Final Results

RNS Number : 1264T

Schroder Asian Total Retn InvCo PLC

16 March 2023

 

ANNUAL REPORT AND ACCOUNTS

Schroder Asian Total Return Investment Company plc (the "Company") hereby submits its final results for the year ended 31 December 2022.

The Company's Annual Report and Accounts for the year ended 31 December 2022 (" the 2022 Annual Report") are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's website www.schroders.co.uk/satric . Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/1264T_1-2023-3-15.pdf

Enquiries:

Kerry Higgins

Schroder Investment Management Limited 

Tel: [phone]

Chairman's Statement

2022 was a difficult year for Asian markets and a disappointing one for the Company. Russia's unexpected invasion of Ukraine significantly changed global growth and inflation expectations causing a sell off in equity markets across the board with technology and semiconductor sectors faring particularly badly which adversely impacted the Company's performance. China's zero-COVID policy, maintained until the last month of the year, further depressed economic and corporate growth expectations within Asia and markets in the region were particularly hard hit. Our Portfolio Managers reduced positions in technology stocks most exposed to cyclical slowdown and heightened trade tensions, whilst utilising derivatives to reduce overall market exposure.

During the year ended 31 December 2022, the Company produced a net asset value ("NAV") total return of -12.7%, under-performing the Reference Index which fell by 7.1%. The share price total return was
-17.4% as the shares moved from trading at a premium to NAV at the start of the year to a discount.

However, performance has markedly improved since the beginning of 2023 and some of the losses from 2022 have been recouped. From 1 January 2023 to 7 March 2023, the NAV has risen by 7.8%, outperforming the Reference Index which rose by 5.1%.

Further comment on performance and investment policy may be found in the Portfolio Managers' review.

Earnings and dividends

The revenue return from the portfolio for the year increased by 34.8% to 12.47p per share from 9.25p per share in 2021. The Board has recommended a final dividend of 11.00p per share for the year ended 31 December 2022, an increase of 29.4% over the final dividend of 8.50p per share paid in respect of the previous financial year. Subject to shareholder approval at the annual general meeting ("AGM"), the dividend will be paid on 11 May 2023 to shareholders on the register on 11 April 2023.

Promotion, share issuance and discount control

At the start of 2022, the Company's share price continued to trade above NAV and in the first two months of the year the Company issued 340,000 new shares, all at a premium to NAV, for a total consideration of £1.7 million (2021: 7,840,000 shares). However, following the Russian invasion of Ukraine in February 2022, investor sentiment turned negative and Asia, in particular, performed poorly. Our share rating, together with that of the peer group, subsequently fell and the Company's share price slipped to a discount to NAV as investment trust discounts widened across the board.

The Company took steps to ensure that the discount remained within the Company's target of 5% or less and began to purchase its own shares. During the eight months ended 31 December 2022, 3,851,448 shares, amounting to 3.5% of the issued share capital, were repurchased, at an average discount of 5.1%, for a total consideration of £15.7 million and placed in treasury for future reissuance at a premium to NAV. The Company's shares traded at an average discount of 3.9% during the year.

The Company had not bought back its own shares since 2016 and, as I have previously mentioned, the Board is of the view that good performance supported by good marketing is the best way to sustain a premium in the long term.

The Company will continue to implement both an issuance and a discount management policy. Shares will be issued at a moderate premium to NAV and the discount policy will continue to target a discount to NAV of no more than 5% in normal market conditions. The Board believes that overall liquidity and the relative discount to the Company's peers has also to be considered in any decision to issue and to buy back shares.

The Board will be seeking approval from shareholders to renew the issuance and buy back authorities at the AGM to be held on 25 April 2023, further details of which can be found on page 96 of the 2022 Annual Report.

Gearing and the use of derivatives

The Company may use gearing to enhance performance but net gearing will not exceed 30% of NAV. The Board has agreed a disciplined framework for using gearing to increase market exposure, based on a number of valuation indicators.

Gearing was actively utilised by the Portfolio Managers during the year and ranged between 6.6% at its lowest and 13.4% at its highest. Average debt was 9.3%.  Shareholders should be aware that the use of borrowing must be seen in the context of the use of derivative hedging instruments.  For the year up until the end of September 2022, gearing was largely offset by derivatives resulting in a neutral net exposure.  However, this was reversed in the last three months of the year when the Company was net long equity markets.

The Board

The Company announced in December 2022 that Mike Holt would be standing down from the Board and as Chairman of the Audit and Risk Committee at the completion of the AGM in April 2023 and that Jasper Judd would be appointed as a non-executive Director and Audit and Risk Committee Chairman designate, with effect from 1 February 2023.  I am delighted to welcome Jasper, who is a qualified accountant and brings a wealth of experience, to the Board. Jasper will stand for election to the Board at the AGM in April 2023 following which he will also take over as Audit and Risk Committee Chairman.

On behalf of the Board, I should like to thank Mike for his invaluable contribution to the Board over the last nine years and to wish him well for the future.

Online presentation

There will be a presentation by the Portfolio Managers at 12.00 noon on Tuesday, 25 April 2023 which will be available to watch online. To sign up to watch the presentation please click on this link: https://schroders.zoom.us/webinar/register/WN_1VSXYNFaQliuaR9R3fvhPQ

Details on how to watch the presentation are also available on the Company's webpage: www.schroders.co.uk/satric.

By using a webinar, I hope more shareholders, and interested parties, will be able to listen to, and ask questions of, the Portfolio Managers.

AGM

The AGM will be held at 1.00 pm on Tuesday, 25 April 2023 at the Manager's offices at 1 London Wall Place, London EC2Y 5AU. Any shareholders planning on attending the AGM will also be able to watch the Portfolio Managers' presentation at the Manager's offices at 12 noon, prior to the AGM.

All shareholders are encouraged to vote by proxy. Proxy votes can be submitted electronically through the registrar's portal, by post and also by email. Details are set out in the Explanatory Notes to the Notice of AGM and on the Company's webpages.

