This marks my first annual statement for the Company as Chair, following Nigel Cayzer’s retirement as a Director of the Company at last year’s Annual General Meeting. Once again, the Board and I would like to reiterate our thanks to him for the enormous contribution he made in steering this investment trust forward since its launch.
The state of flux in global markets continues. Inflation in Asian economies was more moderate over the review period than elsewhere, and central banks not as aggressive in their rate hikes. Even so, the threat of a possible global recession spilling into the region weighed heavily on investors’ minds. As ever, markets have paid close attention to US Federal Reserve (Fed) policy, which has put up rates 11 times since March 2022 (with a combined rise of 525 basis points). As I referenced in the Half Yearly Report, China easing Covid restrictions raised expectations that a reopening economy would lead to greater demand across several sectors. This recovery has proved to be patchier than anticipated. Struggles in the country’s property sector continue and political tensions exacerbated market volatility (once again rising US-China rhetoric was a notable feature). By contrast, India has shown signs of recovery in urban consumer demand, and has a buoyant housing market. The Reserve Bank of India (RBI) forecasts GDP growth of 6.5% for the 23/24 fiscal year, putting India among the fastest-growing economies. Indonesia’s market has also been stronger, with domestic spending particularly resilient. Meanwhile, the ASEAN region continues to look attractive. Your Manager sees the bloc emerging as a key beneficiary of the shifts in global supply chains amid the evolving geopolitical landscape, especially between China and the US. In particular, corporate initiatives to embark on a China plus 1 or China plus 2 strategy as part of a supply chain diversification move is fuelling investment across ASEAN, with notable beneficiaries such as Vietnam, given its niche in apparel and electronics; Thailand, which is drawing interest from the printed circuit board supply chain because of its developed infrastructure and industrial parks; and Malaysia, for its engineering talent in software design companies. The bloc’s supportive policies, cost competitiveness, industrial development, linkages to existing manufacturing hubs and rising middle-income consumers are structural drivers that are not only attracting foreign direct investment but also spurring intra-Asian trade, and in turn, boosting economic growth.
Although the weaker global economic environment has continued to be challenging for investors, over the last 12 months, on a total return basis, the Company’s net asset value (“NAV”) rose +7.6% in sterling terms for the 12 months to the end of July 2023, while the share price return was +7.3% having been impacted by the widening of the NAV discount to 14.5%. By comparison, the MSCI AC Asia ex Japan Small Cap (total return) index returned +8.0% and the MSCI AC Asia ex Japan rose 0.8%.
The outperformance of smaller companies in Asia against their large cap peers now stretches several years, with the small cap index outperforming large cap by more than 10% annually over the past 3 years, testament to the benefits of investing in this overlooked segment of the equity market.
Total return; NAV to NAV, net income reinvested, GBP. Share price total return is on a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value. Source: abrdn Investments Limited and Morningstar.
In addition I am pleased to note that in the two-year period from 1 August 2021 (the date that we set the Company’s new Benchmark against the new investment policy), the NAV total return has been 6.1%, the share price total return has been 5.5% and the Benchmark return was 2.5%. It has been especially satisfying to see the high-quality, cash-generative small companies favoured by your Manager fare well. This was notably the case in countries like India and Indonesia, where structural growth, huge consumer markets and rising adoption of technology led to strong performance from businesses in a variety of sectors, including banking, industrials, IT, and branded consumer products. You can read more detail on company-level performance in the Investment Manager’s Report starting on page 13.
While China has proved to be one of the weaker countries in terms of its performance, your Manager has taken advantage of volatility and attractive valuations of certain high-quality smaller companies to add exposure, from a relatively low base. This was aided by the change of mandate approved by shareholders last year (which saw the removal of the limit on company size at initiation), allowing your Manager greater flexibility in picking companies in larger markets such as China. Asia is more than just China and India, however, and your Company’s portfolio is highly diversified across the region, focusing on businesses with healthy balance sheets and strong growth prospects. Stock selection was strong in Korea and Taiwan, where companies involved in cuttingedge technologies and digital services benefitted from a recovery in sentiment towards the IT sector globally, supported by a wave of interest in Artificial Intelligence. Frontier markets such as Vietnam and Sri Lanka also had a pretty volatile ride due to political and economic pressures although ended the period on a much stronger footing, with some of the companies there among the portfolio’s strongest performers. Over the long term, the value of investing in such handpicked smaller companies in Asia has proved their worth. £1,000 invested in 1995 is now worth £22,580 with dividends reinvested; and your Company is one of the top five among the Association of Investment Companies (AIC)‘s ISA millionaires: a company that would have made investors over £1,000,000 had they invested their full ISA allowance from 1999 to 2023.
