Half-year results from two of the three Asia smaller company investment trusts shows their managers at Aberdeen and Fidelity becoming more concerned about valuations, so the recent sell-off in response to the Iran war could be helpful so long as the conflict does not drag on.

Aberdeen Asia Focus (AAS), a £523m trust managed by Gabriel Sacks and Ng Xin Yao, made an 11.4% underlying return in the six months to 31 January, beating the 9% return of the MSCI AC Asia Japan Small Cap index.

The managers have adopted a “more defensive stance”, lowering gearing, or borrowing, and adding to Southeast Asia where they thought valuations were “more compelling”.

It was a similar story at Fidelity Asian Values (FAS), a £379m trust whose assets are run by Nitin Bajaj and Ajinkya Dhavale. It delivered a 10.9% total underlying return, but 15.2% shareholder return, over the same half-year period. The performance was partly helped by the value-style managers’ large overweight to China and Indonesia and underweight to India which was the region’s main market to fall, down nearly 14% in response to US tariffs and big gains in the previous two years. 

Unusually, for a small-cap focused fund, FAS’s best holding was Taiwan’s $1.5trn chip foundry giant TSMC, benefiting from its long-standing partnerships with Apple, Nvidia and AMD, leading technological edge and huge barriers to entry.

The managers noted that the average valuation of stocks in the MSCI benchmark were above their long-term average and the index no longer looked “cheap”. “However, this headline number makes a wide gap between value and growth stocks,” they said.

AAS should avoid tender offer

Going back to Aberdeen Asia Focus, its shareholders saw a 12.5% total return, with two quarterly dividends included, as the company joined the FTSE 250 index, where it hopes to gain a higher profile with investors. 

The half-year result extends a good run for AAS which looks likely to avoid holding a 25% tender offer this year, as it promised to do in August 2021 if five-year growth in net asset value (NAV) did not beat the MSCI index. Chair Krishna Shanmuganathan said the NAV total return since then had been 50.8%, well ahead of the benchmark’s 37.2%.

Performance was driven by Taiwanese and Korean AI and electronics providers such as Chroma ATE, Taiwan Union Technology and Hyundai Electric. 

The managers said they had continued to find “compelling ideas’ in Taiwan given its deep pool of high quality smaller companies, adding MPI Corp, a niche semiconductor probe cards and testing provider, and Sino-American Silicon Products which has a stake in GlobalWafers, a silicon wafer supplier. 

More recently, however, the AAS pair had taken “significant profits” in technology stocks, particularly in hardware, an area the FAS duo had already shunned, and had recycled into cheaper areas such as Thai Life Insurance and Chifeng Jilong Gold Mining in China. 

Eyes on India

Their search for mis-priced stocks has even got them looking in India where valuations were more “palatable” after the market’s decline and a bottoming out in earnings downgrades as economic conditions became more supportive. The FAS managers were also starting to see “selective pockets of opportunity” in the country. 

Our view

James Carthew, head of investment companies research at QuotedData, said: “Decent half-year numbers from both Aberdeen Asia Focus and Fidelity Asian Values have since both been overshadowed by the impact of the Iran war on energy prices. Nervous investors may take reassurance from the Fidelity trust’s managers’ comments that “periods of disruption can also create opportunities to invest in high quality businesses at attractive valuations”. 

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