Outlook

Although equity markets started the year well with a degree of optimism over the direction of interest rates and inflation this has swiftly abated. Markets have been unsettled by recent US economic data which may result in greater than expected rate rises from the US Federal Reserve. Furthermore, geopolitical tensions continue to hang over the markets. There is mounting concern over China's lack of condemnation for the Russian invasion of Ukraine. In addition, US/China relations remain delicate over Taiwan, US sanctions and US restrictions on technology transfer to Chinese companies. However, the impact of reopening in China, following the abandonment of their zero-COVID policy, will have positive implications across the region for both economic growth and earnings expectations. Asian equity valuations are moderate when compared both to their historical range and against other regions, with many attractive opportunities to be found. We have confidence that the considerable investment experience of our Portfolio Managers, supported by an extensive team of 39 research analysts on the ground in Asia, puts them in a strong position to ascertain the most attractive investment opportunities in the region.

Sarah MacAulay

Chairman

15 March 2023

Portfolio Managers' Review

2022 REVIEW

2022 has undoubtedly been one of the most disappointing years in terms of performance for your Portfolio Managers. The Company was performing in-line with Asian regional stock markets until the Russian invasion of Ukraine at the end of February 2022, after which the Company materially lagged the Reference Index over the course of the year. The end result was the Company's NAV fell by 12.7% compared with a fall in the Reference Index of 7.1%. As we move into 2023, your Portfolio Managers have been doing a fair bit of soul-searching. So, what are some of the key detractors to performance last year, and what lessons have we learnt?

Detractor #1: Taiwanese and Korean semiconductors

Perhaps unsurprisingly, the Company's large positions in Taiwanese and Korean semiconductor (foundry and fabless) companies top the year's list of negative contributors. Stellar contributors to the Company's outperformance in 2020 and 2021, the last year has seen a reversal of fortunes as these very same holdings handed back a third of the combined alpha that they had generated in the previous two years. For your Portfolio Managers, the investment thesis here has always been clear. We are bullish on the longer-term trends of automation, electric vehicles ("EVs"), Internet of Things ("IoT"), artificial intelligence ("AI"), cloud migration and digitalisation; we see a structural uplift in semiconductor demand that underpins the long-term earnings of these companies and engenders their future shareholder value creation. Being world leaders in a fast-consolidating industry, the continued investments into R&D by these firms, as well as the reasonable valuations they trade on, further boost our conviction in them.

Unfortunately, short term share price performance was not to be. The global slowdown, particularly in the consumer technology space (computers, smartphones, televisions etc), has led to a large build up in inventories and downgrades to earnings forecasts for the Asian technology sector. However, even after the humbling share price experience of these names, we have seen little that has fundamentally shaken our confidence in our long term investment thesis. With hindsight, and being more critical of ourselves, the lesson learnt here is that we should have been more cognisant that nothing goes up in a straight line and that even in a structural uptrend, there will still be mini-booms and busts along the way. This means that we should have been more ruthless in trimming the Company's positions when the upsides to the fair values of our names narrowed, particularly at the end of 2021 when an element of froth entered the market. Lesson here is do not get too caught up in hubris and be disciplined about trimming stocks as they approach our fair values.

Detractor #2: Indian stock selection

The second drag to the Company's performance last year was the stock selection in India. This detraction stems not just from the stocks that were held in the Company, but also the ones that we did not hold. The Company holds a long-term position in the Indian IT consulting industry, a traditional Indian stronghold that benefits from the rapidly-unfolding trends of corporate digital transformation and IT modernisation. Unfortunately a lull in IT spend by Western clients last year has put a temporary dent in the project pipelines of these Indian IT companies. Worried about the Ukraine war and concerned about an impending recession, some customers have slowed their digital transformation plans. Given that for most companies these projects are essential for long-term competitiveness we believe it is only a matter of time before these projects resume. Even before COVID hit, 92%¹ of companies surveyed by McKinsey already thought that their business models were in need of an overhaul given how disruptive an economic force digitalisation had become. We therefore do not see this near-term cyclical weakness derailing customers' longer-term technology ambitions and we believe Indian IT companies are well placed to take market share given their substantial labour cost advantage and the huge pool of young, well-educated engineers they can draw from.

What was perplexing to your Portfolio Managers were the parts of the Indian market that performed strongly in 2022. The Indian consumer sector, where stocks often trade at bubble like levels, continue to do well despite muted, and in some cases contracting, earnings. The other perplexing sector was the Adani group companies, which over the last two years have been on a massive acquisition spree across industries as diverse as cement and media. This not only propelled corporate debt to giddying levels but also drove share prices for the various group companies to stratospheric heights on the back of a retail driven investor frenzy. At the time of writing (February 2023), accusations of accounting fraud and share price manipulation have been raised and this has caused an overdue collapse of this bubble at least.

Detractor #3: US housing-related plays

The last major drag on the Company's performance last year was our holdings in a few US housing-related plays, particularly power tool giant Techtronic, window blinds manufacturer Nien Made, fibre cement siding leader James Hardie and plumbing fittings expert Reliance Worldwide. The poor near term performance was perhaps not surprising. After all, the average 30-year mortgage rate in US was only about 3% in mid-December 2021. By December 2022 though, the average rate has already more than doubled to 6.3%. A swing in interest rates of this magnitude will always cool some demand in the market. Long-term we remain bullish on the sector. A significant lack of housing inventory in the country persists, and this means that long-term demand for US housing remains well-supported. More importantly, our original investment rationale of these companies being intangible giants who are building ever-widening economic moats via continual investments into R&D remains intact. As such, we view the loss of performance here as more of a cyclical blip than a structural concern.

Hedges, debt and net exposure management

It has not been all bad news for the Company. On the brighter side, our hedging strategy and net exposure management yielded a positive contribution of c.20 basis points last year. That said, in a year like the last where the market has fallen by double-digits, we would normally have expected a better outcome. This is particularly frustrating as the calls by our hedging and proprietary valuation models were, by and large, correct over the course of 2022. Unfortunately in this instance we were constrained by the exorbitant prices demanded on put options through much of the year, which meant that we were only able to buy hedges cheaply on a few rare days. Put options are contracts that the Company uses for hedging purposes in order to try and provide some capital protection if our models indicate that markets could correct.

The Company was approximately 5% to 10% geared throughout 2022. However until early October 2022, with the Company's proprietary valuation and hedging models cautious or neutral on Asian stockmarkets, we sold index futures to bring the Company's net exposure back to a neutral (100% invested) position. In October 2022 with Asian stock markets very weak, around the time of the Party Congress in China, the proprietary gearing indicators flashed BUY so we took the Company to a 10% geared position by removing all hedges and adding to stock positions. The Company then remained at c.10% debt from October to the end of 2022.

