This week’s investment trust pick is the Asia Dragon Investment Trust [LON:DGN] which is in the Association of Investment Companies’ Asia Pacific sector and has been around since September 1987.
Part of Edinburgh-based Abrdn (formerly Standard Life Investments which merged with Aberdeen Asset Management), the fund is managed by James Thom and Pruksa Iamthongthong, Thom is based in Singapore and has been with Abrdn since 2010, joining from Actis. Iamthongthong, a Thai national, has been with the fund management group since 2007.
The GBP650m fund aims to achieve long-term capital growth principally through investment in companies in the Asia Pacific region, excluding Japan.
The Asia Pacific region is a dynamic market, driven by the world’s second-largest economy, China, but also boasts some significant global companies including South Korea’s Samsung [KRX:005930], and Taiwan Semiconductor Manufacturing Company (TSMC) [TWSE:2330]. Many countries in the region are experiencing rapid economic growth, driven by urbanisation, having a strategic role in key industries including technology and rising consumer spending.
Asia Pacific has a vast and expanding middle class creating a growing demand for domestic goods and services, but also, given the region’s manufacturing strength, a strong export market. The workforce across the region is young, growing and increasingly well-educated (especially in the strategic STEM (science, technology, engineering, maths) disciplines).
Growing momentum in the technology cycle
The investment trust’s chairman, James Will said: “There are multiple themes that reinforce the attractiveness of Asia, with growing momentum in the technology cycle with AI adoption rising rapidly and Asia at the heart of the global technology supply chain […] the managers’ committed focus on quality companies with solid balance sheets and sustainable earnings prospects should position the [fund] to deliver attractive returns for shareholders over the longer term.”
Although the region’s demographic advantages are well-known, there are underlying structural shifts as more of the less-developed nations are rapidly industrialising and more people are moving from the land to the cities, creating exciting business opportunities.
Benchmarked against the MSCI AC Asia (ex-Japan) Index (in sterling terms; capital return basis), the management team look for high quality companies that are dynamic, forward-looking and “future-facing”, but are mispriced by the market, and they think will become corporate leaders of the future.
The team is a long-term, cornerstone investor in Asian equity markets, and, said Will: “Asia Dragon Trust seeks to provide investors with access to high quality companies – companies we believe to be attractively valued with effective management, good cash flows and healthy balance sheets.”
Disappointing longer-term performance, but is it turning the corner?
The AIC Asia Pacific sector is made up of five funds. Asia Dragon returned (on a share price total return) +25.4% over one-year, against a sector average of +16.8% and placing it second in sector. Performance was disappointing over five-years, returning +14%, last-in-class, twenty-four percentage points behind the sector average. Over ten-years, Asia Dragon returned +76.31% against a sector average of +131.2%, again putting it in fifth place.
However, the fund could be turning a corner. Iamthongthong said: “The growing importance of supply chain resilience is pushing companies to diversify their sourcing and manufacturing to reduce risk – both operational and geopolitical […] Instead of concentrating most of their production bases in China, corporations are branching out to other markets – either closer to their end customers or to ones with friendlier relations with their countries of origin.”
She pointed out that these structural changes are seeing the emergence of ASEAN, an association of ten southeast Asian countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam) representing more than 600 million people, attracting western investment and emerging as a low-cost alternative manufacturing base to China and is amending the portfolio to reflect this structural change.
Asia Dragon Investment Trust top five holdings as at 30th September 2024:
Investment | Country | Weighting |
Taiwan Semiconductor Manufacturing | Taiwan | 13.4% |
Tencent Holdings | China | 8.9% |
Samsung Electronics | South Korea | 8.3% |
AIA Group | Hong Kong | 4.4 % |
SBI Life Insurance Company | India | 2.7% |
Source: abrdn |
The fund’s aggregate exposure to any single holding, whether direct or indirect, cannot exceed 15% of assets under management, and it may deploy gearing to seek to enhance long-term capital growth of up to 20%. Gearing is around 9% currently. Although Asia Pacific-focused, the fund has the mandate to invest up to 30% of the fund in investments outside of the region – as long as the companies they are investing in derive more than 50% of their turnover or revenue from the Asia Pacific region.
In its last interim report (end-February) the managers were still bearish on China but argued that the market has punished China too much, with Thom saying: “In China, sentiment has been far weaker than we would like, given that the fundamentals of our holdings are intact. There are still [negative] headwinds, especially in the property sector, while geopolitical risks linger. It is a positive that Beijing signalled its intent to support the economy at the recent key policymaking session in March, announcing a reasonably ambitious growth target of around 5% for 2024. We view China as oversold, and we are seeing value in some quality stocks that have been indiscriminately sold off despite delivering on growth and earnings.”
ASEAN’s attractive demographic dividend
However, he saw promise in ASEAN: “The region has an attractive demographic dividend – some 685 million people and a combined projected growth of around 4.6% GDP annually for the rest of the decade. Moreover, though China’s labour costs are relatively cheaper than the West, direct manufacturing costs in Indonesia, Thailand, and Malaysia are between 10% and 15% lower than in China.”
He added: “[…] Southeast Asia has a range of well-established manufacturing clusters, including electronics in Malaysia and Vietnam, automobiles and packaged food in Thailand, machinery and petrochemicals in Indonesia, and semiconductors, biopharmaceuticals, and aerospace components in Singapore.”
The fund has an ongoing charge of 0.91% and second-highest five-year dividend growth in sector of 10.5% and trades at a discount to premium of -14.14%. Despite its past challenges, Asia Dragon presents a compelling investment opportunity for those seeking exposure to this dynamic region. With a seasoned management team, a focus on high-quality companies, and a diversified portfolio, the fund has the potential to deliver attractive returns over the long term. While the region may face headwinds, its underlying growth prospects remain strong, making Asia Dragon a worthy consideration for investors seeking to capitalise on this exciting market.