Dividend and Reserves
The Board recognises the importance of your Company’s dividend income for many shareholders. The Ordinary dividend has been maintained or raised every year since 1998, and your Board is firmly committed to the new enhanced and progressive dividend policy approved by shareholders in 2022. Three interim dividends of 1.6p and a fourth interim of 1.61p have been paid in March, June, September and December 2023, totalling 6.41p (2022 – Ordinary dividend 6.4p). Furthermore, I am very pleased to report that the continuing strength of dividend generation from the portfolio has allowed the Company to declare a further special interim dividend in respect of the year ended 31 July 2023 of 2.25p per Ordinary share which will be paid on 20 December 2023 to shareholders on the register on the record date of 24 November 2023 (ex dividend 23 November 2023). The special dividend will bring the total distribution for the year to 8.66p (2022 – 8.0p). The Board’s strategy is to maintain the progressive dividend policy of the last 25 years (including with the flexibility to pay dividends out of capital reserves where merited in the future) in order to provide shareholders with a regular level of income alongside capital growth prospects. Following payment of the four interims and special dividend for the year to 31 July 2023, there remains well over a year’s worth of reserves to cover the Ordinary dividend.
Share Capital and Gearing
One of the disappointing aspects of your Company’s performance is the continuing discount to NAV. During the period the shares have traded at an average discount of 12.5%, which is higher than its long-term average. This is in line with the Company’s immediate peers, at a time when investment trust discounts have moved to historically wide levels. Your Board is very mindful of the negative impact of large discounts to NAV to shareholders. As a result, we have started to buy back Ordinary shares in the market for treasury. In total 500,000 shares have been purchased in the Company’s financial year (2022: nil), 0.3% of the Company’s issued shares (excluding Treasury shares). A further 595,000 shares have been purchased since the end of the reporting to date. We will continue to oversee the judicious use of share buy backs. The shares bought back in this reporting period were at a weighted average discount to NAV of -13.5%, supporting the twin aims of reducing the volatility of any discount whilst modestly enhancing the NAV for shareholders. The Company’s net gearing at 31 July 2023 was 12.1% with the debt provided by the £30m Loan Notes and the £36.6 million Convertible Unsecured Loan Stock redeemable in 2025. As at 18 October 2023, the latest practicable date, the net gearing stood at 10.2%.
Your Investment Manager
When we announced the amended investment policy in November 2021 (and approved by Shareholders in January 2022) we also introduced a number of other changes; one of which was to deepen the Company's management team, in particular the addition of Flavia Cheong, abrdn's Head of Equities, Asia Pacific, as joint lead manager alongside Hugh Young and Gabriel Sacks and now Xin-Yao Ng, both of whom have worked alongside Hugh for 15 and 5 years respectively. This was partially in recognition of the fact that the long-term success of your Company can be attributed to the strong teamwork at abrdn and that Hugh Young was nearing retirement.
I can now confirm that Hugh will be retiring on 31 December 2023, the same point at which he retires from the Manager. Hugh has worked tirelessly on behalf of the Company since its launch and, both personally and on behalf of the Board, I would like to thank him and wish him the very best for his well-earned retirement. The cumulative long term performance disclosed on page 27 is testament to Hugh’s skill, dedication and methodology that he has handed down to the management team over the years. While Hugh leaves us in good hands with a highquality team across Asia (over 40 investment personnel across six countries) continuing the vital on-the-ground research as part of your Company’s investment process, he will be much missed. I know Hugh still views Asia’s rapidly developing economies as providing a fertile ground for smaller companies. Your Manager continues to explore opportunities across the region to produce a genuinely diversified portfolio not reliant on any one market, looking for businesses with strong balance sheets, exceptional business models and demonstrating resilience to macro concerns.
