Investing in smaller companies can be an exciting, if bumpy, ride, yet it often leads to long-term out-performance. This has been the case not only for the UK, where there are some excellent small-cap fund managers, but also around the globe. Combine the potential of smaller companies with Asia’s fast-growing economies and you have a compelling opportunity.
An interesting way of accessing this is through the Aberdeen Asian smaller companies investment trust. Aberdeen’s expertise in Asian equities is well known. A focus on good quality, resilient businesses has helped navigate the volatile Asian markets exceptionally well over the years. The team, run by Hugh Young, believes share prices reflect the quality of underlying businesses over the long term. It therefore looks to identify the best firms and buy them when the valuation is right.
Aberdeen’s approach is consistent across its range of funds. You do not often find a stock held in just one. For example, the 60 or so smaller companies in this trust will also be found in either its off-shore Asian smaller company unit trust or in the individual country funds Aberdeen manages across the region.
The trust focuses on companies below $750m in size at the time of purchase, high-lighting one of the benefits of the investment trust structure. As there is no money coming in and out of the trust to worry about, Aberdeen can hunt more freely for much smaller companies, which are often more illiquid.
In contrast, its Asian smaller companies unit trust looks at companies below $2.5bn. However, according to Young, the portfolios are fairly similar. Indeed, running the two types of funds is complementary – the discipline of having to buy and sell new holdings as money flows in and out forces the team to reassess whether it should also be holding a company in the investment trust.
The current portfolio trades at a price to earnings ratio of about 13.5 times this year’s earnings. This is above the MSCI Asia Pacific small-cap index, although this is heavily skewed to Australia, where the trust rarely invests. According to Young, this is near the long-term average following a rally in the first few months of 2012.
The positive start to this year has been beneficial for existing holdings of the fund but Young is finding it harder to unearth opportunities as valuations are less attractive than they were. The portfolio currently favours companies exposed to domestic consumption in the region. Consumer businesses make up almost 45 per cent of the portfolio, compared with about 13 per cent of the index. Top 10 holdings include Thai retailer Siam Macro, brewer Multi Bintang and Godrej, a consumer products business.
At a country level, the team has found good opportunities in India, Malaysia, Thailand, and Indonesia, while it is harder to find high quality smaller companies in China, Taiwan and Korea. Ultimately, the decision whether to invest is based on the quality of the companies alone, not location.
When assessing an investment trust, factors other than performance must be considered. For example, the amount of borrowing, or gearing, the trust has. Gearing can add value in a rising market and detract in a falling one. Aberdeen’s approach is prudent and gearing tends to be no more than 10 per cent.
Another issue to bear in mind is that the share price may not accurately reflect the underlying net asset value of the trust. It may be a premium or discount, according to market sentiment. Shares are currently trading marginally above net asset value, meaning they trade at a premium.
Investors looking to purchase may want to monitor this to see if shares fall to a discount prior to buying. Those not wanting to take the additional risk of the share price discount/premium could consider the unit trust instead. Either way, Aberdeen’s Asia team is of the highest calibre and exposure could be an excellent addition to an adventurous portfolio.
Ben Yearsley is investment manager at Hargreaves Lansdown