Edinburgh Dragon. Summary. Analysts: Portfolio. Update 01 October 2018

Transcription

1 Aberdeen Standard Investments is a client of Kepler Trust Intelligence. Material produced by Kepler Trust Intelligence should be considered as factual information only and not an indication as to the desirability or appropriateness of investing Edinburgh Dragon Update 1 October 218 Summary Edinburgh Dragon owns a portfolio of Asia Pacific ex Japan stocks selected on a bottom-up basis for their quality characteristics, with an expected long-term holding period. The trust has seen something of a transformation in recent years as the managers have sought to increase its exposure to quality companies, and there has been greater exposure to technology and China. Following periods of poor performance in 213 and 215, the portfolio trades on a discount wider than the sector average, although supported by a buyback programme. Dividends have grown steadily over the past five years, although the focus is on total returns and the portfolio tends to yield less than the market thanks to its quality tilts. Portfolio Edinburgh Dragon invests in Asia Pacific ex Japan equities, selecting stocks for their quality growth characteristics with a secondary focus on starting valuations. Environmental, social and corporate governance (ESG) considerations are incorporated into the stock section process, and the management team as a whole are active as shareholders to improve corporate governance. The approach is rigorously bottom-up, with the intention of being a long-term buy-and-hold investor in companies selected for their attractive fundamental characteristics. The team is willing to build a portfolio very different to the index, which in recent years has meant taking significant country bets relative to the index. These are outputs of stock-specific opportunities rather than macro calls on the countries, however. Following a run of disappointing performance between 213 and 215, Aberdeen implemented a number of refinements to the process. The team was arguably too patient, in the case of long-term holding Standard Chartered Bank in particular, and it has formalised greater investigation into troubled stocks to ensure it doesn t hold on to companies for too long once their fundamentals have deteriorated. The team has allocated bull and bear roles among analysts for its holdings to help uncover possible problems with its holdings sooner rather than later. Analysts: William Heathcoat Amory +44 () Pascal Dowling +44 () Thomas McMahon, CFA +44 () William Sobczak +44 () Kepler Partners is not authorised to make recommendations to Retail Clients. This report is based on factual information only. The material contained on this site is factual and provided for general informational purposes only. It is not an invitation or inducement to buy, sell or subscribe to any product described, nor is it a statement as to the suitability or otherwise of any investments for any person. The material on this site does not constitute a financial promotion within the meaning of the FCA rules or the financial promotions order. Persons wishing to invest in any of the securities discussed in the website should take their own independent advice with regard to the suitability of such investments and the tax consequences of such investment. There has also been a greater embedding of ESG analysis into the process and dedicated ESG analysts have been taken on in each regional equity team. Finally, the portfolio has been tilted more to information technology, which the team believes is one of the key growth areas in the future and one it was too little exposed to in the past. Here, Tencent is the key holding, added in the middle of 217. Previously the manager was concerned about the quality and resilience of Tencent s businesses and its securities structure, but he has become more assured with how 1

