Scottish Oriental Handbook: Part 5
Avoid: Building a portfolio based on the composition of an index
The handbook
Our investment approach is aimed at preserving capital and growing it sensibly. This approach has remained steadfast since the Company was established in 1995. In the fast-growing Asian region, there are several exciting stories or popular themes prevailing at any point of time, which promise attractive returns. These themes rarely stand the test of time and investing behind such opportunities comes with the risk of permanent loss of capital.
Therefore, our investment process starts by determining what we will not do.
Avoid: Building a portfolio based on the composition of an index
Our focus is on generating strong absolute returns and accordingly, we view risk as the permanent loss of capital, rather than underperforming a benchmark. Our country weightings bear no relationship to regional stock market indices. Regardless of index significance, we do not consider ourselves obliged to hold investments in any individual market.
We are often asked about our exposure to sectors such as information technology or to countries such as Taiwan and Korea, which comprise a large share of the benchmark. As our focus is on investing in high-quality companies rather than investing in specific countries, we have found few businesses in these markets which offer high standards of governance, a dominant business franchise and predictable growth. Several companies in the technology hardware supply chain in these countries operate as contract manufacturers for their customers. This gives them limited bargaining power, with their customers demanding annual reductions in their selling prices and long payment terms. This results in low returns on capital and these companies raise capital frequently, diluting shareholders. We are also cognisant of risks emanating from technology adoption cycles and disruptions, which makes their earnings unpredictable.
An example is the recent excitement around artificial intelligence, which has led to a significant re-rating of the valuations of these companies. In our experience of previous such technology cycles, predicting the winners from the adoption of new technologies is difficult. Instead, we continue to find new investment opportunities in leading businesses operating in large addressable markets in India, China, Indonesia and Philippines. With growing per-capita incomes, the penetration levels of their categories is growing and these companies are acquiring a larger share of their respective profit pools. They comprise over 82 per cent of the Company’s portfolio. The Company’s sector and country allocations are entirely a residual of our stock selection process which focuses on finding good companies, and we don’t expect this allocation to necessarily bear any resemblance to our benchmark index.
Risk factors
Capital at risk. The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back significantly less than the original amount invested.
Important Information
This document has been prepared for informational purposes only and is only intended to provide a summary of the subject matter covered and does not purport to be comprehensive. The views expressed are the views of the writer at the time of issue and may change over time. It does not constitute investment advice and/or a recommendation and should not be used as the basis of any investment decision. This document is not an offer document and does not constitute an offer or invitation or investment recommendation to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this document.
Net Asset Value (NAV) performance is not the same as share price performance and shareholders may realise returns that are lower or higher than NAV performance.
This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy, or completeness of the information. We do not accept any liability whatsoever for any loss arising directly or indirectly from any use of this information.
References to “we” or “us” are references to First Sentier Investors.
In the UK, issued by First Sentier Investors (UK) Funds Limited which is authorised and regulated by the Financial Conduct Authority (registration number 143359). Registered office Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB number 2294743.
Scottish Oriental Smaller Companies Trust plc (“Company”) is an investment trust, incorporated in Scotland with registered number SC0156108, whose shares have been admitted to the Official List of the London Stock Exchange plc. The Company is an alternative investment fund and has appointed First Sentier Investors (UK) Funds Limited as the alternative investment fund manager for the Company. Further information is available from Client Services, First Sentier Investors (UK) Funds Limited, Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB or by telephoning 0800 587 4141 between 9am and 5pm Monday to Friday or by visiting www.scottishoriental.com. Telephone calls with First Sentier Investors may be recorded.
First Sentier Investors entities referred to in this document are part of First Sentier Investors a member of MUFG, a global financial group. First Sentier Investors includes a number of entities in different jurisdictions. MUFG and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk including loss of income and capital invested.
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