Key changes and positioning at end December 2022

The Company had a relatively active 2022, which given the volatility in markets and the changed economic backdrop was perhaps not altogether surprising. One key change over the course of the year was a reduction in some of the Company's technology positions. Given the much sharper cyclical slowdown than we anticipated, and the rise in trade tensions and trade barriers imposed on Chinese technology companies in particular, this has we believe created winners and likely losers. The Company exited all of its Chinese technology positions as we are worried about oversupply in China and long-term competitiveness of many companies given US sanctions. In Korea, we exited SK Hynix which goes into the sharp downcycle weakened by significant debt after a badly timed acquisition; in the memory space we think Samsung Electronics will come out of this cycle even more dominant. Elsewhere, we exited internet stocks Naver and HKTV as we lost confidence in management teams who seemed more focused on diversification rather than core operations. Both stocks have fallen sharply since we exited our positions. Worries about the advancement of state control into ever more sectors in China, and what that is likely to mean for long term capital allocation (as we explained in the outlook section), also led us to substantially reduce the Company's China holdings.

What did we add to? Additions were primarily in two areas. We added to financial stocks in Singapore and Hong Kong. This was for quite separate reasons. Singapore is now the wealth management hub for Asia and increasingly the corporate hub for the region. This will benefit Singapore banks who also have broad based exposure to recovering ASEAN economies and offer attractive dividend yields of c.4-5%. In Hong Kong, we primarily added to insurers and HK Exchange which we expect to benefit from the re-opening of the border with China. As we explain below, we view Hong Kong stocks as a more attractive way to play China reopening given the much cheaper valuations. The other market we added to over the year was Australia which now comprises 17% of the Company's assets. This was mostly using weakness during the year to add to existing Australian positions in the healthcare sector and we also added logistics company Brambles and US housing play Reliance Worldwide to the Company's holdings.

Current fund strategy - sector and market allocation as at 31 December 2022

Sector/Country (%)	Australia	China	Hong Kong	India	Indonesia	Korea	Malaysia	Philippines	Singapore	Taiwan	Thailand	United Kingdom	United States	France	Vietnam	Cash & Others	Grand Total
Communication Services	1.2	3.4	-	0.8	-	-	-	-	1.4	-	-	-	-	-	-	-	6.9
Consumer Discretionary	1.5	1.6	-	-	-	-	-	2.9	-	3.6	1.7	-	2.5	1.8	0.5	-	16.1
Consumer Staples	-	-	-	-	-	-	-	-	0.7	-	-	-	-	-	1.1	-	1.8
Energy	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Financials	1.4	-	6.3	4.5	2.2	-	-	-	6.7	-	-	1.1	-	-	-	-	22.2
Banks	-	-	1.4	4.5	2.2	-	-	-	5.0	-	-	-	-	-	-	-	13.0
Diversified Financials	-	-	1.8	-	-	-	-	-	1.7	-	-	-	-	-	-	-	3.5
Insurance	1.4	-	3.2	-	-	-	-	-	-	-	-	1.1	-	-	-	-	5.7
Healthcare	5.5	-	-	1.6	0.4	-	-	-	-	-	-	-	-	-	-	-	7.5
Industrials	2.4	0.9	2.9	-	-	-	-	1.1	-	3.4	-	-	-	-	-	-	10.8
Information Technology	-	-	-	5.5	-	8.3	-	-	1.5	15.3	-	-	-	-	-	-	30.6
Materials	4.9	-	-	-	-	-	-	-	-	-	-	1.9	-	-	-	-	6.8
Real Estate	-	-	3.4	-	-	-	-	-	-	-	-	-	-	-	-	-	3.4
Utilities	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Cash	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-8.7	-8.7
Derivatives	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Collective Investments	-	-	-	2.7	-	-	-	-	-	-	-	-	-	-	-	-	2.7
Grand Total	17.0	5.9	12.6	15.0	2.7	8.3	-	4.1	10.3	22.3	1.7	3.0	2.5	1.8	1.6	-8.7	100.0

Fund Positioning in %	Stocks (%)	Hedges (%)*	Net Long (%)
Strategic hedges - Notional	-	-	-
Tactical hedges - Notional	-	-	-
Total Exposure - Notional	108.7	-	108.7
Strategic hedges - Delta-adjusted	-	-	-
Tactical hedges - Delta-adjusted	-	-	-
Total Exposure - Delta-adjusted	108.7	-	108.7
Cash	-8.7	-	-

*As at 31 December 2022 there were no hedges.

Source: Schroders.

INVESTMENT OUTLOOK

At the beginning of the Chinese Lunar New Year your Portfolio Managers normally write a detailed investment update that summarises how we are approaching investment in the Asian region and where we see the best opportunities and sometimes the biggest potential pitfalls. The update below is a summary version of the report. It is in several sections and parts were written by each of the Portfolio Managers and by Tom Clough who has recently joined the Company's investment team. It principally covers an update on our investment views on China, valuations and the Company's quant models, the importance of dividends, the technology outlook, and the Company's financials exposure.

Before we delve into details what does the Year of the Rabbit potentially herald? - according to Google:

" The rabbit is the symbol of longevity, peace, and prosperity in Chinese Culture, thus 2023 is predicted to be a year of hope ."

Well let's hope this prediction comes true at least!

SECTION ONE

China update

We wrote extensively on China in our last interim report but post the 20th National Congress in October 2022, and the c.50% rise in the MSCI China over the three months to end January 2023, we felt an update was in order. In particular given the current volte face in views from many stockmarket commentators, and the sensationalism that is coming from the financial press and much of the stockbroking community, we try and provide a more fundamental, sober and longer term investment view on the Chinese equity market.

Clearly since the interim report there have been some major policy changes - principally the dramatic and overnight abandonment of zero-COVID policies and a change to put the economy as the focus of policy over, for the short-term at least, ideology.

This has caused your Portfolio Managers to take some time out for a period of reflection and discussion. Chart 2 of the 2022 Annual Report has the questions we have been asking ourselves (and ones we think all investors in Asia need to think about given the importance of China in our investment universe).

