Scottish Oriental Smaller Companies
Edison | Jun 26, 2015 08:28AM ET
Quality and growth from Asian small-caps
Scottish Oriental Smaller Companies Trust (SST) is one of the longest-established Asian trusts, and one of only two in its sector with a specialist smaller companies focus. It invests mainly in companies of US$1.5bn or less, drawn from across Asia (excluding Japan and Australasia), with the aim of achieving long-term capital growth. Portfolio construction is mainly driven by stock selection, focusing on quality companies with competitive advantages and stable earnings growth potential. Following the forthcoming division of management group First State Stewart into two companies, SST will come under the FSS Asia umbrella but will continue to be managed by Wee-Li Hee, now assisted by Martin Lau and Scott McNab.
Investment strategy: Growth at a sensible price
Portfolio construction is undertaken from the bottom up, with country and sector allocation largely an output of stock selection. The investment team meets with all holdings and assigns a fair market value based on a detailed understanding of a company’s history, strategy and competitive landscape. Candidates for inclusion must combine quality and growth characteristics (integrity of management, competitive advantage, cash flow generation and sustainable earnings growth) with sensible valuations, allowing fair value to be achieved over three to five years.
Market outlook: Long-term investment case intact
Asian markets have outpaced global equity index growth since the nadir in 2009, yet price/earnings and price/book valuations on both large-cap and small-cap indices look more favourable than the US-dominated MSCI World index, with dividend yields at similar levels. However, geopolitical tension, slower economic growth and worries about US interest rate rises and European bond markets could spill over into increased risk aversion, causing near-term volatility. In spite of this, the long-term investment case for Asia, predicated on growing prosperity and infrastructure development, remains intact.
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