Robotics play drives bumper returns for Aberdeen Asia Focus
Shares in Aberdeen Asia Focus (AAS ) shot up over the past year, led by a high precision machine tools manufacturer and robotics play.
Over the 12 months to the end of July, AAS delivered a net asset value (NAV) total return of 20.3%, while shares climbed 26.6%. This compares with a 7.6% gain for the MSCI AC Asia ex Japan Small Cap index.
Talking to Citywire, manager Gabriel Sacks put the strong results down to savvy stock selection, noting the £519m small cap trust is 96% differentiated from its benchmark.
Heading up the list of top performers was Precision Tsugami China, the portfolio’s third largest position at 3% of total assets.
Tsugami is a Chinese business but listed in Hong Kong, and utilises Japanese technology.
‘It’s a stock that we’ve held for a number of years now,’ said Sacks. ‘It was on the more illiquid end of small caps and relatively undiscovered when we first looked at it.
‘We bought it as a value play on industrial strength and automation in China. It was trading then on about 5x earnings with a 10% dividend yield.’
Year-to-date, shares in the company have more than doubled, surging 131.7% over the reporting period.
‘The whole revenue base has been growing very fast. In the last results they grew revenue about 50% year on year, and that’s through a couple of years where China has been a bit tough in terms of the macro economy.
‘Because of the excitement around robotics and AI in China, investors have cottoned on to the fact that 10% of their sales are to clients in that space.’
The manager stressed this is only a small part of the business, noting that ‘they make computer numerical control machines that basically go into everything, underpinning industrial automation across a lot of different industries’.
Also within tech, Taiwanese companies Chroma ATE and Taiwan Union Technology were standouts, with shares rising 90.8% and 56.5% respectively.
AAS’s small-cap remit rules out AI behemoth Taiwan Semiconductor, and Sacks emphasised a highly targeted approach to the rest of the value chain in the country.
‘We avoid a lot of component manufacturers within the Taiwanese ecosystem.
‘We’re more leveraged to the logic than the memory side of the AI supply chain. Essentially logic chips, which is what TSMC specialises in, have had a more steady growth trajectory, and memory chips are slightly more commoditised.
‘That’s changing a bit with AI, where we have these high bandwidth memory chips, but the memory cycle is still a bit more extreme.’
As at the end of September, the trust’s top country weightings were to India (23.1%), Taiwan (17.8%) and China (16.2%). Its smaller company mandate also brings exposure to less conventional markets such as Vietnam, the Philippines and Sri Lanka.
‘These smaller companies in Asia are not speculative businesses’, Sacks explained. ‘From a quality point of view, we put them in the same camp as a lot of the large caps that we invest in.
‘They’ve got strong balance sheets, some of them established as mature companies and leaders in their space globally.’
He said the trust’s hunting ground encompasses ‘a large universe of under researched and underappreciated stocks, which is a good backdrop for active managers to add value.
‘Being less correlated to global markets also breaks down portfolio risk.’
Stifel analyst Will Crighton said: ‘This was a very good period for the trust which has been demonstrating strong stock selection recently, with this being the principal driver of returns.’
He pointed out that gains over the year ‘comfortably lead’ the trust’s Asia small cap peers, and ‘rivals some of the best returns of the Asia generalist trusts.’
‘There have been some changes to the research and portfolio construction process at the investment manager, and these look to have been working,’ he added. These included some new senior research hires: a dedicated tech analyst, Asian financials specialist and India small cap specialist.
Stifel believes further narrowing of the discount is due, which as of yesterday closed at 11.6%.
