Until FSSA split from Stewart Investors nearly ten years ago, Pacific Assets Trust (LSE: PAC) and Scottish Oriental Smaller Companies Trust (LSE: SST) were managed under the same roof, with the former investing in larger companies in Asia, excluding Japan, and the latter in smaller companies. A decade later, it’s as if they never parted company.
The performance of SST, with £500 million of net assets, is ahead of Pacific Assets, with £410 million – 65% versus 52% over five years, 41% versus 15% over three and 15% versus 10% over one. That’s thanks to the outperformance of smaller companies in Asia, which has been unusual in a global context. Relative to their own benchmark indices, SST is well ahead over one and three years and slightly ahead over five, while Pacific Assets is well ahead over five and three years but 10% behind over one. Both trade on a mid-teens discount to net asset value (NAV).
The weak recent performance of Pacific Assets is attributable to its low exposure to China, which accounts for 10% of the portfolio against 41% for India. “The vast majority of the Chinese market is state-owned or controlled,” says manager Douglas Ledingham of Stewart Investors. “We don’t want to hand your money to the Chinese Communist Party.”
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Stewart Investors favours family-controlled companies (57% of the portfolio) or ones controlled by entrepreneurs (28%), though Ledingham adds that there are some “very questionable” families in Asia. “We see only 3% of the largest 100 Chinese companies as investible against 27% for India.” Quality, sustainability and reliable people are the key characteristics he looks for.
The investment approach of Sree Agarwal of FSSA, the manager of SST, is similar but with more focus on reasonably priced long-term growth. SST is looking for “small caps which have the potential to be the large caps of the future”.
Trimming India
Pacific Assets puts more emphasis on long-term holdings with an average holding period of ten years, while SST appears more pragmatic. This showed last year, when SST’s exposure to India was significantly reduced in favour of China, Hong Kong and Taiwan. “We have been trimming some of our Indian companies on valuation grounds in favour of very high-quality names in China and Southeast Asian markets, which are trading at rarely seen valuations,” says Agarwal. The trust still has 34% of the portfolio in India but 25% is now in China and another 11% in Hong Kong and Taiwan.
For example, Agarwal has bought into DPC Dash, now the largest holding at 6.9% of SST. It holds the Domino’s Pizza franchise in China, where it is gaining momentum. China has just one-third the number of pizza stores per capita compared to Japan and South Korea, he says. “We expect it to grow at a mid-teens rate, while market leader Pizza Hut has been losing market share." The founders of DPC Dash bought the franchise, which had 18 stores, in 2010. By the end of 2024 it had more than 1,000 stores in 39 cities, yet has the potential to become several times its current size.
Both managers remain long- term bullish on Indian equities, despite their strong performance and high valuations. “The median age of Indians is only 35,” says Ledingham, “and manufacturing wages are just a quarter of those in China. As a result, a quarter of iPhones are now made in India.”
Pacific Assets’ holdings have little overlap with the larger Asia and emerging markets trusts and funds. SST is one of three Asian small cap specialists but there are no trusts covering small caps across all emerging markets. Both look attractive, but SST’s shrewd navigation of the return to favour of Chinese equities, while most commentators have remained sceptical surely gives it the edge.
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