Client update: Performance, positioning and Asia’s new growth drivers
It’s been a volatile period for Asian markets. Since February, the Iran conflict has disrupted energy supplies and stoked price inflation in India and Southeast Asia. Meanwhile, developments in artificial intelligence (AI) technology have unleashed animal spirits in Taiwan and South Korea, creating both opportunities and hazards for equity investors.
For Scottish Oriental, market fluctuations are nothing new. Since the Company’s launch in 1995, Asia has witnessed financial crises and pandemics, technological leaps and economic booms. Over the decades, businesses that were once considered regional minnows have grown into multinational giants; once-favoured companies have fallen away and been forgotten.
Throughout this period, FSSA Investment Managers has overseen the Scottish Oriental portfolio with a consistent, fundamentals-orientated philosophy. We look for smaller Asian companies that are run by capable management teams, possess durable competitive advantages and operate in sectors with the potential for consistent and predictable growth. We prefer firms with strong, net-cash balance sheets, because they tend to stay more resilient during downturns.
This approach has served the Company well, as reflected in strong cumulative returns since inception. More recently, however, performance has been disappointing in both absolute and relative terms, and this has resulted in the triggering of the conditional tender offer (CTO) mechanism. Full details of the timetable, structure and process of the CTO will be set out in Scottish Oriental’s forthcoming circular.
In this letter, we want to explain the reasons behind the decline in performance over the last two years, the changes we have made to the portfolio, and why we believe the Company is now better positioned to capture opportunities as technology and geopolitics continue to transform Asia’s market landscape.
The case for Asian small caps
Before turning to the performance analysis, it might be helpful to begin by revisiting the case for an Asian small-cap portfolio. In our view, the rationale is just as compelling today as it was 30 years ago, despite the vast changes in Asia over the intervening decades.
As set out in the Company’s interim report, we would highlight three salient factors.i First and most important is the growth opportunity among small caps. Smaller Asian businesses often operate in sectors where they have a long runway for expansion, benefiting from trends such as rising incomes or the upgrading of consumer preferences. Dominant firms in these areas have the potential to grow much faster than equivalent large-cap companies in mature segments – “elephants can’t gallop”, as the saying goes.ii
Second, our research shows smaller Asian companies tend to have substantially less analyst coverage than their larger counterparts (see Figure 1), especially in Southeast Asian markets that have traditionally attracted limited foreign investment. The resulting information gaps mean changes in a smaller company’s growth or profitability trajectory can take time to be fully recognised and reflected in its valuation. This creates inefficiencies that can be exploited by investors who have the expertise to find these businesses and the patience to hold onto them. For well-covered large companies, such opportunities are harder to come by.
The third factor is the prevalence of founder-led and family-controlled businesses among Asian small caps. In our experience, these owners tend to take a view of value creation that chimes with our own long-term approach. This can manifest, for instance, in making investments through market downturns or periods of uncertainty when attractive opportunities emerge. Larger companies are more likely to have fragmented ownership structures or government ownership, whose interests can be less aligned with those of minority shareholders.
Figure 1: Average analyst coverage of companies by market capitalisation in Asia
This three-part rationale has broadly held true since the launch of the Company. However, changes in the composition of Asian economies and their growth drivers are creating nuances within this framework. For example, Asian industries are evolving as the region’s economies develop. While retail and household consumption continues to formalise in many markets, the range of growth drivers has broadened compared with the experience of the previous two decades, when consumer staples businesses provided the most conspicuous examples of long-term expansion.
Key structural shifts include a transition of consumer spending away from staples towards discretionary products and services; rising capital expenditure on industrialisation and manufacturing capacity in an era of renewed geopolitical tensions; and the growing importance of companies in Taiwan and Korea in the global technology ecosystem. The complexity of supply chains in these areas enables smaller companies to create and quickly grow in specialist niches, opening fresh opportunities for investors looking for businesses that can compound over the long term.
Addressing portfolio imbalances
Despite the enduring investment case for small caps, these companies have, in the aggregate, underperformed large caps of late. The MSCI AC Asia ex Japan Small Cap Index returned 19.4% over the 12 months to August 31, 2026 (in GBP terms), compared with a return of 40% for the equivalent all-cap index over the same period. The disparity is largely explained by the sharp rise in share prices among a narrow group of large semiconductor companies benefiting from the surge in spending on AI-related infrastructure.
Even in the context of a challenging environment for small-cap investing, however, the Company’s investment performance over the last two years has been disappointing. In the 12 months to end-August, net asset value (NAV) fell by 6.0%. This followed a NAV return of -1.6% over the preceding year.
As benchmark-agnostic investors, our performance should be expected to diverge at times from the broader market – our focus on company fundamentals and capital preservation means the portfolio often looks very different from the index. And while such divergence can mean missing out on some of the gains when markets are rising, it can also result in better outcomes over the longer term, particularly during market corrections (see Figure 2).
