The portfolio managers of Schroder Asian Total Return (ATR ) will maintain their China underweight in the coming year, with Robin Parbrook and Lee King Fuei saying Chinese shares are trading in ‘a secular bear market’. 

However, despite that, the duo actually added to mainland China names in the second half of last year as they took advantage of stockpicking opportunities. Meanwhile, they see the Indian market as ‘vulnerable’, given high expectations, and have also been focusing their technology exposure as they grow cautious on ‘AI-themed stocks’. 

The comments came in solid 2024 annual results for the £437m trust, which invests across the Asia Pacific region excluding Japan.

It delivered net asset value (NAV) returns of 13%, outperforming the MSCI AC Asia Pacific ex-Japan index for the ninth year in the last decade. The share price total return was 12.6%. 

To protect a 5% discount, in line with the trust’s policy, £17m worth of shares (3.8% of the share capital) were bought back over the year.

A ‘challenging year’ for navigating China

Parbrook and Fuei described 2024 as ‘a challenging year’ for investors in Chinese and Hong Kong stocks, with the Schroders’ trust’s positioning detracting from performance. 

In the first half of the year, holdings in high-quality private sector companies such as Tencent, NetEase and Trip.com performed well. 

However, with a sharp rally in markets following China’s announcement of a stimulus package in September, the portfolio suffered for its underweight in Chinese internet stocks such as JD.com, Alibaba and Meituan.

Traditional Hong Kong-listed businesses such as Shenzhou International and AIA underperformed during the rally.

Parbrook and Fuei, who have managed the trust since 2013, said: ‘We take the view that Chinese stock markets are in a secular bear market. We do not believe current, and hoped for, stimulus packages will reverse this.

‘We have had at least eight supposed economic stimulus packages since 2008, and none have delivered a sustained rebound in Chinese stock markets,’ they continued. 

‘Why is this? It is principally because stimulus packages do not address the underlying issues in the Chinese economy. Instead, they often exacerbate issues by creating more excess overcapacity in industries considered strategic, focusing on building infrastructure of questionable value, and allowing banks to evergreen bad debts.’

They also argue that valuations are ‘not as cheap as the China bulls claim’. However, they believe that holdings such as those referenced above are in secular growth areas and ‘generate good cash flow which is being returned to shareholders’. 

‘In summary, we expect to remain underweight China and are structurally cautious on the market but as stockpickers, we find good opportunities and thus are happy to own selective names,’ said the Schroders duo.

At the end of 2024, holdings in mainland China names hit 14.4% of the portfolio, up from 8.2% six months before. At 7.8%, Hong Kong exposure was little changed. 

‘Increasingly cautious on AI-themed stocks’

The biggest drag for the trust was its exposure – albeit underweight – to Korea, and especially to the memory sector. 

The share price of Samsung Electronics fell sharply in the face of intensified competition from Chinese manufacturers, a decline in global smartphone market share, and challenges in the AI memory chip segment. 

Over 2024, the trust reduced its exposure to this holding and to the broader technology sector.

Parbrook and Fuei explained the decision: ‘At this point, we are increasingly cautious on AI-themed stocks. We worry that we will see a hiatus in AI capital expenditure (the driver of Taiwan AI stocks) at some point as the reality of AI use cases and monetisation needs to catch up with the huge expenditure being undertaken by the likes of Microsoft, Amazon and Alphabet.’

The trust’s technology holdings are now reduced to those they see as ‘long-term structural winners’ including TSMC, Chroma ATE, MediaTek, Voltronic and ASE. 

‘Boring is often good’ 

Assets in Australia and Singapore were a source of stability for the portfolio. 

High-dividend-yielding stocks such as Singaporean banks DBS and United Overseas did particularly well.

The fund managers increased holdings in the area over 2024 and the portfolio is now materially overweight in what they say is ‘the most boring part of the Asian investment universe’. 

‘From your portfolio managers’ perspective, boring is often good – the Australian and Singapore stock markets offer good corporate governance, lots of dividends and reasonable earnings per share growth,’ they explained.

‘Our focus in Australia and Singapore is principally on dividend stocks, and we are still finding attractive opportunities in this space’. 

ASEAN markets also contributed positively over the year, with International Container Terminal Services and leading banks in Indonesia and the Philippines being top performers.

In India, there was a ‘minor drag’ from being underweight a strongly-performing market, but a holding in MakeMyTrip made some of the shortfall.  

With 13% exposure to the country, they are 6% underweight. 

‘India is the biggest single underweight in the portfolio, and we would need to see a material correction (probably driven by an exit of domestic retail money) for us to look to move overweight,’ Parbrook and Fuei said.

Schroder Asian Total Return has a three-yearly continuation vote, with the next to be held on 24 April at the annual general meeting.  

For the first time since 2021, the trust announced a performance fee has been paid in addition to the management fee of 0.65% of gross assets.