Six months Six months (Audited)
ended ended Year ended
30 June 30 June 31 December
2023 2022 2022
£'000 £'000 £'000
Changes in called-up share capital during the period were as follows:
Opening balance of ordinary shares of 5p each, excluding shares held in 5,263 5,439 5,439
treasury
Repurchase of shares into treasury (108) (22) (193)
Issue of shares - 17 17
Subtotal, ordinary shares of 5p each, excluding shares held in treasury 5,155 5,434 5,263
Shares held in treasury 301 22 193
Closing balance, ordinary shares of 5p each, including shares held in treasury 5,456 5,456 5,456
(Unaudited) (Unaudited)
Six months Six months (Audited)
ended ended Year ended
30 June 30 June 31 December
2023 2022 2022
Changes in the number of shares in issue during the period were as follows:
Ordinary shares of 5p each, allotted, called-up and fully paid
Opening balance of shares in issue, excluding shares held in treasury 105,263,203 108,774,651 108,774,651
Repurchase of shares into treasury (2,167,985) (443,000) (3,851,448)
Issue of shares - 340,000 340,000
Closing balance of shares in issue, excluding shares held in treasury 103,095,218 108,671,651 105,263,203
Closing balance of shares held in treasury 6,019,433 443,000 3,851,448
Closing balance of shares in issue, including shares held in treasury 109,114,651 109,114,651 109,114,651
7. Net asset value per share
(Unaudited) (Unaudited) (Audited)
30 June 30 June 31 December
2023 2022 2022
Total equity shareholders' funds (£'000) 447,169 452,561 457,474
Shares in issue at the period end, excluding shares held in treasury 103,095,218 108,671,651 105,263,203
Net asset value per share 433.74p 416.45p 434.60p
8. Reconciliation of total return before finance costs and taxation
to net cash inflow from operating activities
(Unaudited) (Unaudited)
Six months Six months (Audited)
ended ended Year ended
30 June 30 June 31 December
2023 2022 2022
£'000 £'000 £'000
Total return/(loss) before finance costs and taxation 12,530 (89,953) (69,832)
Less capital (return)/loss before finance costs and taxation (5,105) 97,891 84,615
(Increase)/decrease in prepayments and accrued income (2,277) (1,975) 83
Decrease/(increase) in other debtors 6 (6) (1)
Increase/(decrease) in other creditors 71 (250) (388)
Special dividend allocated to capital - - 63
Stock dividend - - (63)
Management fee allocated to capital (1,150) (1,250) (2,427)
Overseas withholding tax deducted at source (413) (353) (1,031)
Net cash inflow from operating activities 3,662 4,104 11,019
9. Financial instruments measured at fair value
The Company's financial instruments that are held at fair value include its
investment portfolio and any derivative financial instruments.
FRS 102 requires that these financial instruments are categorised into a
hierarchy consisting of the following three levels:
Level 1 - valued using unadjusted quoted prices in active markets for
identical assets.
Level 2 - valued using observable inputs other than quoted prices included
within Level 1.
Level 3 - valued using inputs that are unobservable.
The following table sets out the fair value measurements using the above
hierarchy:
30 June 2023 (unaudited)
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Financial instruments held at fair value through profit or loss
Equity investments 475,994 - - 475,994
Derivative financial instruments - index put options 484 484
Total 476,478 - - 476,478
30 June 2022 (unaudited)
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Financial instruments held at fair value through profit or loss
Equity investments 490,426 - - 490,426
Derivative financial instruments - index futures 1,723 1,723
Total 492,149 - - 492,149
31 December 2022 (audited)
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Financial instruments held at fair value through profit or loss
Equity investments 499,305 - - 499,305
Total 499,305 - - 499,305
10. Events after the interim period that have not been reflected in the
financial statements for the interim period
The Directors have evaluated the period since the interim date and have not
noted any significant events which have not been reflected in the financial
statements.
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