Aberdeen Asian Smaller Companies (AAS) is celebrating its twentieth birthday this year, having launched on 19 October 1995.
Like many of Aberdeen’s Asian funds, it has been through the mill recently. In fact, in share price terms, it is the worst performing fund in its peer group over the past three years. This has also left it trading on the second widest discount of its peer group (close to 13%), after Martin Currie’s Asia Unconstrained fund.
However, I don’t think investors should write off the fund. The first thing to point out is that, over its first 20 years AAS is the best performing Asian fund by some distance. It generated a return on net assets of 1,029% over the 20-year period.
The next best fund, Scottish Oriental Smaller Companies (which has a similar remit to AAS) returned 951% but these two funds are streets ahead of the best of the funds investing in larger capitalisation Asian equities – Aberdeen New Dawn returned 411%.
Next, it is a decent size. AAS’s market capitalisation is £278 million, which also makes it one of the more liquid investment companies in its sector. It doesn’t have much of a yield, but then it is not something the managers target. Importantly, it has also applied a consistent investment style all the way through its life.
Hugh Young has been associated with the fund since it was launched.
Aberdeen operates a team-based approach. Currently, Christopher Wong is named as the senior investment manager but the way he selects stocks for the portfolio will be pretty consistent with the way the fund has been managed throughout its existence.
If we are looking for reasons as to why AAS has underperformed its peer group recently, the investment approach is to blame. All Aberdeen’s funds have struggled over the past few years.
Talking to the company recently when we were writing a research note on Edinburgh Dragon, it believes the easy money and stimulative economic policy adopted by the major central banks since the financial crisis has created an environment where investors have become much less risk-averse.
Aberdeen’s focus on high quality companies with sound balance sheets, cashflow and good corporate governance, which has been a great benefit to it over the years, is not rewarded in this environment.
Asia has been out of favour with investors generally, largely on the back of slowing growth in China.
However, the efforts the Chinese government has made to get things going again meant that over the first half of 2015 we saw a bubble in the domestic Chinese market. The Shanghai Composite index has retrenched back to levels seen in mid-March but is still up over the year.
AAS was a bystander in all of this, with just 1% of the portfolio invested directly in China at the end of September against a weight of over 21% in the MSCI index. Aberdeen believes valuations in China are still too high, despite the recent correction.
AAS is heavily overweight Malaysia, which might seem odd given that the country has been hit by the fall in the oil price and beset by political scandal. Aberdeen has however identified a number of stocks it likes in this market and is sticking with them.
In March, I talked about the boom in the Asian technology sector. AAS is very underweight in this area. At the end of July, it had just one investment in the sector, CMC (an IT services company in India that is a subsidiary of Tata Consultancy Services) at 2.4% of the portfolio.
So what AAS and the other Aberdeen funds are holding out for is a return to sanity in markets. They have a record of outperforming in downturns and this has made a major difference to these funds’ long-term returns. The question will be: how long will they have to wait?
The Bank of Japan did not extend its quantitative easing programme at its recent meeting but inflation in the country is still well below target and it may decide to inject yet more stimulus into the economy. China’s announcement that its one child policy will become a two child policy could prove a significant boost to its economy over time and a nervous government will be looking at other ways it can arrest slowing growth in the country.
However, genuine market corrections have a habit of coming out of left field. Aberdeen remains convinced its stance will be rewarded eventually and, if it is right, AAS should return to form.
James Carthew is a director of Marten & Co