Figure 2. Scottish Oriental’s historic performance in different market conditions
Nevertheless, the scale of the recent performance setback is significant. A key factor has been the portfolio’s substantial holdings of companies in South and Southeast Asia, particularly India, Indonesia and Philippines, markets that have faced stern macroeconomic challenges in the form of trade tariffs and energy-supply disruptions over the last two years.
Meanwhile, South Korea and Taiwan – countries where the portfolio historically had fewer investments – have posted considerably stronger performance, partly as a function of the AI data-centre buildout, which has benefited technology hardware suppliers in these markets. By sector, the portfolio’s large holdings in consumer discretionary and consumer staples detracted as well, as sluggish demand weighed on consumer-focused businesses in China and several other countries.
The regional and sector biases in the portfolio were an outcome of company-selection decisions taken over many years. While these markets and industries delivered healthy returns for Scottish Oriental in the past, in retrospect their representation had become too large. This has been the primary lesson the investment team has taken from this difficult period; as we will discuss, we have been taking steps to gradually correct the imbalances in the portfolio over the last 12 months. The aim has been to provide greater diversification and enable the Company to capture a broader share of the value being created in Asian markets into the future.
Performance review
A review of stock-level performance over the past two years further illustrates these themes. Several of the Company’s best-performing holdings are embedded in the region’s fast-developing tech supply chains, while the biggest detractors operate in consumer-related industries.
Starting with the positive contributors, the standout performer was Hong Kong-listed ASMPT, a leader in semiconductor assembly and packaging equipment. The company’s recent progress in advanced packaging – a collection of manufacturing processes that combines multiple semiconductor chips into a single electronics package, helping to increase capability while reducing power consumption and cost – has enabled it to win contracts from major chipmakers. It is seeing particularly robust demand for its thermo-compression bonding (TCB) tools, which can be deployed to combine layers of chips, and photonics tools, which are used to build and test light-based semiconductor components.
Hongfa Technology has also contributed positively to performance. A Chinese manufacturer of relay equipment, the company has reported strong earnings results over recent quarters, showing revenue growth across various segments of its business, including power generation, automotive, industrial control and signals. Hongfa expects to benefit as Big Tech companies continue to allocate huge sums to the construction of new AI data-centre infrastructure, which could lead to even stronger demand for Hongfa’s high-voltage direct current relays over the coming years.
Unfortunately, these positive results have been outweighed by the fall in share prices among other holdings. An example is DPC Dash, the exclusive franchisee of Domino’s Pizza in China and a major detractor from overall returns over the last two years. As with many Chinese consumer businesses, lacklustre domestic demand has affected market sentiment on the company despite solid underlying results.
DPC Dash saw a particularly sharp decline in March 2026 after disclosing its 2025 earnings; although revenue and net profit margins grew strongly, investors were concerned by a fall in same-store sales growth (SSSG). The SSSG decline is partly a function of the company’s rapid recent expansion (new locations typically experience an initial surge in daily sales, driven by early consumer enthusiasm, after which sales moderate before gradually rising again). As performance at newer stores stabilises, we expect overall SSSG to improve. We believe the stock has fallen to levels that no longer reflect the long-term value in the business, as profitability continues to improve and DPC Dash gains further market share in the fast-growing pizza category in China.
Another significant detractor was Century Pacific Food, the largest canned-food maker in the Philippines and a holding in the portfolio since 2018. Macro weakness in the country has put pressure on the company’s share price, especially over recent months. However, financial performance has remained resilient and Century Pacific expects to expand steadily from here: it has incubated new businesses in pet food and dairy products, which should enable it to sustain its longer-term growth trajectory.
Portfolio activity
We believe the investment rationales for DPC Dash and Century Pacific remain broadly intact, and so we are retaining them in the portfolio. By contrast, we have been selling other consumer businesses where we see a slower growth trajectory over the long term (such as Stella International, Uni-President China, Haw Par Corporation and Unilever Indonesia) or where valuations looked too expensive (including holdings in India such as Radico Khaitan and United Breweries). This has helped reduce the Company’s overall exposure to consumer sectors and contributed to our portfolio rebalancing efforts.
In redeploying capital from these sales, we have sought to capture a broader spread of growth drivers across different markets and sectors. This has not been a “top-down” portfolio reallocation process, but rather the outcome of rigorous bottom-up research into emerging opportunities across the region, based on in-person country visits and company meetings. FSSA undertook 1,343 such meetings in 2025, of which over 800 were with smaller businesses.