Your Manager has long been at the forefront of including environmental, social and governance assessment in their investment research. Whilst your Company is not a ‘sustainable fund’, we have long acknowledged that the best companies are sustainable companies, and that is very much your Company’s investment philosophy. Although the portfolio’s MSCI ESG rating of ‘BB’ is in line with that of the benchmark it is pleasing to note that the Company’s portfolio Economic Emission Intensity is only 13.6% of the benchmark. Further detailed information can be found in the ESG report on page 106. Active engagement with your investee companies is also a hallmark of your Manager’s long experience of investing in smaller companies in Asia. You can read more detail on company-level engagement and responsible investing in the Annual Report starting on page 37. The task force on climate-related financial disclosures (referred to as “TCFD”) is now a global standard for reporting climate risks and opportunities. As a listed investment company, the Company is not subject to the FCA Listing Rule requirement to comply with TCFD reporting. However, the Board is a keen supporter of the ambitions of TCFD, as it believes it will improve disclosure of climate related risks. This in turn will help the Investment Manager and other stakeholders better assess the risks which will support sound investment decisions. Your Manager is subject to mandatory requirements to report on the Company as one of its products and the first abrdn Asia Focus plc TCFD Report, for the year ended 31 December 2022, is available under the ‘Literature’ section at asia-focus.co.uk.
As I indicated at the half-year stage, as part of the Board’s succession plan, Randal McDonnell, the Earl of Antrim, will be stepping down at this year’s AGM having completed his service. I’d like to thank Randal for his service to the Company. It has been a pleasure to have him on the Board and his wise contributions will be much missed. Following a review of the Board’s skills, background and experience, and with the support of Fletcher Jones, an independent specialist investment trust recruitment consultant, I am pleased to announce the appointment of Lucy Macdonald as his replacement who will be joining the Board immediately following the close of business of the AGM on 5 December 2023. Lucy has enjoyed a successful career in asset management and was, until 2020, managing director, CIO global equities at Allianz Global Investors. Lucy will bring significant investment experience to the Board. She is an experienced board director and is currently a member of the investment committee of the RNLI, a non-executive council member of the Duchy of Lancaster and senior independent director of JPMorgan Global Emerging Markets Income Trust Plc. To further diversify the Board’s composition and deepen the bench strength on the Board with future Board succession in mind, I am also pleased to announce the appointment of Davina Curling with effect from 1 March 2024. Davina has also enjoyed a successful career in asset management and was formerly managing director, head of European equities at Russell Investments. More recently Davina has consulted on projects for small companies and start-ups in the financial, manufacturing and retail sectors. Davina is a non-executive director of Henderson Opportunities Trust plc and INVESCO Select Trust plc and is a member of the investment committee of St James’s Place Wealth management. Davina will become Senior Independent Director upon appointment. Your Board is cognisant of the FCA's diversity and inclusion Policy Statement PS22/3 and remains committed to corporate governance best practice as recommended in the Hampton-Alexander and Davies reviews. I am pleased to confirm that from 1 March 2024, the Board will be compliant with the new diversity and inclusion targets set out in Chapter 15 of the FCA’s Listing Rules.
Value for Money
We strive to keep the cost of investing low for shareholders to retain as much of the return on their investment as possible. Ongoing charges for the year were 0.92% (2022: 0.88%), primarily made up of the management fee. As you know, the fee was reduced in 2021 to 0.85% for the first £250m, 0.6% for the next £500m and 0.5% for market capitalisation over £750m, to provide even better value for money for shareholders. Importantly, the management fee is tied to the share price of the Company, and not the NAV. This aligns your Manager’s fees with shareholder returns, and sets your Company apart from many of its peers. In addition, in 2022 the Company introduced a performance-linked conditional tender offer for up to 25% of the issued capital. Shareholders will be offered the opportunity to realise a proportion of their holding for cash at a level close to NAV less costs in the event of underperformance against the benchmark in the five year period ending 1 August 2026. Your Board continues to keep all costs under review but believes that, given the breadth and depth of on-theground research by your Manager, the very selective stock picking (your Company’s portfolio has an active share of 97.8 at year end) and the long-term outperformance, the current fees constitute good value for money.