Chart 2: China - Key questions investors to think about

-	Do we think the Chinese economy has turned a corner despite the unpredictable and chaotic COVID strategy?
-	Do we think there will a strong post-COVID recovery in the Spring, and which sectors will lead this?
-	What has been reflected in valuations?
-	Do we think President Xi has had a genuine change of heart with respect to China's long term economic and foreign policy settings?
-	In essence is China reopening a cyclical "trade" or a major structural change?

In the China section of this report we will try and tackle each of these questions in turn. Dealing with the first question - has the Chinese economy turned a corner despite the short term chaos? On this we are positive - the end of zero-COVID is good news for the Chinese economy, good news for the Asian economy and should be good news for the global economy.

At the time of writing lots of data points around Chinese New Year travel and consumer spending are being released and it is quite clear that we are seeing a dramatic rebound in certain sectors from very depressed levels. Chart 3 of the 2022 Annual Report shows just how depressed levels were and the extent of the pick up even by mid-January.

The other bit of good news (for the economy at least) is because the reopening was rapid and completely uncontrolled it looks like main COVID waves should be over by mid-February 2023 (Chart 4 of the 2022 Annual Report). With Omicron much milder, as evidenced by the end of zero-COVID elsewhere in Asia, we expect fatality rates are likely to be relatively low in China, though clearly given suppression of information we will never know the real fatality rate.

So, the answer to the first question in Chart 2 of the 2022 Annual Report is unequivocally yes - zero-COVID was causing serious economic weakness and was effectively untenable so reopening is good news for the economy. The second question is more interesting. Where is recovery likely to be strongest, and where could it disappoint?

After the traumatic zero-COVID policies of 2022, which led to a sharp fall in consumer confidence, we expect to see a good rebound in consumer spending. We expect to see a repeat of the pattern from 2020/21 so retail sales in China should rebound to c.10% after a flat 2022 (Chart 5 of the 2022 Annual Report), however we also expect recovery will be uneven. High unemployment levels and rising Gini coefficients are likely to mean the rebound in consumption from the highest earners and white collar workers is strongest, whereas rural and mass consumption we think could disappoint. Looking at the second graph in Chart 6 of the 2022 Annual Report it is also the case that whilst goods consumption is slightly below trend it is not dramatically so, whereas travel, catering, "experiences" spending is very depressed. So similar to the West and the rest of Asia we expect the "revenge" consumption will be focused in very set areas and be driven by higher earners.

We are more cautious about the recovery potential for other areas of the Chinese economy and see scope for disappointment. The outlook for the manufacturing and export sector looks difficult with end demand weak, inventories in many sectors high, and in some areas excess capacity (Chart 6 of the 2022 Annual Report). We expect this part of the economy to substantially lag and earnings from many export and manufacturing companies to disappoint.

The key swing factor for the Chinese economy and whether the recovery will be stronger than we currently expect is the property market. Our views here are mixed. As Chart 7 of the 2022 Annual Report shows Chinese property investment is a large part of GDP and has been running at very elevated levels since the early 2000s. Whilst we would expect Chinese property sales to now stabilise we do not think a return to the bubble days of 2015-2020 is likely, particularly as we have been told many times by President Xi that property is for living in not speculation.

There are several key factors that we believe make a sustained and large rebound in property prices and volumes unlikely. As shown in Chart 8 of the 2022 Annual Report there is a huge backlog of uncompleted properties waiting to be finished - will ready buyers step up whilst many are still waiting years for uncompleted properties? Secondly whilst there may be plenty of cash and bank deposits in China the household debt level (principally) mortgages is already high (Chart 8 of the 2022 Annual Report) as are home ownership rates. And this is even before we start talking about long-term demographics (Chart 9 of the 2022 Annual Report).

On a more positive note, we do think a return of consumer confidence, government measures to stabilise the finances of property developers so unfinished properties can be completed, and the availability of financing/lower mortgage rates should help to see a pick up in property activity from current depressed levels. What we do not see however is property as a structural driver of growth and recovery in China; longer term the importance of property within the Chinese economy will shrink.

Returning to the second question in Chart 2 of the 2022 Annual Report, we expect to see a good pick up in consumer spending that is likely to be focused on travel, restaurants and "experiences". With no furlough schemes in China and high unemployment levels amongst youth and blue collar workers we think the recovery will be stronger amongst the mid and high end consumer groups and recovery in some areas could well disappoint.

So this leads us on to the key question - given we invest in stocks not economies - what is reflected in current valuations in China?

Chart 10 of the 2022 Annual Report has the current price-earnings ratio ("PER") of the MSCI China; it is exactly in line with it's long-term average so to claim the market is cheap versus history you have to expect a repeat of the Chinese internet bubble in 2020/21 (more on this later). Interestingly, the hedging models we use within the Company's processes also have a cautious reading on China with valuations relatively high (versus history) and business cycle indicators very negative (admittedly some of these will change post reopening).

As highlighted earlier, we do believe we are going to see a good recovery in certain parts of the Chinese economy and this should lead to a strong earnings rebound for some companies. However, after being widely talked up and sharp market moves, is the good news reflected in share prices? We will leave readers to judge for themselves but Chart 11 of the 2022 Annual Report has the current valuations for a selection of genuine reopening plays in the consumer, transport and leisure sectors in China. As can be seen, even on 2023 P/Es and assuming an aggressive EPS recovery, these stocks are expensive. Fundamentally, we believe Chinese stocks exposed to the consumer/reopening are now, in the main, fully priced.

The counter argument we have had to our caution on Chinese equities at current levels is that internet stocks are still cheap and a good way to play reopening. We disagree with this on both counts.

Firstly, are internet stocks a reopening play? As highlighted earlier whilst there is likely to be significant demand for travel and experiences (so this might help travel and hotel booking websites) for e-commerce and food delivery we would expect a slowdown, or a potential reversal of recent trends in China.

Chart 12 of the 2022 Annual Report shows GRAB, which is ASEAN's largest food delivery platform, revenues. After ASEAN economies reopened GRAB's delivery revenues stalled and actually shrank despite food delivery penetration in ASEAN being very much lower than China. The second chart shows the performance of the main Asian (ex-China) internet stocks and how they have performed on reopening. Chart 13 of the 2022 Annual Report also shows the current e-commerce penetration of key categories in China, after years of strong growth key e-commerce categories look very well penetrated to us. Could a return of travel and "experiences" lead to a reversal in market share for e-commerce in China?

