Scottish Oriental Handbook: Part 6
Our investment approach
Having invested across Asia for the past thirty years, we are well versed in understanding the nature of Asian companies and the nuances of the Asian stock markets. We wanted the handbook to highlight how the Portfolio Managers invest your money in companies with high quality management teams, sustainable earnings growth, using a long-term investment horizon with a focus on capital preservation. At the same time, we have sought to describe the methods of avoiding some of the traps that lie in wait for the inexperienced investor.
Having detailed what we will not do, now we outline the investment approach and outcomes which Scottish Oriental’s investors could expect.
1. Investing in a portfolio of high-quality smaller companies
Scottish Oriental’s portfolio comprises businesses which are simple and predictable, run by people who have a track record of treating all stakeholders fairly, with strong returns on capital and attractive growth prospects over the long term. Over time, the portfolio has been consolidated in favour of our highest conviction smaller companies. Since 2017, the share of the portfolio’s top ten holdings has risen from 25 per cent to 42 per cent currently, and that of the top twenty holdings has risen from 44 per cent to 66 per cent of the portfolio over the same period. The quality of the portfolio is reflected in its high returns on equity, with the portfolio's median return on equity improving from 13.6 per cent to 19.0 per cent currently*.
2. A long-term investment horizon
Our investment horizon extends beyond five years, and many of Scottish Oriental’s portfolio holdings have been held for over a decade. Seven of Scottish Oriental’s ten largest holdings have been held in the Company’s portfolio for over five years. This allows us to be viewed by the owners and management teams of these companies as a long-term stakeholder. Our engagement with them on issues ranging from the composition of their board of directors to their capital allocation strategy or environmental and social issues is viewed constructively and allows us to contribute to the development of the businesses in which we are invested.
3. Companies which can grow their earnings sustainably
We are focused on owning smaller companies which have the potential to become significantly larger businesses in future. Their growth comes from rising penetration levels of the categories in which they operate, along with strengthening market positions. We expect that in periods of disruption, such as Covid-19, these companies gain market share from their smaller competitors and emerge with a larger share of their respective profit pools as the economy recovers. The portfolio’s estimated earnings per share growth over two years has also risen from 14.2 per cent to 17.4 per cent*, alongside the improvement in the portfolio’s median return on equity (ROE).
4. A focus on achieving strong absolute returns led by capital preservation
The chart below reflects the performance of the portfolio against that of the comparator index since inception. In strong periods (months where the comparator index has risen), the Company’s portfolio may not always keep pace with the market’s returns. However, the Company has performed better than its comparator index in almost 80 per cent of weak periods (months where the comparator index has fallen). This ability to preserve capital during difficult times has driven Scottish Oriental’s superior performance against the comparator index across the majority of market periods.
With an investment approach that is consistent since the inception of the Company, we expect these portfolio outcomes to sustain in the coming periods as well.
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.
*Source: Annual Report 2024, Scottish Oriental Smaller Companies plc
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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