Elephants can't gallop
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 1990’s, 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”.
The managers of Scottish Oriental Smaller Companies Trust (the Trust) would agree that the scale of the opportunity of investing in smaller companies is exceptionally attractive. The challenges of picking the right smaller companies are different from their larger peers, and the Trust has a track record of almost three decades of dealing with these challenges successfully.
The Trust was initially listed in 1995, raising £23.7 million with mandate to invest in smaller Asian companies. Over the following 27 years, the Company has navigated dramatic changes in its operating environment. The large markets of the time, such as Malaysia, Singapore and Hong Kong, have been eclipsed by the emergence of China and India. The Trust has evolved with market dynamics; the definition of what constitutes a smaller company has also evolved, from US$500 million in 1995 to US$5 billion today, reflecting the impact of inflation. The value of the Trust’s investment minus any debts, also known as Net Asset Value (NAV), has increased to £337m.
Over its entire history, the Trust has been managed by four different lead portfolio managers. Through all these changes, it has been anchored by the investment approach set out in the first Annual Report. Its key tenets, shown below, still hold true today.
Our approach to investing:
- We aim to maximise the rate of return with due regard to risk. Risk is contained by focusing on soundly managed and financially strong companies, and by ensuring that the companies that we invest in are well diversified geographically and sectorally at all times.
- Whilst cultural, political, economic and sectoral influences play an important part in the decision making process, the availability of reasonably-priced companies with solid long-term growth prospects in the major determinant of investment policy.
- 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.
- Although considerable attention is paid to "value", we are primarily "growth" investors. As most regional companies are family controlled, value on its own (i.e. unless associated with assets per share, sales, cashflow and/or earnings growth) is generally ignored by the market.
- Existing holdings are scrutinised constantly to ensure that our corporate performance expectations are likely to be met, and that market conditions are not excessive. Where otherwise, disposals are made.
- Strong emphasis is placed on frequent visits to countries of the region and on meeting the management of those companies in which we are invested, or might invest.
Growth in an initial investment of £1,000 at launch (as at 31 August 2024)
Scottish Oriental Smaller Companies Trust NAV: £23,482
MSCI AC Asia ex Japan Index1: £5,207
Note: These figures refer to the past. Past performance is not a reliable indicator of future results.
Source: First Sentier Investors
Our approach to investing has held the Trust in good stead. An investment of £1,000 made at the inception of the Trust would have returned a net asset value of £23,482 today, compared with £5,207 if the same sum had been invested in the MSCI AC Asia ex Japan Index.
The Trust is no stranger to operating in uncertain economic environments. At the time of its inception in 1995, there were fears of rising interest rates, substantial currency depreciation in Asian economies and worries about the fallout from the collapse of Barings Bank. Investors like us also faced challenges of smaller companies in Asia having short listed track records and the regulations protecting minority shareholders being at their early stages of evolution. Despite all of these risks, being shareholder of the Trust since inception would have been a rewarding experience.
While the characters are different today, the story has many similarities. The lockdowns in China and the worries about rising inflation, interest rates and weakening currencies create a comparable investing environment. The market leading businesses in which the Trust invests have faced several crises during this period and have emerged stronger from each of them.
The number of smaller companies in Asia is much larger, their listed track records are longer and the regulations protecting minority shareholders are also well established. Stock pickers like us have a more favourable hunting ground than we have had in the past. This is reflected in the smaller number of company holdings in the Trust, and the greater faith we have in their growth prospects. We expect high earnings growth for the companies in the Trust, as they recover from the Covid-19 disruption, while returns on equity (ROE), a measure of a company’s financial performance, is also strong. Despite the higher growth and ROEs, the Trust’s valuations are cheaper than in past years. As these market leading businesses are poised to emerge as the large companies of the future, we are excited about the Trust’s prospects in the coming years.
Scottish Oriental Smaller Companies Trust annual performance (% in GBP) as at 30 June 2024
| 12 months to 30 Jun 24 | 12 months to 30 Jun 23 | 12 months to 30 Jun 22 | 12 months to 30 Jun 21 | 12 months to 30 Jun 20 | |
| NAV per share | 18.5 | 18.4 | 0.6 | 25.2 | -15.9 |
| MSCI AC Asia ex Japan Index1 | 13.9 | -5.2 | -14.4 | 25.2 | 5.0 |
| MSCI Asia ex Japan Small Cap Index2 | 21.9 | -0.8 | -8.6 | 45.4 | 1.6 |
| Share Price | 21.8 | 11.5 | -1.7 | 37.9 | -18.4 |
Note: Data provided in GBP. Since inception calculated from 29 March 1995. These figures refer to the past. Past performance is not a reliable indicator of future results. The benchmarks shown is on an income reinvested gross of tax basis. Sources: i) Trust Administrator for Trust performance; ii) Lipper for index performance.
Footnotes
1 The MSCI AC Asia ex Japan Index is not the current benchmark. This index is used as a comparison as the MSCI AC Asia ex Japan Small Cap Index was not available at the time of the Trust’s inception.
2 The MSCI AC Asia ex Japan Index covers developed markets: Hong Kong and Singapore; and emerging markets: China, India, Indonesia, Korea, Malaysia, the Philippines, Taiwan and Thailand.
3 The MSCI AC Asia ex Japan Small Cap Index covers smaller companies in developed markets: Hong Kong and Singapore; and emerging markets: China, India, Indonesia, Korea, Malaysia, the Philippines, Taiwan and Thailand.
Risk factors
Capital at risk. The value of investments and any income from them may go down as well as up and are note guaranteed. Investors may get back significantly less than the original amount invested.
Read full risk factors
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 September 2024 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.
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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