Schroder AsiaPacific (SDP ) has cautiously reduced its underweight to China by topping up positions in ‘high quality’ companies at improving valuations.

Results for the year to 30 September reported an underlying net asset value (NAV) total return of 16.5%, although shareholders received 15.6% including dividends as the gap, or discount, between the share price and NAV widened slightly to 12.4%. Both fell short of the MSCI All Country Asia ex-Japan index which returned 17.3%.

However, Deutsche Numis noted the £791m closed-end fund had a strong 10-year record with an average annual investment return of 8.6% compared with 7.1% for the MSCI index.

In response to the discount, the board upped the pace of share buybacks, repurchasing 8.2m at a cost of £42m compared to 6m shares bought for £30m in the 2023 financial year. Buying back its cheap shares added 0.6% to NAV. 

A final annual dividend of 12.5p marked a 4.2% increase and was covered by revenues rising to 12.79p per share from 12.06p to put the shares on a 2.3% yield.

While poor stock selection in China was a hindrance to performance, offset slightly by an underweight to the superpower, fund managers Richard Sennitt and Abbas Barkhordar tentatively upped their position in the world’s second largest economy.

They said China is still a ‘substantial underweight’ partially offset by the overweight to Hong Kong, which is ‘more attractive from a valuation and governance perspective’.

The trust’s October factsheet shows it held 19% in China against a 31.1% index weighting and 12.7% in Hong Kong versus its benchmark’s 4.8%.

‘We have, however, reduced our China underweight during the year, by adding to several high-quality stocks which had been sold down to attractive levels during the period,’ they said.

This included video game developer NetEase, music streamlining service Tencent, automation equipment supplier Shenzhen Inovance, and battery manufacturer Contemporary Amperex Technology.

Although the underweight position in large e-commerce companies held returns back with an ‘intense rally’ in the final week of the period on the back of stimulus measures from Beijing, Sennitt and Barkhordar cut their exposure to Alibaba.

The duo said China is likely to become ‘more aggressive’ on domestic stimulus to try and counter threatened tariffs from incoming US president Donald Trump, although they said levies imposed by the maverick Republican in his first term did little to curb Asia economies in the long term.

China faces both domestic challenges, including a failing property market, weak consumer confidence, and deflation, as well as external headwinds in the form of Trump and geopolitical tensions.

Even with the promised stimulus and better valuations, the managers said they had been adding to China with ‘caution’.

‘Given…the structural challenges facing stock pickers in China – poor capital allocation, structurally lower nominal growth, unpredictable regulatory and political shifts, and high debt levels – we remain significantly underweight the market, albeit less so than where we were 12 months ago,’ they said.

However, the fund remains overweight to IT, which was the best performing sector over the year, as the managers believe in the ‘structural growth drivers behind global demand for technology, particularly advanced semiconductors’.

Although valuations in the sector have moved higher on cyclical improvements and the surge in artificial intelligence (AI)-related hardware, Sennitt and Barkhordar ‘remain comfortable with the valuations of what we hold in the portfolio…but are mindful we do not want to overstay our welcome here’.

An overweight to financials also remains, which includes exposure to banks, insurers and exchange companies. Many of the holdings are in ‘more mature markets, such as Singapore’, with low exposure to Asean markets and India.

Chair James Williams said China remains ‘central to the region’s growth story, yet it also presents unique challenges’.

While there are significant uncertainties, the long-suffering Chinese stock market has been showing some recent momentum and these issues are ‘balanced by the region’s long-term structural growth drivers’.

‘Asia Pacific remains an engine of global growth, with robust domestic consumption, technological innovation, and an increasingly affluent population,’ he said.