2 leading investment trusts with an Asian focus

Both Scottish Oriental and Pacific Assets are trusts that concentrate on reputable businesses run by reliable founders or families

The Pacific Assets Trust (LSE: PAC) and Scottish Oriental Smaller Companies Trust (LSE: SST) were managed under one roof until FSSA separated from Stewart Investors almost ten years ago. The former invested in larger Asian companies, with the exception of Japan, while the latter focused on smaller businesses. It seems like they never parted ways ten years later.

With 500 million net assets, SST has outperformed Pacific Assets, which had 410 million, 65 percent less than 52 percent over five years, 41 percent less than 15 percent over three, and 15 percent less than 10 percent over one. This is because Asian small businesses have outperformed the global average, which has been uncommon. While Pacific Assets is ten percent behind over one year but well ahead over three and five, SST is significantly ahead over one and three years and marginally ahead over five when compared to their own benchmark indices. Both are priced at a discount to net asset value (NAV) of the mid-teens.

Pacific Assets' poor recent performance can be attributed to its low exposure to China, which makes up 10% of the portfolio compared to 41% for India. "The vast majority of the Chinese market is state-owned or controlled," adds Stewart Investors manager Douglas Ledingham. It is not our intention to give your money to the Chinese Communist Party.

Ledingham notes that there are some "very questionable" families in Asia, but Stewart Investors prefers businesses run by entrepreneurs (28 percent) or families (57 percent). Only 3% of the top 100 Chinese companies are deemed investible, compared to 27% of Indian companies. The qualities he seeks out are quality, sustainability, and trustworthy individuals.

Sree Agarwal, the manager of SST at FSSA, takes a similar approach to investing, but he places more emphasis on long-term growth at a reasonable cost. Small companies that have the potential to become the big caps of the future are what SST is searching for.

Cutting back on India.

With an average holding period of ten years, Pacific Assets places greater emphasis on long-term holdings, whereas SST seems more realistic. This was evident last year when China, Hong Kong, and Taiwan saw a significant increase in SST exposure to India. "In favor of very high-quality names in China and Southeast Asian markets, which are trading at rarely seen valuations, we have been trimming some of our Indian companies on valuation grounds," asserts Agarwal. Thirty-four percent of the trust's portfolio is still in India, but 25 percent is now in China, and another 11 percent is in Hong Kong and Taiwan.

Agarwal, for instance, has invested in DPC Dash, which currently holds the largest stake at 60.9 percent of SST. In China, where it is expanding, it owns the Domino's Pizza franchise. He claims that China has only one-third as many pizza joints per person as South Korea and Japan. "We anticipate that it will expand at a mid-teens pace, while Pizza Hut, the market leader, has been losing market share. In 2010, the 18-store franchise was purchased by the DPC Dash founders. It could grow to several times its current size, but by the end of 2024 it had over 1,000 stores spread across 39 cities.

Despite their impressive track record and high valuations, both managers are still long-term bullish on Indian stocks. According to Ledingham, "Indians' median age is only 35, and their manufacturing wages are only 25% of those in China." As a result, India now produces 25% of iPhones.

The holdings of Pacific Assets don't much overlap with those of the larger Asia and emerging markets funds and trusts. Although there are no trusts that cover small caps in all emerging markets, SST is one of three Asian small cap specialists. Although both appear appealing, SST has the advantage due to its astute handling of the return to favor of Chinese stocks, which has left most analysts unconvinced.