The key positive for the Chinese internet sector is the authorities in Beijing do seem to be moving back to more predictable policy making. So the sudden and often unpredictable regulatory onslaught on the sector appears to be easing. There also appears to be a concerted effort underway by the authorities to try and revive confidence in Chinese stockmarkets and to attract back foreign investors, so the "techlash" is probably over.

There are however two sides to this. State control looks set to increase in coming years as all key internet platforms sell small stakes to Government entities via so called "Golden Shares". These golden shares effectively give the state overall control of companies via the right to appoint board directors and senior management and to veto important decisions and set investment priorities. There is little doubt in our mind who will be in charge of major strategic decisions at the large Chinese internet stocks going forward.

This is of course happening across many sectors in China as state money funds start ups in areas considered a key priority by the authorities in Beijing. As noted in the Economist in its 26 November 2022 issue, of the 38 largest initial public offerings in China in the first nine months of 2022, which raised US$34bn, around 22% of the proceeds came from state entities. To grow and be successful in China in many sectors you clearly need to be part of the "Party Plan". For foreign shareholders the party plan may not be the best - our experience over 35 years of investing is that state owned or controlled companies tend not to invest well regardless of which country they operate in - as Chart 14 of the 2022 Annual Report shows, experience in other sectors in China doesn't fill us with confidence that golden shares will be very "golden" for investors.

So, going back to the key questions on China from Chart 2 of the 2022 Annual Report we think reopening is now fully reflected in Chinese equity valuations and with the state continuing to advance (and Adam Smith's invisible hand in retreat) the current rebound and policy reset has not led to a major structural change in our investment views.

So how is the Company positioned in China? Optically from Chart 15 of the 2022 Annual Report the portfolio looks to have a low weighting in China at c.6%. This is however deceptive. The Company has 13% in Hong Kong stocks, most of which are exposed to China reopening - whether they are shopping mall operators, insurers, or domestic Hong Kong stocks which will benefit from the reopening of the border with China. The Company also has exposure to China reopening and travel through it's holdings in LVMH, Las Vegas Sands and Prudential PLC. So, in summary, whilst we remain structurally cautious on Chinese equities for the reasons outlined above the Company does have exposure to China reopening but this is mostly via stocks listed on other stockmarkets where valuations are more attractive.

Chart 15: Different ways to skin a rabbit - we have exposure to a consumer rebound in China but not

via stocks classified as "China" by MSCI

Current strategy - sector and market allocation as at 31 December 2022

Sector/Country (%)	Australia	China	Hong Kong	India	Indonesia	Korea	Malaysia	Philippines	Singapore	Taiwan	Thailand	United Kingdom	United States	France	Vietnam	Cash & Others	Grand Total
Communication Services	1.2	3.4	-	0.8	-	-	-	-	1.4	-	-	-	-	-	-	-	6.9
Consumer Discretionary	1.5	1.6	-	-	-	-	-	2.9	-	3.6	1.7	-	2.5	1.8	0.5	-	16.1
Consumer Staples	-	-	-	-	-	-	-	-	0.7	-	-	-	-	-	1.1	-	1.8
Energy	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Financials	1.4	-	6.3	4.5	2.2	-	-	-	6.7	-	-	1.1	-	-	-	-	22.2
Banks	-	-	1.4	4.5	2.2	-	-	-	5.0	-	-	-	-	-	-	-	13.0
Diversified Financials	-	-	1.8	-	-	-	-	-	1.7	-	-	-	-	-	-	-	3.5
Insurance	1.4	-	3.2	-	-	-	-	-	-	-	-	1.1	-	-	-	-	5.7
Healthcare	5.5	-	-	1.6	0.4	-	-	-	-	-	-	-	-	-	-	-	7.5
Industrials	2.4	0.9	2.9	-	-	-	-	1.1	-	3.4	-	-	-	-	-	-	10.8
Information Technology	-	-	-	5.5	-	8.3	-	-	1.5	15.3	-	-	-	-	-	-	30.6
Materials	4.9	-	-	-	-	-	-	-	-	-	-	1.9	-	-	-	-	6.8
Real Estate	-	-	3.4	-	-	-	-	-	-	-	-	-	-	-	-	-	3.4
Utilities	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Cash	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-8.7	-8.7
Derivatives	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Collective Investments	-	-	-	2.7	-	-	-	-	-	-	-	-	-	-	-	-	2.7
Grand Total	17.0	5.9	12.6	15.0	2.7	8.3	-	4.1	10.3	22.3	1.7	3.0	2.5	1.8	1.6	-8.7	100.0

Fund Positioning in %	Stocks (%)	Hedges (%)*	Net Long (%)
Strategic hedges - Notional	-	-	-
Tactical hedges - Notional	-	-	-
Total Exposure - Notional	108.7	-	108.7
Strategic hedges - Delta-adjusted	-	-	-
Tactical hedges - Delta-adjusted	-	-	-
Total Exposure - Delta-adjusted	108.7	-	108.7
Cash	-8.7	-	-

*As at 31 December 2022 there were no hedges.

Source: Schroders. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.

SECTION TWO

1. WHAT OUR MODELS ARE SAYING ABOUT ASIA IN 2023

As we enter the year 2023, our models, on aggregate, are feeling rather mixed about the prospects of Asian markets.

Specifically, our models anticipate some challenges for the region in the coming year. One major concern is that, based on the leading indicators we track, the earnings environment for Asia looks lacklustre. This is attributed to a variety of factors, including a deteriorating global economic outlook, weak export growth, a still-tight monetary policy stance, and lethargic earnings expectations. Together, our indicators suggest that earnings growth for Asian companies will remain sluggish until at least the second half of the year, which creates a challenging domestic environment for regional markets.

Meanwhile, the mounting indebtedness of some Asian countries since the Global Financial Crisis ("GFC") also represents a longer-term worry. With the exception of India and Indonesia where total-debt-to-GDP has stayed largely flat, most Asian countries have seen their gearing ratios rise significantly over the last two decades. This is clearly bad news as it renders the region vulnerable to any macroeconomic shock, and places a large economic burden on future generations.

