Mark Dampier: Smaller companies often pay off, especially in Asia
Saturday 28 April 2012
Investing in smaller companies can be an exciting, if a somewhat bumpy, ride. Yet it often leads to long-term outperformance. This has been the case not only for the UK, where there are some excellent smaller companies fund managers, but also around the globe.
Combine the potential of smaller companies with Asia's fast-growing economies and you have a compelling opportunity.
An interesting way of accessing this is through the Aberdeen Asian Smaller Companies Investment Trust. Aberdeen's expertise in managing Asian equities is well known. A focus on good-quality, resilient businesses has helped navigate the volatile markets of Asia exceptionally well over the years. The team, headed by Hugh Young, believe share prices reflect the quality of underlying businesses over the long term. They therefore look to identify the best firms and buy them when the valuation is right.
Aberdeen's approach is consistent across their range of funds. You don't often find a stock held in just one. For example, the 60 or so smaller companies in this investment trust will also be found in either their offshore Asian smaller company unit trust or in the individual country funds Aberdeen manage across the region.
The trust focuses on companies below $750m (£464.3m) in size at the time of purchase, highlighting one of the benefits of the investment trust structure. As there is no money coming in and out of the trust to worry about, the Aberdeen team can hunt more freely for much smaller companies, which are often more illiquid. In contrast, their Asian smaller companies unit trust looks at companies below $2.5bn at the time of purchase.
However, according to Mr Young, the portfolios are currently fairly similar. Indeed, running the two types of funds is complementary: The discipline of having to buy and sell new holdings as money flows in and out of the unit trust forces them to reassess whether they should hold a company in the investment trust too.
The current portfolio trades at a price-to-earnings ratio of about 13.5 times this year's earnings. This is above the MSCI Asia Pacific Small Cap Index, though this index is heavily skewed to Australia where the trust rarely invests. According to Mr Young, this is around the long-term average following a rally in the first few months of 2012.
While the positive start to this year has been beneficial for existing holdings of the fund, Mr Young and the team are finding it harder to unearth new opportunities as valuations are less attractive than they were. The portfolio is currently tilted towards companies exposed to domestic consumption in the region. Consumer businesses make up almost 45 per cent of the portfolio compared to around 13 per cent of the index. Top 10 holdings include Siam Macro (a Thai retailer), Multi Bintang (a brewer) and Godrej (a consumer products business).
At a country level, the team has found excellent opportunities in India, Malaysia, Thailand, and Indonesia; while it is harder to find high-quality smaller companies in China, Taiwan and Korea. Ultimately, the decision on whether to invest is based on the quality of the companies alone, not their location.
When assessing an investment trust, other factors should be considered aside from performance, for example, the amount of borrowing the trust has, otherwise known as "gearing". In a rising market, gearing can add value and in a falling market it can detract. Aberdeen's approach here is prudent, and gearing has typically been no more than 10 per cent.
Another issue to bear in mind is that the share price may not accurately reflect the underlying net asset value of the trust. It may be a "premium" or "discount" according to market sentiment. Currently shares are trading marginally above net asset value meaning they trade at a premium. Investors looking to purchase may wish to monitor this to see if shares fall to a discount prior to buying. Those not wishing to take the additional risk of the share price discount/premium could consider the unit trust instead. Either way, I believe Aberdeen's Asia team is of the highest calibre, and exposure could be an excellent addition to an adventurous portfolio.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk/independent
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Emergency call 'started off dumb, but got pretty serious'
- 1 This 'woman calls police to order pizza' story isn't going where you're expecting
- 2 Watch what happened when food critics were unknowingly served McDonald's
- 3 Jimmy Carr's controversial Oscar Pistorius joke goes a bit too far at the Q Awards
- 4 Ottawa shootings: Bruce MacKinnon's cartoon is the perfect tribute to soldier Nathan Cirillo
- 5 Of course, teenage girls need role models – but not like beauty vlogger Zoella
Of course, teenage girls need role models – but not like beauty vlogger Zoella
Cameron is warned 'no possibility' of UK reducing immigration and that bid to bring in quota on migrant workers would be illegal
Support for EU membership 'at highest level since 1991' with most Brits wanting to stay 'in'
Thousands with degenerative conditions classified as 'fit to work in future' – despite no possibility of improvement
Residents should throw a street party and mix with immigrant neighbours, councils told
London bus driver 'kicks gay couple off for kissing'
iJobs Money & Business
£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...
£350 - £360 per day: Ashdown Group: SQL Developer with T-SQL, Watford, Hertfor...
120-150k: Accountancy Action: We are looking for an experienced CFO from a min...
£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...
Day In a Page
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village