Aberdeen - opportunities in Asian smaller companies

Kate Marshall | Fri 31 March 2017

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• The team continue to focus on high-quality businesses trading on reasonable valuations
• Following a weaker period of performance, they remain resolute in their long-term disciplined investment process
• The team are encouraged by the improving earnings outlook across the Asian region

Our view

Aberdeen’s Asian equities team seek high-quality companies with sound balance sheets and good levels of corporate governance, which can be purchased at reasonable valuations. Our analysis shows few active fund managers investing in Asia have outperformed their benchmarks over prolonged periods. Aberdeen Asset Management is home to one of the few Asian equities teams that has successfully added value for their investors over the long term.

In the shorter term however, the team's Aberdeen Global Asian Smaller Companies Fund has been through a difficult period of performance, which we have previously highlighted to our clients. Please remember past performance is not a guide to the future and the fund invests in higher-risk smaller companies and emerging markets.

Past performance is not a guide to the future. Source: Lipper IM to 28/02/2017

We have met senior members of the team on several occasions over the years and we are encouraged they continue to adhere to the same disciplined investment process that has been applied to their Asian funds for 30 years.

We acknowledge all active fund managers experience weaker periods of performance compared with their benchmarks. The team at Aberdeen remain one of the most experienced in the industry and we expect their process to drive good long-term returns. While we remain positive in our outlook, Aberdeen is not actively seeking new money into this fund at present. As such, the fund does not currently feature on the Wealth 150 list of our favourite funds across the major sectors.

Market and fund review

We recently met James Thom, a senior member of Aberdeen's Asian equities team, who shared their current views and outlook for the Asia Pacific region.

Following a difficult few years, Asian stock markets staged a recovery over the past year. These markets could face further challenges over the coming year, however. Rising US interest rates and a stronger dollar, for example, could make it difficult for Asian companies with high levels of US dollar-denominated debt to service these debts. Donald Trump's proposed protectionist policies could also stifle global trade and damage the export markets of Asian and emerging economies.

The positives should not be overlooked. Asian economies are generally better positioned than their Western counterparts to withstand periods of uncertainty. They have healthier current accounts, which typically means they export more goods and services than they import, and have lower levels of debt overall.

The team tend to focus on the prospects for individual companies rather than their views on the wider economy when positioning the portfolio. They are encouraged to see a recovery in the profits and earnings of many Asian companies. Cash flows have also been improving, which could help strengthen corporate balance sheets and provides an opportunity to increase dividends to shareholders.

The team are particularly positive in their outlook for Indian companies, where 11.4% of the fund is currently invested. India's stock market recently experienced a period of volatility after the government announced the removal of most of the country's cash from its economy in an effort to crack down on corruption and unpaid taxes. The team believe the policy could yield longer-term benefits and used the period of weakness to add to their exposure at more attractive share prices. New investments in City Union Bank and consumer goods company Jyothy Laboratories were added to the fund, while an existing investment in paint manufacturer Kansai Nerolac was topped up.

An investment in Shell Philippines was also initiated. Currently the second largest retailer of fuel products in the Philippines, the team believe the company will benefit from ongoing support from its parent company, Royal Dutch Shell; its strong distribution network; and the increasing ownership of motorised vehicles in the country.

Please note as this is an offshore fund you are not normally entitled to compensation through the UK Financial Services Compensation Scheme.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.