Thankfully, our models also identify some mitigating positive factors in the near-term. Firstly, investor sentiment towards the region appears to be at a low point. After reaching a peak of 17% of total market capitalization in 2014, overseas investors have been pulling their money out of the region, bringing the proportion of foreign holdings back to levels seen three decades ago. Historically, this has been a strong and reliable contrarian indication for the region, and bodes well for Asian equity markets in the near-term.

Secondly our top down and bottom up valuation indicators as highlighted below whilst off recent lows (or buy territory) to more neutral levels are still indicating Asian equities are offering reasonable value. These are the indicators we use to help determine the level of gearing to use in the Company and with both flagging "buy" in October 2022 we moved the Company to c.10% debt position at the time.

The combination of these negative and positive factors hopefully explain our mixed views on markets. In October 2022 valuations were cheap and we could see good opportunities but after a 25% rise in Asian markets over the following three months the obvious undervaluaton has gone. With put option pricing slowly retreating from previous elevated levels, the Company is currently unhedged. However, if opportunities arise to purchase some protection at a low cost, we will certainly consider doing so.

2. CONSENSUS VIEWS AND WHERE WE STAND

When one looks at Asian markets today, what are some of the key consensus views? To answer that, your Portfolio Managers surveyed the year-end research of the main sell-side Asian strategists based in major US and European broking houses.

Key consensus view #1: Overweight China

Overwhelmingly, the most consensus call today is going overweight China. With the exception of one broker who is sitting on an equal-weight call, everybody seems to have hopped aboard the China bandwagon, and for exactly the same reasons. It is about playing the reopening trade as the country exits its zero-COVID policy. As highlighted earlier, valuations for the fundamentally attractive Chinese equities are high and we think the reopening "trade" from here is more than reflected in stock prices. Whenever your Portfolio Managers hear the whole market singing from the same hymn sheet, it is always a large cause for concern. Putting aside the question of whether the stated reasons prove to be ultimately correct, one must seriously wonder if these potential positives are not already well priced in.

Key consensus view #2: Underweight Taiwan

If China is the most favoured country by the sell-side at this point in time, then sitting across the straits is a much unloved Taiwan which more than half the strategists are bearish on while another fifth are sitting on the fence. The reasons for this scepticism are two-fold. The first concern is related to the current slowing domestic aggregate demand outlook which, combined with the ongoing global export weakness, is threatening the country's near-term economic prospects. The second and more significant worry is the ongoing correction in the tech inventory cycle that is still not showing any signs of bottoming out. That is not new news though, and one that is certainly well-recognised by global investors. After all, the cumulative net foreign flows into Taiwan equities has been deep in negative territory for over two years. This has driven the market's risk-love indicator, a contrarian indicator with a reasonable track record, into the panic zone. Meanwhile, on any valuation measure, the market is close to, if not already at, the bottom of its historical trading range. Indeed, our own analysts are now pointing to an abundance of Taiwanese stocks that are offering positive upsides to their fair values. For the brave, the market is a fertile hunting ground for long-term investment opportunities.

A contrarian portfolio

So where does that leave us? The world has clearly entered 2023 with two key consensus views, namely going overweight China and underweight Taiwan. In our view, these views are already well reflected in current share prices. When your Portfolio Managers cast our sights over longer investment horizons, we actually find limited stock opportunities in China and a plethora of them in Taiwan. This is why even though China comprises almost a third of the reference Asian stock universe, Chinese names barely account for a tenth of our portfolio. Meanwhile, for Taiwan and to a lesser degree Singapore, our Company has considerable exposures to both markets despite them being equally unloved by the stockbroking community.

3. THE POWER OF INVESTING FOR DIVIDENDS IN ASIA

When will the Fed be done with its rate hikes? Does the spectre of recession push global central banks into monetary loosening mode soon? As global investors grapple with the future direction of travel of global interest rates, it is sometimes worth reminding ourselves that regardless of where interest rates go, a core investment truth remains: Dividends are an important part of equity investing in Asia .

The long-term case for investing for dividends in Asia

It is no secret that stock markets are generally obsessed with share price appreciation. As tales of multi-baggers abound in Asia, many an investor has been seen chasing pipe dreams. Yet when one takes a step back and decomposes the region's equity performances, one will be surprised to learn that in reality almost three-quarters of Asia's long-run equity returns have historically come from dividends, and it will be harebrained to ignore this major component of total returns. Just consider the experiences of Singapore and Korea. Compatriots in the now-defunct Four Asian Tigers club, both countries were known for their rapid economic growth rates in the 90's which propelled the economies from agrarian societies of the 1960s into the industrialised nations that they are today. Both their stock markets have also delivered almost identical price returns over the last 35 years. And yet this is where the similarities end.  Generally viewing the notion of paying dividends as a sign of failure, Korean corporates have largely kept their payout ratios unchanged over the last two decades even as their Singaporean counterparts steadfastly raised theirs. This has seen companies from the Lion City deliver a whopping 690% dividend return to their investors over 1988-2022, a figure that easily dwarfs the 345% from the Land of the Morning Calm. For investors hoping to take a leaf our of the history books, focusing on dividends is clearly key.

Higher dividends = Higher earnings growth

Doubters however balk at this notion. Why bother with boring dividends in a vibrant place like Asia, they ask? After all, only companies which have run out of growth opportunities pay dividends. Aren't dividend-paying companies really just dull, slow-growing companies? Contrary to this belief, companies that pay high dividends are neither low-growth nor boring. Because corporate managers have better information about their future prospects and loathe cutting dividends, they often only pay high dividends if they are confident that their future earnings are robust enough to sustain the payout. This explains why companies that pay high dividends today are routinely also the ones registering the fastest earnings growth tomorrow. Academics call this phenomenon the "dividend-signalling effect". As such, for investors seeking to benefit from the Asian economic growth story, focusing on high-payout companies is definitely key.

Higher dividends = Better corporate governance

In a region riddled with corporate governance pitfalls, focusing on dividends has the added benefit of keeping investors away from potential disasters. Companies reduce the temptation to waste money on value-destroying investments when they return excess cash to shareholders. They also subject themselves to more stringent levels of stakeholder scrutiny when they next tap the markets for funds. Meanwhile, focusing on dividends also helps investors avoid companies with "fake" earnings because dividends can only be paid out of real earnings and real cash flows. As a result, Asian companies that pay high dividends are frequently also those with high corporate governance standards.

