Scottish Oriental does the splits, takes profits in India and lifts China
Scottish Oriental Smaller Companies (SST ) is proposing a five-for-one share split as the Asia equity fund steps up marketing in a bid to reverse a widening in its discount despite good performance that saw it win a Citywire award this month.
The board of the £398m investment trust, which won Best Asia Pacific Trust in the annual Citywire awards, said that a share split and the appointment of Investec as broker would help liquidity in a stock currently trading 15% below net asset value.
Chair Jeremy Whitley said the trust’s performance had been strong and it was ‘disappointing’ to see the discount widen to 14% from 12.4% in the year to 31 August, despite a share buyback programme.
Over the 12-month period, the trust delivered underlying total returns of 18.6% and the shares gained 16.5%, beating the MSCI AC Asia ex Japan Small Cap and MSCI AC Asia ex Japan benchmark indices’ respective returns of 13.5% and 12%, annual results show.
The outperformance generated a £98,000 performance fee for fund manager FSSA Investors. Since the financial year-end, the hurdle rate has been lowered, making it easier for FSSA to earn a performance fee.
Indian holdings were among the top performers as valuations soared. Personal care products company Colgate Palmolive contributed 4.8% to performance as it reported strong sales and profit growth and shares in air conditioner manufacturer Blue Star surged 125.4% as growing market share lifted profits.
FSSA Investors’ Citywire A-rated fund managers Vinay Agarwal and Sree Agarwal held 41% of the portfolio in India at year-end, which has fallen to 37%, according to the October factsheet, as they exited six companies. In exchange, they bought several that remained at attractive valuations.
‘We sold almost 20% of the value of the trust in India as we took profits. That’s not a view on the market, we just thought they looked expensive,’ Sree Agarwal said. ‘The trust has got more consolidated among higher quality companies over time.’
New positions include Mahindra & Mahindra Financial Services, a leading non-bank finance company, which has a strong rural brand, but lost its way recently, he said. The pair were reassured by the appointment of a new chief executive and the improvement of the loan book.
The pair also took advantage of weakness in China, where some smaller companies have shown the ability to grow consistently despite the weak economic environment by gaining market share and are available at attractive valuations, lifting exposure from 12% to 19%.
They added DPC Dash, the exclusive franchise operator of Domino’s Pizza in China, which has over 1000 branches in 30 cities, and online music platform Cloud Music.
They also bought their first New Zealand-based business, global logistics company Mainfreight, which has been gaining market share and increasing profits since the Covid pandemic.
The 14 exits and six purchases were part of a major portfolio consolidation, which saw the weighting to the top-20 positions rise to 65.7% of net assets, the highest in the last eight years, reflecting the pair’s conviction.
Sree Agarwal added that the portfolio was more resilient and higher quality than it had ever been, pointing to the median forward price-to-earnings ratio of 18.9 times, median two-year forecast annualised earnings per share growth of 17.4% and median current year return on equity of 19%.
Having conserved dividends since the Covid pandemic, many companies resumed payouts over the period, lifting the trust’s earnings by 95% to 27.74p. The chair proposed a final dividend of 14p, as well as a special dividend of 8p, equating to a 1.5% yield, although the trust’s focus is wealth preservation and capital growth.
Over five years, the trust has delivered underlying returns of 58% and the shares have risen 52% versus 63% for the MSCI AC Asia ex Japan Small Cap index and 23% for the MSCI AC Asia ex Japan index, according to Morningstar data.
