James Carthew: Tough times could be over for the largest Asian trust

Even after the three-way merger that ultimately created Invesco Asia Dragon (IAD ), the largest investment trust focused on Asia remains Schroder AsiaPacific (SDP ). The trust, with a market capitalisation of £811m, was launched in November 1995 and so is approaching its 30th birthday. For most of its life it was managed by Matthew Dobbs, who built up a great track record of outperformance versus its MSCI All Countries ex-Japan Index benchmark. In March 2021, he handed over the reins to Abbas Barkhordar and Richard Sennitt.

The trust has been through some difficult times since then. According to its website, the trust’s share price total return was -3.4% from 31 March 2021 up to the end of June 2025 and the NAV return was -1.1%. That NAV return was a bit behind the return on the benchmark of 1.9%. However, more recently, the performance appears to be improving and SDP can now boast the best 1-year NAV returns of its four-strong peer group. Although, Asian income-focused funds have still mostly performed better.

A locally-based team of over 40 analysts, spread across six offices in Asia, helps come up with ideas for the two co-managers to consider. The depth of the team means that the analysts can talk to customers, suppliers, and firms in the supply chain as well as the management of companies.

The aim is to identify attractive, good quality businesses trading at sensible valuations. Targeted companies will have good governance, recognising the importance of treating minority foreign investors fairly, and an alignment of interest between management and investors.

The investment approach has remained consistent since launch and is focused on picking 50-60 stocks. Sector weights and country exposures are a by-product of this, but the managers are conscious of macroeconomic risks when assembling the portfolio, and these are reviewed at least monthly.

Companies should be capable of sustaining attractive excess returns on capital – that means having some lasting, defensible competitive advantage. Analysing companies in this way makes it easier to compare companies in different sectors and geographies.

Analysts come up with fair value targets for stocks based on projections for the next three years. The managers do not try to second-guess these. Good quality companies are often expensive, but the SDP approach also emphasises not overpaying for them.

Opportunities created by Trump

Asian markets have been volatile this year, mostly in reaction to the noise emanating from the White House. Trump’s first term actually worked out well for Asia. This time around, the managers knew Trump’s views on trade but were not anticipating some of the measures that the US president has taken that have undermined US economic growth, as tariffs put pressure on US consumers and drive up inflation. The market volatility has created chances to buy companies on attractive valuations.

One important thing may be the weakness of the US dollar. In the past, periods of dollar weakness have been good for developed Asia and emerging markets, not least because it encourages US investors to look at opportunities outside their home country.

The trade deals that have been announced so far are not great news but at least they alleviate some of the uncertainty in markets. In addition, some markets, India for example, are mostly domestically focused. Trump may also be driving Asian businesses to look for opportunities away from the US market.

Big underweights

The SDP portfolio is underweight both China and India. In China’s case, this reflects perceived governance weaknesses. There has also been an excess of investment in some sectors – such as solar panels and electric vehicles – that has driven down returns. SDP has no exposure to the big Chinese ecommerce companies because of competition concerns and government-encouraged investment in low return areas such as data centres.

For India, while the managers feel that there is no shortage of good quality businesses, valuations are too high, in their view. The danger is that such stocks are very vulnerable to a savage derating on the back of short-term disappointment.

By contrast, SDP has an overweight exposure to some of the smaller countries in ASEAN, including an off-benchmark exposure to Vietnam. Singapore is favoured for its tendency towards good governance and Hong Kong is preferred over China for the same reason.

The SDP portfolio has biases towards IT companies and financials. Some important Asian companies, such as the Asian chipmakers, simply have no credible US competition. The largest position, as in most Asian trusts, is TSMC, which benefits from prodigious cash flows and high R&D investment, and Samsung Electronics is the third-largest holding.

Financials is a diverse sector. Banks are a good way to capture economic growth. It helps that the interest rate environment is positive and that companies in Asia tend to have robust balance sheets compared to western counterparts. Hong Kong Exchanges and Clearing is a top 10 position. The local initial public offering (IPO) market is fairly healthy and trading volumes have been strong.

Where SDP differs from some peers is the managers’ wariness about consumer-facing stocks. They feel that the rise of ecommerce and digitalisation has lowered the barriers to entry in this sector. If challenger brands can scale quickly, they can undermine margins for incumbents.

In my own portfolio, it is some time since I owned a pan-Asia trust, although I do own separate trusts focused on India, China, and emerging markets. Over the past five years, Asian trusts focused on income and on small caps have done better than mainstream funds such as SDP. However, I wonder whether the recent pick up in SDP’s returns might be a sign that things are turning in its favour.

James Carthew is head of investment company research at QuotedData.

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