Our strong belief in the importance of dividends is perhaps most clearly reflected in our portfolio. Every single stock that we hold, with the exception of two, pays dividends today. And of the two that are not doing so at this time, one of them is expected to start paying out soon. It also explains why we traditionally have disproportionately more of our portfolio in the markets of Australia, Hong Kong and Singapore, and less in China and Korea. After all, these markets do stand at opposite ends of the region's dividend payout spectrum.

In your Portfolio Managers' view, given how big a component of long-term equity returns dividends have historically been any investor who is looking for fast-growing companies with strong corporate governance in Asia will do well to pay heed to them.

SECTION THREE

1. TECHNOLOGY OUTLOOK

As we highlighted earlier our technology holdings and semi-conductors stocks in particular were a key detractor to 2022 performance. However, we continue to be bullish on their long-term outlook given digitalisation and the competitive positioning of the companies we own in our portfolio. Even more so given they have given up all their COVID gains.

2023 will be a difficult year for technology demand amid a continued slowdown in consumer demand. Your Portfolio Managers don't know whether a US recession will or won't occur but we expect some technology sectors like personal computers (PCs) will see ongoing weakness amid strong pull-forward in demand during the COVID years.

Our portfolio is positioned towards three key technology themes:

1.  Beneficiaries of structural demand - particularly in servers and artificial intelligence (AI);

2.  Balance sheet strength;

3.  Further consolidation within the semi-conductor supply chain

Within foundry we remain of the view that there has been a structural shift eastwards in the ability to fabricate leading edge nodes. As data from Credit Suisse shows, TSMC now enjoys nigh on monopolistic positioning in 7nm and 5nm with a similar market share expected in 3nm.

As we move into the era of "high performance compute" as TSMC calls it (code words for servers and artificial intelligence) they are very well placed to extract high returns. AMD continues to take market share away from Intel (partly because TSMC can fabricate their chips at leading edge versus Intel's in-house fabrication being a generation behind) and they will almost exclusively capture the growing market for artificial intelligence given Nvidia uses TSMC as a sole supplier for leading edge GPUs.

Memory is another area where we think there is likely to be market share shifts. Memory companies highlight why balance sheets are all important at this point of the cycle. DRAM (where memory companies make their profits) is currently going through a severe correction where heightened inventory means there is zero demand elasticity even as prices reach cash cost.

Samsung Electronics - the lowest cash cost producer - could well break its own internal record of never posting more than three consecutive quarters of operating losses.

The difference between this cycle and the last correction in 2018 is that Samsung's key Korean competitor has been on a buying spree, spending c$10bn in M&A and giving investors c$3bn in dividends they with hindsight could ill afford. Micron and Samsung have been better corporate stewards resisting acquisitions at the top of the cycle and returning $4bn and $43bn in capital to shareholders.

It is no surprise to your Portfolio Managers which company (SK Hynix) has had to cut utilisation rates first. With a very high level of fixed costs the unit economics of memory worsen materially once utilisation rates reduce - this cycle is likely to leave SK Hynix a weaker long-term competitor.

To summarise, we believe at an aggregate level that 2023 will be a year of inventory digestion and we expect continued pockets of weakness in consumer demand (PCs in particular). Your Portfolio Managers' view however is that we are approaching the nadir of bad news, which is why we remain heavily weighted in TSMC and Samsung Electronics which we believe will come out of this cycle in a stronger competitive position. Looking further forward we continue to be bullish on the increase in silicon content and the high returns on capital that a consolidated Asian supply chain can provide, which given reasonable valuation is why the portfolio remains significantly exposed to the sector.

2. ASEAN AND BANKING

On the topic of banking, we thought we would end the report with an update on how we are thinking about our ASEAN and Indian exposure. The Company is positioned in best in-class Indian, Indonesian and Singaporean banks. Your Portfolio Managers continue to be recommended Thai banks by brokers as the natural China re-opening trade and we don't doubt that Chinese consumers will return to Thailand for their holidays.

However, Thai banks typically exhibit higher credit losses than peers and naturally find it difficult to lend into an indebted economy (see chart earlier in Section 2 of the 2022 Annual Report). We note that even when tourism was booming from 2016-2019 credit loss ratios were markedly higher than peers.

We prefer to have our banking exposure in countries that generate superior return on assets through their fee and commission income (e.g. Singapore banks) or those where there is a long runway for credit expansion and select banks taking market share whilst underwriting risk better than peers (India and Indonesia). This informs our positioning in Singaporean, Indonesian and Indian banks.

CONCLUDING REMARKS

Well done to any reader who has managed to read the whole report; the perils of having three separate authors (the Portfolio Managers and Tom Clough who has recently joined the Company's investment team) penning their thoughts mean updates tend not to be short. Hopefully the report provides a broad update on our investment views as we enter the Year of the Rabbit. Key messages are we are moderately optimistic on prospective returns, China reopening however looks more than reflected in valuations, we are happy to stick with our technology positions and see selected opportunities in financials and consumer names. Capital allocation, the importance of dividends and long-term return on invested capital are however the key determinants of the Company's holdings.

Robin Parbrook and Lee King Fuei

15 March 2023

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

The securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

Strategic Report

Principal and emerging risks and uncertainties

The Board, through its delegation to the Audit and Risk Committee, is responsible for the Company's system of risk management and internal controls and for reviewing its effectiveness. The Board has adopted a detailed matrix of principal risks affecting the Company's business as an investment trust and has established associated policies and processes designed to manage and, where possible, mitigate those risks, which are monitored by the Audit and Risk Committee on an ongoing basis. This system assists the Board in determining the nature and extent of the risks it is willing to take in achieving the Company's strategic objectives. Both the principal risks and uncertainties and the monitoring system are also subject to regular, robust review. The last review took place in March 2023. Following this review, the Board added geopolitical and political risk and ESG and climate change risk to the list of principal risks.

During the year, the Board also discussed and monitored a number of risks that could potentially impact the Company's ability to meet its strategic objectives. The Board received updates from the Portfolio Managers, Company Secretary and other service providers on emerging risks that could affect the Company. The Board was mindful of the following emerging risks during the year: an escalation or expansion of the conflict in Ukraine; heightened tensions in the US-China relationship, especially relating to Taiwan and to potential further US and European sanctions; and the continuing risk of a global recession.

