Thirty years of lessons from investing in Asia
As 2025 marks the thirtieth anniversary of the founding of Scottish Oriental, this is a good time to look back at the history of the Trust and the factors that have helped and hindered our investments in Asian smaller companies during the period.
Over the past three decades, Asia has transformed beyond recognition. The Trust has witnessed the currency collapses of the Asian Financial Crisis, the tech-driven boom and bust of the dotcom era, the upheavals of the Global Financial Crisis, and the wrenching dislocations that followed the outbreaks of SARS and Covid-19. We have watched China’s ascent to become a technological superpower and India’s emergence as a regional growth engine.
While these events have posed challenges, they have also created immense opportunities. We are constantly on the lookout for well-run businesses with strong competitive advantages and the ability to deliver attractive returns on capital. Market volatility can offer the chance to pick up these kinds of quality companies at discounted valuations.
In this article we review the evolution of the portfolio since 1995 and lessons we have learnt from managing the Trust’s assets through periods of both profound crisis and robust growth. At a time when hype around new technology is once again fuelling an investor frenzy, the past may well prove to be a useful guide.
1995-1999: After launch, an immediate test
1995-1999: After launch, an immediate test
When Scottish Oriental was established in 1995, the investing landscape in Asia looked very different from today. Hong Kong was a British colony, with the China handover still two years away. Markets that have since become mainstays of global investment portfolios – including mainland China, India, South Korea and Taiwan – were difficult for foreign equity investors to access.
However, much like today, the investment team saw abundant opportunities among companies that were benefiting from the growing affluence of the expanding Asian middle class. Among them was Vitasoy International, a Hong Kong beverage company.
At this early stage, the portfolio was spread across a large number of holdings – over 100 in total – partly as a way to diversify risk at a time when many smaller Asian firms had short trading records and had yet to be tested in difficult market conditions.
We did not need to wait long for such conditions to arrive. In July 1997, the Thai government, grappling with a widening current account deficit, was forced to sharply devalue the baht. This move catalysed the Asian Financial Crisis. The fall in the Thai currency sparked a chain reaction across the region, resulting in the depreciation of other Southeast Asian currencies and severe pressure on banks that had run up sizable US dollar-denominated debts in the preceding years.
The Trust’s net asset value plunged 57.3% in the 1998 financial year, and the share price fell by a similar amount. Those investors who had participated at launch saw the value of each pound of their initial investment fall to a little over 33 pence. But the investment team’s long-term, fundamentals-orientated philosophy came into its own amid the fallout, as opportunities emerged to buy strong companies at attractive prices.
“For those willing to trawl the regional markets for smaller fry, there are exceptional bargains to be found,” portfolio managers Angus Tulloch and Susie Ripingall wrote in their yearly review of the Trust’s investments, pointing to their confidence in the high-quality management teams among holdings such as Singaporean retailer Robinson & Company and Philippines dairy company Alaska Milk.
The following year, net asset value rose by 112%, and the share price by 145%. The crisis had proved a useful stress-test, not just of the Trust’s nascent portfolio, but of the wider universe of smaller Asian companies.
2000-2004: From the dotcom bubble to the China boom
2000-2004: From the dotcom bubble to the China boom
By 2000, Asian markets were frothy with investor exuberance once again. The excitement surrounding Silicon Valley internet companies spilled over into Asia, with sharp rises in the valuations of tech-related stocks, particularly those in India and Taiwan.
The dotcom bubble burst in March of that year, when the US NASDAQ tech index corrected. Global growth slowed and Asian markets fell sharply, but Scottish Oriental preserved capital, largely thanks to disciplined stock selection.
Apparel firm Texwinca was among a number of Chinese companies that we added to the portfolio at this time. China’s economy was growing at a rapid pace and new business models were emerging to cater to its bewilderingly vast and diverse consumer base. The country’s entry into the World Trade Organisation in December 2001, meanwhile, opened lucrative new export markets for its manufacturers.
We also began to find more attractive opportunities in India, where corporate governance was improving and smaller companies were starting to benefit from trends such as the rise in service-sector outsourcing among large Western firms.
But Southeast Asia still accounted for the bulk of the Trust’s investments in the mid-2000s. Key holdings such as Unilever Indonesia benefited from the relentless growth in consumer spending across the region, which continued in spite of a rise in inflation, the result of an oil-price spike following the US invasion of Iraq in 2003.