2 the revenue streams have grown and diversified and more comfortable with the treatment of minority shareholders. The weighting to technology has risen from around 1% of the trust at the end of 215 to around 23%. Financial services remain the largest sector exposure and a slight overweight, although the allocation has come down over the past two years. The trust is underweight energy and materials but does have holdings in these sectors, unlike some of its peers. Fig.1: Asset Allocation Industrials Communication Services Edinburgh Dragon: Sector exposure Technology Energy Utilities Healthcare Consumer Defensive As at Basic Materials Real Estate Consumer Cyclical Financial Services One relatively new addition to the financials portfolio is Ping An, which the team is particularly excited about, believing it to be a ten to 15 year opportunity. The insurer serves China s growing middle class, and Aberdeen s Asian equity team rates the management highly. The stock is only 2% given the valuation, but the intention is to build the position up on any weakness. On a country basis the changes to the portfolio have been more marked: the weighting to China has increased from 5% in 214 to 25%, with new investments made in the onshore China A-Shares market. Picks here include Fig.2: Regional Exposure Edinburgh Dragon: Regional exposure Thailand Taiwan South Korea Singapore Vietnam United Kingdom Other Countries As at China Hong Kong China International Travel Service, Hangzhou Hikvision and Kweichow Moutai. Much of this has come from the company s Singapore and Hong Kong holdings. Singapore is less attractive now than three or four years ago when the trust built up its overweight, manager Adrian Lim explains, thanks to valuations rising markedly. In China, the stocks the team has gone for tend to be the privately-owned stocks rather than state-owned enterprises (SOEs), about which it still has corporate governance concerns. The A-Shares additions have built up the trust s exposure to the Chinese consumer story. Overall this has been an uncharacteristically busy period in terms of turnover, with the trust seeing elevated levels of purchases and sales in each year between 215 and 217. This is due to opportunities being thrown up in periods of market volatility and the emergence of more mature technology stocks which now pass the company s quality screens. The intention is for the holding period to settle down to three to five years in line with the long-term history of the portfolio. New positions have been brought in gradually, with the company generally opening with positions of 5bps to 8bps. Usually it would enter at 1% and then bring the position up in 1% increments, but with the riskier nature of the stocks and the gearing on the trust, it believes it appropriate to be more cautious. Arguably, the manager has made wholesale changes without sacrificing the key elements of his approach. For example, although the trust has bought into Tencent, it has not bought into Alibaba or Baidu because both stocks fail the company s corporate governance screens. Similarly, while the company has increased its exposure to technology and to China, it has done so without sacrificing its quality characteristics. In fact, return on equity and operating margins have improved relative to the benchmark since the start of 216 as the changes to the portfolio started to come through. Overall Adrian and the team are highly positive about the opportunities in Asia over the long term, thanks to the young population and growing middle class. China in particular looks interesting thanks to the huge volume of reforms in recent years, which has helped the new economy of consumer services and technology mature rapidly. Adrian believes the current portfolio captures well the opportunities in this area. India too looks exciting, with real steps made to reduce the impact of corruption in the economy. Philippines Malaysia Indonesia India 2

3 Peer group The trust has one of the lowest allocations to value stocks in its peer group, and the second-highest allocation to growth stocks after Baillie Gifford s Pacific Horizon. It is the second largest Asia Pacific ex Japan trust in Morningstar s sector. The company has a 5m, multi-currency, revolving credit facility, which was taken out for a year in January 218 after the company retired 44.7m convertible unsecured loan stock - which was much more expensive as a debt as a result of a higher interest rate. This cheaper gearing should help the trust s profit and loss improve in coming years. That said, the facility will have to be renewed each year. Peer Group GROUP/INVESTMENT LATEST NET ASSETS (CUM FAIR) EQUITY STYLE VALUE % (NET) EQUITY STYLE GROWTH % (NET) EQUITY STYLE CORE % (NET) Pacific Horizon Ord 19,31,, Edinburgh Dragon Ord 75,89,43, Aberdeen New Dawn Ord 29,14,75, Pacific Assets Ord 33,69,7, JPMorgan Asian Ord 35,76,17, Schroder Asia Pacific Ord 81,32,93, Schroder Asian Total Return Inv. Company 3,37,44, Scottish Oriental Smaller Cos Ord 34,2,17, Martin Currie Asia Unconstrained Ord 15,53,52, Aberdeen Asian Smaller Ord 42,22,4, Invesco Asia Ord 22,1,59, Fidelity Asian Values Ord 27,92,95, Henderson Far East Income Ord 43,21,99, Schroder Oriental Income Ord 62,99,41, Aberdeen Asian Income Ord 4,3,21, LATEST % ASSET IN TOP 1 HOLDINGS Gearing Fig.3: Gearing This more flexible facility has also made it easier for the trust to draw in its horns in the difficult markets in 218 in the emerging markets region. Roughly half the overdraft facility is drawn down, worth roughly 3% of net assets. % Edinburgh Dragon: Net gearing Returns NAV has been more or less flat over a year after a difficult period for the region in 218. The trust made strong gains in 216 and 217, although in the latter year it didn t quite keep up with a momentum-driven market Edinburgh Dragon Over five years the trust now lags the index and sector thanks to poor returns in 213 and 215, which saw the trust post negative numbers. The high weighting to India cost the trust in 213, while in 215 the trust was hurt by the collapse in the oil price and by poor results from Standard Chartered Bank and HSBC, as well as an overweight to Singapore. 3