Our recent investments in Korea are a good example of this process in action. Over the last 18 months, FSSA has bolstered its investment team with the hiring of analysts with expertise on the Korean market, and the portfolio managers have made several visits to the country. This has enabled us to identify attractive opportunities such as Hansol Chemical, a key supplier of speciality chemicals for the semiconductor industry. Recent meetings left us impressed with the quality of the company’s leadership and culture; we were also drawn by its commitment to return cash to shareholders through dividends and buybacks, and by its robust growth prospects.
Other additions in Korea have included Eugene Technologies, a company that specialises in chemical vapour deposition (CVD), a technical procedure used to create high-purity coatings for semiconductors; and Park Systems, a leader in precision nanoscale measurement instruments utilised in chipmaking and other areas of cutting-edge scientific research.
Another significant change over the last 12 months has been the increase in the portfolio’s exposure to Taiwan. This is partly a consequence of the recovery in performance of companies such as Silergy and Airtac International, both longstanding holdings whose shares have risen in value since the start of 2026. But we have also added several new Taiwan-based companies to the portfolio over the period, including Lite‑On Technology, a provider of power-management solutions; Tripod Technology, a maker of printed circuit boards; and Realtek, a designer of connectivity chips.
While all of these companies are involved in the AI supply chain to some degree, their exposure to the AI theme is indirect and at the time of purchase they were not considered by the market to be obvious beneficiaries of AI demand. This meant we were able to establish positions at attractive valuations despite their strong underlying characteristics. Lite-On, Tripod and Realtek had a higher average earnings growth rate, dividend yield and return on equity (ROE) than the rest of the portfolio at the time of investment, despite valuations that were similar to the average among our other holdings. (ROE is a measure of how effectively a company generates profits from shareholders’ capital, and the best single indication of earnings power, in our opinion.)
Taken together, these additions and sales have contributed to a portfolio that now shows stronger cash-flow generation, higher expected earnings growth and broader diversification than in recent years, without a meaningful increase in valuation. Average next-two-year earnings-per-share (EPS) growth, which had fallen to 16% in 2024, now stands at 22%, higher than the index figure.iii Meanwhile, ROE remains significantly stronger than the index, at 19% versus 11%, and the portfolio continues to show robust balance sheet characteristics, with holdings exhibiting a net cash position (meaning they hold more cash than debt), on average.iv
The changes have also brought greater balance to the portfolio. Figure 3 shows how the Company’s current exposures compare with 2024; the holdings now have a broader geographic spread, with the concentration in India and Indonesia reduced. In sector terms, the share held in industrials, technology and financials has risen, while consumer businesses account for a much smaller proportion of the overall holdings. We believe the portfolio is consequently better positioned to deliver value creation amid the structural shifts discussed above, such as the transition to more discretionary spending; the industrialisation of regional economies; and the rise to prominence of Asian markets as crucial hubs in global technology supply chains.
Figure 3. Portfolio allocation to country (top) and sector in July 2024 vs July 2026
Investing against the grain
Our confidence in the Company’s outlook is further supported by data that shows Asian small caps may be becoming increasingly attractive in relative terms, at a time when the enthusiasm for a small group of AI “winners” has led to narrower markets and elevated valuations among large caps.
For example, the three major Asian semiconductor companies that have soared on the back of AI-related demand – Taiwan Semiconductor Manufacturing (TSMC), SK Hynix and Samsung Electronics – now account for some 31% of the MSCI Asia ex Japan Index, and the top 10 constituents 42%: an exceptional level of market concentration. By contrast, the small-cap index is far more diversified, with the top 10 constituents accounting for only 7% of the total.
This difference in composition between these two indices is an important consideration for any investor seeking to gain exposure to Asia. If investing in a large-cap fund, the fund’s performance is essentially a function of the manager’s view on the three mega-cap chipmakers. A small-cap fund, by contrast, offers investors a substantially more diversified and all-weather exposure to the growth of Asia. We believe Scottish Oriental’s portfolio – which encompasses, for instance, retail businesses in Vietnam, financials in the Philippines and tech manufacturers in China – is a good expression of this diversity.
As for the performance outlook, our analysis suggests that the recent divergence in returns between large and smaller companies at the market level is likely to be cyclical rather than structural. Taking a longer view, small caps have repeatedly enjoyed periods of outperformance; indeed, small-cap returns were higher than large-cap returns (on a five-year rolling basis) as recently as 2025.
Furthermore, smaller companies are now available at attractive valuations relative to history. While Asian small caps trade at a premium to large caps based on forward price/earnings multiples, this largely reflects the way surging revenues among bigger companies such as Hynix and Samsung have influenced this metric. Looking at valuations over a longer period offers a fairer comparison: when referring to five-year average earnings per share, the apparent premium disappears and instead suggests Asian small caps are trading at a discount (see Figure 4, below). Based on this data, we see a significant opportunity to invest against the grain in high-quality Asian small caps.
