130. Making the most of investment opportunities in Asia

29 April 2021 (pre-recorded 27 April 2021)

Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.

[INTRODUCTION]

Juliet Schooling Latter (JSL): Hello and welcome to the Investing on the go podcast, I’m Juliet Schooling Latter and today I’m joined by Richard Sennitt manager of the Schroder Asian Alpha Plus fund. Richard, thank you for joining me.

Richard Sennett (RS): Thank you very much for having me on.

[INTERVIEW]

[0:19]

JSL: Richard, you were alternate manager on this fund for some years, but recently you’ve taken it over from Matthew Dobbs when he retired. I was just wondering if you’ve made any changes? Is it strange not having Matthew around?

RS: Yeah. I mean, Matthew, as you say, announced his retirement in August last year, and since then I’ve taken on his Asian funds. So, at the end of December, I took on the Schroder Oriental Income investment trust and then at the end of March, the Schroder Asian Alpha Plus fund, as well as the Schroder Asia Pacific investment trust.

As you say, I’ve worked very closely with Matthew over the last 13 years or so. Actually the alternative on these funds. And given that, I suppose it won’t be too much of a surprise to you that that as far as the sort of philosophy and process goes, that very much will remain the same, which is a sort of very bottom up fundamental approach. And so, I think the thing about the sort of transition over from Matthew is more about it being about continuity rather than anything else. To help me Abbas Barkhordar has joined the team. He came across from the emerging markets team where he’d been on there for 13 years, I knew him very well from that side of the business. So, he’s a real positive addition to the team as well.

And as far as sort of Matthew goes, what can I say about Matthew? It will be very strange not having him around both from, I guess, the sort of investment perspective obviously, but also just from the personal one. You know, I’ve thoroughly enjoyed working with him over the years and he’s obviously done a great job managing these funds. But I think over sort of 40 years, he’s sort of due a bit of a bit of a break. Although I would say that he’s staying on as an advisor till the end of the year to Schroders so in that respect too, he’s not quite quite gone yet.

[2:23]

JSL: Well that’s good news. The other funds that you’ve run have an income focus. I was wondering how different it is running a fund purely for growth? Is there any overlap or are they different universes that you looking at?

RS: Yeah that’s a very good question. And what I would say is that, you know, obviously I have managed the Asian Income fund since inception, but during my time I have also managed or been involved with growth mandates, including the global smaller companies fund and the emerging market smaller companies funds, I’ve now dropped off those and focusing totally on the sort of Asian funds.

As far as the Asian funds go, it’s an absolute key question or key thing is that we don’t differentiate between whether in the sense of the process or philosophy, between income and non-income, we treat them the same way in the types of companies that we’re looking for. So we’re looking to buy those sort of quality businesses where we can see upside to fair value. But the Asian Alpha Plus fund obviously is, to us, is indifferent where it gets its returns from, whether it actually is all going to be from a capital appreciation or whether part of that’s also going to be from an income return. So in that sense, you would find, if you look through the portfolio, you would see that there are a number of income funds in there, sorry incomes or what could be deemed income stocks in the portfolio. And I think it sometimes surprises people that if you sort of took the Asian Income funds and the Asian Alpha Plus fund, and you said how much of Asian Income is made up of stocks that you’d find in Asian Alpha Plus, it would be just over 50%. So there is quite a high commonality and in that sense you know, they’re not different universities, it is one big universe in my view.

[4:23]

JSL: Right. Good to know. And what is your overall outlook for Asia? At the moment there’s different sort of outcomes in terms of Covid for China and India. But do you think the outlook is positive, today?

RS: We are positive definitely on the long-term phase, in the very short term, obviously valuations have sort of moved up and they are trading above their longer term averages at the moment, but that’s almost exactly what you would expect at this point in the cycle because the market is clearly expecting a recovery in earnings to come through. And that’s actually what we’re seeing. If you look at consensus earnings today, they have been, it has been in a revision up part of the cycle, if you like. And now if you look consensus is just roughly at about 25% earnings growth coming across for this year.

However, what I think is important is that you look sort of beneath, if you like, the aggregate total valuation for the market, and you say, you know, what are valuations across different sectors across different industries? And there what you actually find is that there’s a very large spread to valuations. So at one end you get some things which are very expensive, you know, quite frothy. So some of the stocks in relation to some of the more thematic areas of the market, like EV, biotech look pretty fully-valued, but in other areas where the sort of we’re just starting to see benefit from the sort of broadening out in earnings, such as some of the financials, for instance, and some of the more economically sensitive sectors look relatively attractive from a valuation perspective.

And indeed, you know, from, to give you an example, sort of, you know, towards the end of last year, beginning of this, we were adding into our banks position in sort of South East Asia, as we felt that there was opportunities there, because they’d obviously been hit very hard from sort of falling interest rates and rising credit costs due to sort of slowdown in economy and the impact of Covid. And as they sort of wear off, we think that the sort of earnings growth can come back and on that basis look relatively attractive. And I think that’s one of the things which is great as an active fund manager that you can do is that you can get to, to sort of, if you like take advantage of some of those sort of valuation discrepancies.