The outbreak of SARS (Severe Acute Respiratory Syndrome) the same year had a significant impact on Hong Kong and Singapore, as retail spending and tourist arrivals declined sharply. While our holdings in both markets recovered quickly, the episode foreshadowed a far worse coronavirus pandemic to come.
2005-2009: A focus on resilience
2005-2009: A focus on resilience
The investment team observed positive longer-term structural developments during this period, such as a fall in corporate debt and a flourishing dividend culture in many parts of Asia. Nevertheless, valuations were becoming steep in many areas.
By August 2007, our Portfolio Manager’s Review was questioning “the investment community’s appetite for risk” in the face of “the deteriorating outlook for America’s sub-prime debt market”. That year, the Trust sold shares in several Chinese companies on fundamental valuation grounds, mostly those with exposure to the US economy. “In its pursuit of capital preservation as well as growth, the Trust’s Board and its Investment Manager have always accepted that it is sometimes necessary to forego short-term gains,” as the Review put it.
Over the following two years, as the Global Financial Crisis engulfed markets, the investment team strived to maintain its focus on companies with robust franchises and manageable debt burdens.
These included Thai home improvement retailer Home Product Center, the largest holding at the time of the crisis. Although the firm was then in the midst of an aggressive store expansion plan, we trusted its management team, which had a significant stake in the business – a good sign that its interests aligned with the Trust’s own.
Scottish Oriental’s enduring commitment to consumer-facing firms in Southeast Asia through this challenging time reflected our belief that companies had learned valuable lessons from the Asian Financial Crisis, with balance sheets across the region in a much healthier state than they had been a decade earlier.
The portfolio’s exposure to these resilient stocks was a factor in the Trust’s outperformance when market sentiment turned in 2009. Scottish Oriental’s net asset value increased 20% that year (compared with a rise of 9% for the MSCI Asia ex-Japan Index and 19.2% for the MSCI Asia ex-Japan Small Cap Index), with holdings in Thailand, Malaysia, Indonesia and the Philippines among the positive contributors.
2010-2014: A pivot to India
2010-2014: A pivot to India
The Trust’s strong performance continued into 2010, despite a rise in civil unrest in Thailand and gathering concerns over China’s overheating property sector. Home Product Center, which remained the largest single holding in the portfolio, did particularly well amid surging demand for residential real estate in Thailand.
Companies in Taiwan and South Korea began to account for a larger proportion of the portfolio during this decade. The most significant shift, however, was the increase in the Trust’s allocation to India, which leapt from 1.5% of the portfolio in 2012 to 10.7% in 2013.
While the Portfolio Manager’s Review of that year noted increasing appetite across the country for much-needed political reforms, the rise in India exposure was not a “top down” bet on the direction of the Indian economy.
Rather, asset allocation was a function of the investment team’s stock selections, and we had begun to identify numerous high-quality Indian franchises that would be able to prosper even if GDP growth remained soft. Among them were consumer firms such as Tata Global Beverages and industrial companies such as Blue Dart Express.
2015-2019: Navigating value traps and trade wars
2015-2019: Navigating value traps and trade wars
Many consumer companies had reached expensive valuations after years of strong retail spending in the Association of Southeast Asian Nations (ASEAN) region. Around this time, we also noticed declining earnings growth and returns on capital among some firms in Singapore and Malaysia.
Steering clear of such value traps, we began to consolidate our Southeast Asia holdings into higher-conviction investments in Indonesia and the Philippines. In 2017, for example, we bought our first stake in Philippines-based Century Pacific Food, a leading consumer staples firm with strong brands and a forward-thinking management. Part of our attraction to the business was its genuine commitment to environmental, social and governance (ESG) issues: the company was an early adopter of a formal sustainability strategy and later became one of the first corporates in the country to achieve plastic neutrality.
Consolidation was also occurring across the broader portfolio, as we opted for fewer, but higher-conviction, positions at a time when political risk had begun to weigh on investor confidence. Rising tensions between the US and China, due to the first Trump administration’s protectionist tariff policy, contributed to negative market sentiment in Asia.
“Politics is messy, to say the least,” as our Portfolio Manager’s Review of 2018 put it, alluding to the gloomy headlines of the trade war. Troubled by a rise in debt across the region in these volatile circumstances, we prioritised investments in companies with net-cash balance sheets and paid careful attention to firms that looked at risk of being caught in the geopolitical crossfire.