4 Fig.4: Performance Edinburgh Dragon: Performance vs. indices Fig.6: Dividends Edinburgh Dragon: Dividends Values 5 Values Fig.5: Performance % Oct '17 Jan '18 Apr '18 Jul '18 Edinburgh Dragon (NAV) MSCI AC Asia Ex Japan Edinburgh Dragon: Discrete calendar year returns The down year of 213, when emerging markets entered an earnings recession, brought to an end three consecutive years of outperformance in up and down markets. Dividend Edinburgh Dragon (NAV) Morningstar IT Asia Pacific Ex Japan Edinburgh Dragon (Price) Morningstar IT AsiaPacific Ex Japan MSCI AC Asia Ex Japan Although there is no explicit progressive dividend policy, in practice dividends have grown steadily over recent years after being held pat following 213, in which revenue per share was also flat. The board s policy is to pay a dividend marginally in excess of the minimum required to maintain investment trust status, which is an 85% payout ratio. The objective of the trust is to maximise total returns though, so the income is a derivative, and the quality focus of the trust means that its portfolio tends to have a lower running yield than the market. Management Adrian Lim manages this trust out of Singapore. Adrian has been with Aberdeen since 2 and is therefore well steeped in the quality-led approach of the organisation. Although Adrian is ultimately responsible for the buy and sell decisions for the trust, Aberdeen takes a team-based approach to its portfolios, with the Asia Pacific equities team working together to build consensus views on stocks. Flavia Cheong heads up the Asia Pacific equities team, which includes 17 analysts based in Singapore (including Adrian), five in Bangkok, six in Kuala Lumpur and four in Jakarta and Hong Kong, as well as others in the more developed Asian countries. The team also have three dedicated environmental, social and corporate governance (ESG) analysts on the desk. Last year s merger with Standard Life Investments has not affected management of the trust. The Asian equities team remains in place from Aberdeen, with Aberdeen s strength in this region complementing SLI s greater UK capabilities. Devan Kaloo remains head of equities at the merged entity. Discount DPS RPS The trust trades on a significant discount to NAV and to its peer group. This is thanks to performance being sluggish relative to peers due to poor results in 213 and 215 in particular. The trust has tended to trade on a discount of 1% to 14% over the past three years, with the sector s average discount narrowing from 1% to around 6%. The board has an active buyback policy and is in the market frequently to support the share price. 4

5 Fig.7: Discount Edinburgh Dragon: Discount / Premium % Edinburgh Dragon Charges Morningstar IT Asia Pacific Ex Japan The OCF of 1.3% is in line with the market cap weighted sector average. The management was reduced last year and is tiered:.85% is paid on the first 35m of net assets and.5% thereafter. The KID RIY figure is 1.59%, close to the sector average. 5

6 Important Information Kepler Partners is not authorised to market products or make recommendations to Retail Clients. This report has been issued by Kepler Partners LLP, is based on factual information only, is solely for information purposes only and any views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment. If you are unclear about any of the information on this website or its suitability for you, please contact your financial or tax adviser, or an independent financial or tax adviser before making any investment or financial decisions. The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country. Persons who access this information are required to inform themselves and to comply with any such restrictions. In particular, this website is exclusively for non-us Persons. The information in this website is not for distribution to and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States of America to or for the benefit of US Persons. This is an information-only document derived from publicly available facts. It does not, and is not intended to, constitute investment research or marketing. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice. Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, but will at all times be subject to restrictions imposed by the firm s internal rules. A copy of the firm s conflict of interest policy is available on request. Past performance is not necessarily a guide to the future. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that Independent financial advice should be taken before entering into any financial transaction. PLEASE SEE ALSO OUR TERMS AND CONDITIONS A copy of the firm s conflict of interest policy is available on request. Kepler Partners LLP is a limited liability partnership registered in England and Wales at 9/1 Savile Row, London W1S 3PF with registered number OC Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority. 6