Figure 4: Valuation comparison – five-year average price/earnings
Conclusion and outlook
While recent performance has been disappointing, then, we believe the case for investing in Asia’s smaller companies remains powerful. The region continues to offer a vast and diverse opportunity set for fundamentals-focused stock pickers, supported by long-term structural growth drivers.
Having recognised that the Scottish Oriental portfolio had become overly tilted towards certain markets and sectors over recent years, we have taken deliberate steps to rebalance our holdings, exploit a broader range of growth drivers across Asia and ensure the Company is better prepared to capture emerging opportunities. Recent additions to the portfolio such as Realtek and Lite-On Technology have already made meaningful contributions to performance.
The portfolio’s aggregate metrics compared with the index reflect its attractive positioning. Return on invested capital – a measure of how efficiently a company uses its invested capital (both debt and equity) to generate profits – is almost double that of the index; the portfolio has a net cash position compared with the net debt position of the index; and earnings growth is higher than the index. In this context, the higher valuations compared with the index look to be justified.
The adjustments to the portfolio, combined with FSSA’s long track record, depth of expertise in small-cap investing and resolute focus on quality underpin our conviction that the Company is well placed to generate attractive returns for shareholders in the years ahead. While much has changed over the last 30 years, our objective remains much the same as in 1995: to find small Asian businesses with the potential to become the giants of tomorrow.
Figure 5. Portfolio metrics vs the index
| As of 31 July 2026 | Scottish Oriental Smaller Companies Trust | MSCI AC Asia ex Japan Small Cap Index |
|---|---|---|
| Quality | ||
| ROIC* / ROA (financials) | 17% / 7.4% | 9.5% / 4.4% |
| ROE | 19% | 11% |
| Net debt to EBITDA* | -0.6x | +0.5x |
| EPS Growth last 5y - CAGR | 8% | 9% |
| EPS Growth next 2y - CAGR | 22% | 21% |
| Valuation | ||
| PE (FY2 fwd) | 16x | 12x |
| FCF yld / P/FCF* | 3.7% / 27x | 3.7% / 27x |
Note: ROA = return on assets, a measure of how efficiently a company uses its assets to generate profit. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. The Net Debt-to-EBITDA ratio compares a company’s net debt to its operating earnings and is commonly used as a measure of leverage and an indication of debt sustainability. FCF = free cash flow. FCF yield is free cash flow per share expressed as a percentage of the share price.
Source: FSSA, FactSet, MSCI, as at July 31, 2026. Note: *ex-financials.
References
1 Scottish Oriental Interim Report 2026.
2 Initially coined by Rudyard Kipling, the adage that “Elephants can’t gallop” was adopted by famous UK small cap investor Jim Slater in the early 1990s, when he observed that “for management to double the value of a £10bn company takes many years of hard work, whereas to double the value of a smaller company is an easier task”. See “Elephants can’t gallop”, Scottish Oriental, 2024.
3 Figures correct as of July 31, 2026.
4 Figures correct as of July 31, 2026.
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.
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Risk factors
This material is a financial promotion for The Scottish Oriental Smaller Companies Trust Plc (the “Trust”) intended for those people resident in the UK for tax and investment purposes.
Investing involves certain risks including:
- 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 or none of the original amount invested.
- Emerging market risk: Emerging markets tend to be more sensitive to economic and political conditions than developed markets. Other factors include greater liquidity risk, restrictions on investment or transfer of assets, failed/delayed settlement and difficulties valuing securities.
- Currency risk: the Fund invests in assets which are denominated in other currencies; changes in exchange rates will affect the value of the Fund and could create losses. Currency control decisions made by governments could affect the value of the Fund's investments and could cause the Fund to defer or suspend redemptions of its shares.
- Smaller Companies Risk: investments in smaller companies may be riskier and more difficult to buy and sell than investments in larger companies.
- Leverage risk: the Trust may be leveraged due to: i) borrowings; or ii) the use of derivatives to hedge currency exposure. The amount of leverage employed is disclosed on the Trust’s website from time to time. Higher leverage increases the potential risk of loss. Investment trust share prices may not fully reflect Net Asset Value.
- The Trust’s share price may not fully reflect net asset value.
Where featured, specific securities or companies are intended as an illustration of investment strategy only, and should not be construed as investment advice or a recommendation to buy or sell any security.
All information included in this material has been sourced by First Sentier Investors and is displayed as at March 2026 unless otherwise specified and to the best of our knowledge is an accurate reflection as at this date.
For an overview of the terms of investment, risks, returns and costs and charges please refer to the Key Information Document.
If you are in any doubt as to the suitability of our funds for your investment needs, please seek investment advice.
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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.
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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 Group, 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 Group may be recorded.
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