Migration of abrdn Savings Plans to interactive investor (“ii”)
The Company’s Manager, abrdn, has been reviewing its current service provider for its investment trust share plans (abrdn Savings Plan, Children’s Plan and ISA). In May 2022, abrdn completed the acquisition of ii, the UK’s second largest, award-winning investment platform for self-directing private investors. Having considered the various options, abrdn has concluded its review and has decided to migrate its share plan customers to ii in December 2023, given the strength of the ii offering, its understanding of and enthusiasm for investment trusts and the strong representation of investment trusts in its customer portfolios. Following completion of the migration, plan participants should contact the Company’s registrars, Equiniti (further details on page 111) if they would like to continue to receive hard copies of shareholder reports and communications and they will be added to the Company’s mailing list. Plan participants who have queries in respect of the migration should raise them directly with abrdn’s investor services team by email at firstname.lastname@example.org or by telephone on 0808 500 4000 or 00 44 1268 448 222 (Monday to Friday 9am to 5pm – call charges will vary).
and Annual General Meeting The Company's Annual General Meeting is scheduled for 11:00 a.m. on 5 December 2023. The AGM will be preceded by a short presentation from the management team and following the formal business there will be a light shareholder buffet lunch and the opportunity to meet the Directors. In addition to the usual ordinary business being proposed at the AGM, as special business the Board is seeking to renew the authority to issue new shares and sell treasury shares for cash at a premium without preemption rules applying and to renew the authority to buy back shares and either hold them in treasury for future resale (at a premium to the prevailing NAV per share) or cancel them. I would encourage all shareholders to support the Company and lodge proxy voting forms in advance of the meeting, regardless of whether they intend to attend in person.
In light of the significant take up from shareholders at the online presentation held in November 2022, in advance of the AGM, the Board has decided to hold another interactive Online Shareholder Presentation which will be held at 11:00 a.m. on 21 November 2023. At the presentation, shareholders will receive updates from the Chair and Manager and there will be the opportunity for an interactive question and answer session. Following the online presentation, shareholders will still have time to submit their proxy votes prior to the AGM and I would encourage all shareholders to lodge their votes in advance in this manner. Full registration details can be found at: asia-focus.co.uk.
While it has been a tough period for small caps elsewhere, Asia’s domestic growth story means that the region’s diverse and fast-growing small companies are outpacing larger rivals. Asia is forecast to contribute around 70% of global growth for 2023, according to the IMF’s last World Economic Outlook (published in April). Growth in Asia and the Pacific is set to accelerate to 4.6% this year from 3.8% in 2022. As I have already referenced, although China’s post-Covid recovery has thus far failed to take off and there has been much talk of the ‘Japanification’ of China’s economy, improved policy messaging from China’s government and more concrete measures could see an improved backdrop for companies over the longer term. Meanwhile, India’s prime minister Narendra Modi continues to make the bold claim that India will become one of the world’s top three economies within his third term (should he be reelected in 2024). Importantly your Company is able to invest in excellent companies spread across Asia and it is not dependent on investing solely in India or China. Recovery in Southeast Asia continues to gather pace and markets like Vietnam are providing a more positive environment for small-cap investors, notwithstanding significant volatility there during the year. Stronger GDP growth should benefit the smaller companies targeted by this investment trust over time. But by no means does this measure alone automatically result in strong share-price performance. Pinpointing those businesses that can succeed and are capable of becoming ‘multi-baggers’ (stocks that deliver returns many times over the original investment), requires a disciplined, bottom-up stock picking approach. Your Company remains positioned around Asia’s longterm structural growth themes, such as greater domestic consumption that comes with Asia’s rising affluence, booming infrastructure, the growth of digital, moving to a lower-carbon future, advances in health and wellness technology, and the opportunities offered by the rollout of 5G, big data and digital interconnectivity. Relatively under-researched and inefficient markets across the whole Asian continent mean there is ample potential for unearthing hidden gems, companies with strong balance sheets and sustainable earnings prospects that can emerge stronger. I am confident that with extensive on-the-ground coverage and a highly experienced management team, your Manager is well positioned to keep finding quality companies among the hugely varied Asian small cap universe.
Risk factors you should consider prior to investing:
- The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
- The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
- The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
- The Company may charge expenses to capital which may erode the capital value of the investment.
- The Company invests in smaller companies which are likely to carry a higher degree of risk than larger companies.
- Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
- There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
- As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
- The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
- Specialist funds which invest in small markets or sectors of industry are likely to be more volatile than more diversified trusts.
- Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.