We undertook an in-depth review of the portfolio in 2019, stepping up our meetings with management teams to assess their fitness for purpose in an increasingly challenging macroeconomic environment.
2020-2024: The pandemic and recovery
2020-2024: The pandemic and recovery
Like many crises, the Covid-19 pandemic happened gradually, then suddenly. Rumours of a virus circulating in central China quickly gave way to global panic, as governments around the world imposed movement restrictions to curb transmission.
Investors in the Asia-Pacific region did at least have the memory of the SARS outbreak as a reference point for the pandemic, although Covid-19 had a more lasting and wide-ranging impact than that event.
Many companies in our portfolio struggled, especially those we had recently acquired on seemingly attractive valuations as they dealt with short-term underlying issues. The additional pressures imposed by the pandemic on these businesses proved too great and we regretfully decided to sell, even when doing so incurred a loss of capital.
In other cases, the testing conditions of the pandemic reassured us as to the strengths of key holdings. Philippine Seven, the exclusive 7-Eleven franchise operator in the Philippines, is a good example. Impressed by the company’s rapid response to the challenges of the pandemic – it cut costs, increased available credit lines, renegotiated rents and supported franchisee partners with interest-free loans – we increased our stake.
Over the following years, as the crisis eased and economies reopened, we resumed in-person meetings and spotted an increasing number of interesting opportunities in China, where some smaller companies were showing an ability to grow consistently through gaining market share despite the weak performance of the Chinese economy. Examples included DPC Dash, the exclusive franchise operator of Domino’s Pizza in China, and online music platform NetEase Cloud Music.
Although India continued to be the portfolio’s top country exposure, we also added some geographic diversification, taking advantage of greater flexibility in the Trust’s mandate to acquire our first, small position in New Zealand in 2024.
Learning the lessons
Comparing the Trust’s holdings in 2025 with its first investments in 1995, it’s difficult not to be struck by the differences.
Thanks to our efforts to consolidate into higher-conviction holdings, there are now just 55 companies in the portfolio, down from over 100 in 1995, and the top 10 investments account for 40% of shareholders’ funds, compared with just over 22% three decades ago. Exposure to mainland China and India has risen from 2% to over 60%, reflecting the staggering economic expansion and pace of new company formation in these countries.
Despite the changes, the Scottish Oriental portfolio remains the outcome of the same long-term, conservative methodology that has driven the Trust’s investments since the beginning.
An equally relevant aspect of the Trust’s evolution over the past 30 years is the mistakes we have made. While painful, the lessons learnt from these have helped to strengthen our investment process and informed our portfolio construction today.
Looking back, these missteps have tended to fall into three categories: investing in companies with a limited track record (such as Indian pharmaceutical firm Solara Active Pharma); investing in companies that expand too aggressively and take on too much debt (Ezion Holdings, an engineering procurement and construction business operating in the oil and gas industry); and picking the wrong owners and managers (Philippines cement producer Cemex Holdings). Reviewing mistakes has been a key source of learnings for us and you can find more detail on these investments in our 2025 Portfolio Manager’s Letter.
Outlook
We have recently observed a divergence in investor behaviour across different parts of the investment universe in Asia, which is creating opportunities for us. On the one hand, there is exuberance in areas related to the semiconductor value chain and anything which can be linked to the boom in artificial intelligence (AI) applications. Despite uncertainty around the sustainability of AI-related capital expenditure growth, most companies in these industries are now valued at expensive levels.
On the other hand, we are finding attractive bottom-up opportunities in parts of the investment universe which have been ignored as investors crowd into AI. These include consumer businesses in Asia, which are supported by enduring trends such as premiumisation across a range of categories, and consumers’ increasing confidence in choosing domestic brands over those operated by large multinationals.
Overall, the Trust’s holdings continue to show strong characteristics: they have track records of dealing with varying macroeconomic environments; their competitive position is based upon the strength of their brands and technology investments; and their management teams have been disciplined about their capital allocation policies and maintained conservative balance sheets.
We are confident these companies will capture a disproportionate share of the growth in their respective industries in the years to come. They are the small companies of today but are likely to emerge as the large businesses of the future.
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 Group. 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 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.
First Sentier Group entities referred to in this document are part of First Sentier Group, a member of MUFG, a global financial group. First Sentier Group 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.
© First Sentier Group
Follow us
Keep up-to-date with the latest research and developments by subscribing to email updates or follow us on LinkedIn.
Managed by