You mentioned sort of, you know, the differences between North Asia and the rest, and it’s definitely right that North Asian economies, so the likes of sort of China, Korea, Taiwan, have done better than the rest of Asia over the last year or so, and a that has come from, that has really come from two areas, I think. In part it’s that they’ve managed the crisis much better from a Covid perspective. But it’s also because those indices are made up much more of sort of technology names. So some of the internet platform companies and those of course have been the companies that have sort of benefited if you like from some of the sort of acceleration in trends that we’ve seen towards more use of technology, work from home, e-commerce these sorts of things, and they’ve done well. So their valuations do look relatively a bit fuller versus the rest of the region.

But as you say with India, for instance, you know, there is an opportunity for a recovery in an a catch-up if you like in returns as recovery comes through. But as you said, the unfortunate incident, case of India at the moment where obviously we’ve seen a resurgence in Covid does mean that the visibility of that recovery isn’t totally clear. And so there is a bit of risk around there, and you should think of it is sort of, you know, we think of sort of where, how are we doing it with vaccination rates in the UK and so on, which obviously we’ve been on a global sense, a very high, actually within Asia, they are still relatively low. And therefore, from that perspective, you know, you do still have a risk around sort of, for the outbreaks of, I guess Covid as we’ve seen in India.

I suppose one other area, which has sort of been in a way slightly unsettling markets from time to time has been the rise in bond yields which have been coming out from the US as interest, long-term interest rates have started to tick up. And that has at times impacted the markets in Asia, because they remember the sort of 2013, when we saw interest rates start to rise. And during that period, we went through what was called, the sort of at the time, the sort of the taper tantrum, the sort of tapering of monetary policy and that unsettled the markets. But since then, actually Asia has continued to, I would say improve from a sort of an economic standpoint. So, from the perspective of their external accounts such as the current accounts are more in surplus and their ability in general, they’ve grown reserves, which more than are able to meet their sort of shorter term external debt issue.

So in that sense, I think, you know, Asia is a bit more resilient than perhaps it was back in 2013, but overall, I mean, historically when you have seen a global recovery starting to come through, it has been positive for Asia. And that has really been because it’s translated into better earnings growth for Asian corporates. And that’s what we’re seeing, starting to see at the moment now.

[10:42]

JSL: Thank you. And I was wondering to what extent do you take politics into account in your investment process? For instance, does the sort of current anti-China sentiment worry you at all?

RS: Well, I suppose over the last, well basically over the last few years, we’ve obviously seen a sort of a pickup in sort of tension between the likes of the US and China. Obviously when Trump was in the White House, there was quite an escalation with, in respect to the sort of trade wars and so on, which obviously was unsettling for markets and more for investment really than anything else in a sense that people didn’t know what was going to happen next. I think the feeling was when the sort of Democrats came in to power that actually although the sort of view, if you like of the US on China was unlikely to change, and you can see that sort of clearly, if you look at some of the sort of opinion polls where sort of, you know, Democrats and Republicans sort of have a similar view, it was likely to be a bit more sort of if you like multilateral in approach, a bit more predictable and therefore actually a bit more able to price into markets.

And so from that perspective a bit would be a, sort of a relative drop in tension. Obviously I think this is going to be an issue which is going to drag on over time, as you know, as obviously China grows and becomes more important from a sort of a global perspective. But what I think is interesting is that, you know, despite their differences that they can actually work together on, you know, some of the real big issues out there and such as we’ve seen recently on climate change.

[12:44]

JSL: Just to wrap up Richard, I wondered if you could tell me what sectors you’re finding the most opportunities in at the moment?

RS: Yeah well, if you look at it from a sort of sector perspective, where I’ve still got overweight positions are in sort of information technology where I can still find a lot of sort of world-class companies, particularly in the sort of semiconductor space and they include companies in Korea and Taiwan. Although some of those have run very fast so I have been sort of at the margin taking a little bit of money out of that sector. The other area where I am overweight is in financials. And again, that’s an area which I sort of mentioned earlier. I think it’s attractive from a relative valuation perspective and can find some ideas in, and I’ve been adding to that in sort of, particularly into some of the sort of Southeast Asian markets.

I guess where I am less weighted or underweight from a sector perspective has been more in some of the, what I’d say the, if you like those stocks which have been impacted or likely to be impacted more by sort of rises in long bond yields. So, some of the long duration sectors like utilities, healthcare, staples, where valuations are generally a little bit fuller. And also, I sort of remain underweight in some of those sort of Chinese e-commerce names, which have been lagging recently due to sort of increase, sort of regulatory scrutiny around some of their business models.

And if you look to that from a sort of geographical perspective, where does that leave me? I’d be overweight in sort of places like some of the, actually some of the developed markets like Hong Kong and Singapore, as well as also India, which are I think there’s some attractive opportunities still there and added to that relatively recently, and also, and remain underweight in China where actually you know, China’s sort of in a way dealt with the crisis so well that we’re already starting to see a tightening of coming through of monetary policy as they’re sort of just wanting to bring back to bring the sort of growth rates down so that we don’t get a sort of repeat of what happened after the global financial crisis where sort of growth accelerated away and they had to tighten quite rapidly. So, in a sense, that’s a nice problem to have compared with some areas.

JSL: Richard, thank you for chatting to me today.

RS: Not at all, thank you for having me.

JSL: If you’d like more information about Schroder Asian Alpha Plus fund please visit fundcalibre.com and don’t forget to subscribe to the Investing on the go podcast.