The Scottish Oriental Smaller Companies Trust (SST) 298p

Market cap: £343 million

Investors seeking exposure to smaller Asian companies operating in the world’s fastest-growing economies and with the potential to become much bigger businesses should buy The Scottish Oriental Smaller Companies Trust (SST).

This total return trust trades at an attractive 11.9% discount to NAV (net asset value) and its stock is now more affordable and liquid following a February’s 5-for-1 share split.

Managed by Singapore-based Sree Agarwal, Scottish Oriental celebrated its 30th anniversary this year, making it one of the longest-running trusts investing in small caps in both developed and emerging Asian markets.

Since its 1995 launch, the fund has delivered a cumulative NAV total return of 2,227.3%, trouncing the 475.7% generated by the MSCI AC Asia ex Japan Small Cap Index, or an annualised total return of 11% against 5% for the benchmark.

Shares believes Scottish Oriental can continue to deliver benchmark-beating performance over the long haul by backing some of Asia’s highest-quality, sustainably growing smaller corporate fry, and all for a reasonable ongoing charge of 0.95%.

THE OWNERS’ EYE

This five-star Morningstar-rated trust achieves long-term capital growth by investing in high-quality Asian small caps, defined as having market tags south of US$5 billion at the time of investment.

Singapore-based lead manager Agarwal wears out the shoe leather looking for opportunities in China and India, as well as across countries including Indonesia, Malaysia, Pakistan, Philippines, Singapore, Sri Lanka, Taiwan, Thailand and Vietnam, not to mention Australasia and Japan.

Agarwal and his team begin their process by excluding companies which are not run well enough for the trust to invest in.

As minority shareholders, they have to feel aligned with the owners and managers in any company the trust invests in, therefore they rigorously research how various stakeholders including communities, the taxman, employees and so on have been treated by management over time.

‘Only when we conclude a business is investible do we think about the quality of the franchise, the growth, the valuation and so on,’ Agarwal tells Shares.

Agarwal’s bottom-up stock picking approach is founded on fundamental research, an on-the-ground presence, strong relationships with management and avoiding the latest investment fads.

‘We like to invest with management teams who are ambitious but at the same time conservative, particularly about their balance sheets. We avoid leveraged companies and stay away from what is currently the flavour of the season,’ he explains.

Scottish Oriental is also ‘completely benchmark agnostic,’ according to Agarwal. To illustrate the point, he cites Korea, which represents 15% of the benchmark but is not currently represented in the portfolio, an absence which has hurt the trust’s relative performance of late.

‘Historically, from a governance quality perspective, we haven’t been able to find good quality companies in Korea, although that may be changing,’ he teases.

The trust’s focus is on delivering a strong total return to shareholders by investing in smaller companies with potential to become bigger companies in the future.

It is also worth noting the vast majority of Scottish Oriental’s holdings are domestically-focused businesses which tend to be minimally impacted by global trade issues.

‘We are happy to own businesses with lower dividend yields,’ stresses Agarwal, ‘but we want companies which have consistent dividends and whose businesses are predictable and consistent,’ qualities he normally finds in consumer companies.

One example is top 10 holding Uni-President China (0220:HKG), the drinks-to-instant-noodle-maker trading on 15 times earnings with a 5%-plus dividend yield which is expanding its Chinese distribution, launching new, higher-margin products and reducing spending on promotions, meaning its profitability should continue to improve.

Among the portfolio’s strongest performers over the past year has been Netease Cloud Music (9899:HKG), China’s answer to music streaming star turn Spotify (SPOT:NYSE).

Another top 10 holding is Philippine Seven (PSVNF:OTCMKTS), the exclusive franchise operator of 7-Eleven convenience stores in the Asian nation with 4,200 sites and counting.

Scottish Oriental recently added a new holding in India in the form of family-owned business KEI Industries (KEI:NSE).

The firm is one of the largest wire and cable manufacturers in India and is benefiting from the country’s shift from thermal electricity to renewable generation.

‘KEI has built a strong track record in India over the last 20 years, is one of the market leaders in India and it also has a net cash balance sheet,’ notes the manager. 

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