Risk and Mitigation and management

Although the Board believes that it has a robust framework of internal controls in place this can provide only reasonable, and not absolute, assurance against material financial misstatement or loss and is designed to manage, not eliminate, risk.

Actions taken by the Board and, where appropriate, its committees, to manage and mitigate the Company's principal risks and uncertainties are set out in the table below.

Risk	Mitigation and management
Geopolitical and political Geopolitical risk results from threats to normal relationships between countries or regions that create uncertainty and disruption to economies and financial markets. This includes regional tensions, trade wars, economic sanctions and conflict. Currency rates and borrowings drawn down by the Company, as well as markets generally, may be affected by geopolitical developments and stockmarket volatility or illiquidity arising from geopolitical developments could adversely affect valuations. Changes to public policy in the US, UK, or in the Asia Pacific region, could also impact the Company in the future.	The Board recognises that the potential for mitigation is likely to be limited. However, geopolitical and political risk i s closely monitored and considered by the Board and Manager. At each Board meeting the Manager reports on geopolitical and political challenges including military and diplomatic events and changes to legislation. These factors are also evaluated and assessed as part of stock selection, asset allocation and the regular assessment of the portfolio. The Manager also remains in close communication with investee companies throughout the year in respect of these factors. In conjunction with the Manager, the Board continues to assess the potential consequences of geopolitical and political risk for the Company's future activities.
Strategic The Company's investment objectives may become out of line with the requirements of investors, resulting in a wide discount of the share price to underlying NAV per share.	The appropriateness of the Company's investment remit is periodically reviewed and the success of the Company in meeting its stated objectives is monitored. The share price relative to NAV per share is monitored and the use of buy back authorities is considered on a regular basis. The marketing and distribution activity is actively reviewed. Proactive engagement with shareholders.
The Company's cost base could become uncompetitive, particularly in light of open ended alternatives.	The ongoing competitiveness of all service provider fees is subject to periodic benchmarking against their competitors. Annual consideration of management fee levels.
Investment management The Manager's investment strategy, if inappropriate, may result in the Company underperforming the market and/or peer group companies, leading to the Company and its objectives becoming unattractive to investors.	Review of: the Manager's compliance with its agreed investment restrictions, investment performance and risk against investment objectives and strategy; relative performance; the portfolio's risk profile; and whether appropriate strategies are employed to mitigate any negative impact of substantial changes in markets. Annual review of the ongoing suitability of the Manager is undertaken.
Financial and currency The Company is exposed to the effect of market and currency fluctuations due to the nature of its business. A significant fall in regional equity markets or substantial currency fluctuation could have an adverse impact on the market value of the Company's underlying investments.	The risk profile of the portfolio and appropriate strategies to mitigate any negative impact of substantial changes in markets are discussed with the Manager. The derivative strategy employed by the Manager is subject to review by the Board. The Board considers the overall hedging policy on a regular basis. The Company's operating expenses comprise predominantly variable costs, which would fall pro-rata in the event of a market downturn.
Custody Safe custody of the Company's assets may be compromised through control failures by the depositary.	The depositary reports on safe custody of the Company's assets, including cash, and portfolio holdings are independently reconciled with the Manager's records. Review of audited internal controls reports covering custodial arrangements. An annual report from the depositary on its activities, including matters arising from custody operations is received.
Gearing and leverage The Company utilises credit facilities. These arrangements increase the funds available for investment through borrowing. While this has the potential to enhance investment returns in rising markets, in falling markets the impact could be detrimental to performance.	Gearing is monitored and strict restrictions on borrowings imposed: gearing continues to operate within pre-agreed limits so as not to exceed 30% of net asset value. The Board oversees the Manager's use of derivatives.
Accounting, legal and regulatory In order to continue to qualify as an investment trust, the Company must comply with the requirements of Section 1158 of the Corporation Tax Act 2010. Breaches of the UK Listing Rules, the Companies Act or other regulations with which the Company is required to comply, could lead to a number of detrimental outcomes.	Service providers give regular confirmation of compliance with relevant laws and regulations. Shareholder documents and announcements, including the Company's published annual report, are subject to stringent review processes. Procedures established to safeguard against disclosure of inside information.
Service provider The Company has no employees and has delegated certain functions to a number of service providers, principally the Manager, depositary and registrar. Failure of controls, and poor performance of any service provider, could lead to disruption, reputational damage or loss.	Service providers are appointed subject to due diligence processes and with clearly documented contractual arrangements detailing service expectations. Regular reports are provided by key service providers and the quality of their services is monitored. The Directors also receive presentations from the Manager, depositary and custodian, and the registrar on an annual basis. Review of annual audited internal controls reports from key service providers, including confirmation of business continuity arrangements and IT controls, and follow up of remedial actions as required.
Cyber The Company's service providers are all exposed to the risk of cyber attacks. Cyber attacks could lead to loss of personal or confidential information or disrupt operations.	Service providers report on cyber risk mitigation and management at least annually, which includes confirmation of business continuity capability in the event of a cyber attack. In addition, the Board received presentations from the Manager, depositary and custodian, and the registrar on cyber risk.
ESG and climate change The failure of the Manager to identify ESG issues, including the impact of climate change, could impact shareholder returns due to valuation issues in  investee companies and the Company's shares becoming less attractive to investors.	The Manager's strong ESG policies, including those relating to climate change, which have been adopted by the Company, are fully integrated into the investment process, as set out in the Strategic Report. Investments are valued at fair value and reflect market participants' views of ESG and climate change risk on the Company's portfolio investments. The Manager regularly reports to the Board on ESG and climate change matters, including engagement with investee companies. Any investor feedback is also taken into consideration by the Board.

Risk assessment and internal controls review by the Board

Risk assessment includes consideration of the scope and quality of the systems of internal control operating within key service providers, and ensures regular communication of the results of monitoring by such providers to the audit and risk committee, including the incidence of significant control failings or weaknesses that have been identified at any time and the extent to which they have resulted in unforeseen outcomes or contingencies that may have a material impact on the Company's performance or condition.

No significant control failings or weaknesses were identified from the audit and risk committee's ongoing risk assessment which has been in place throughout the financial year and up to the date of this report. The Board is satisfied that it has undertaken a detailed review of the risks facing the Company.

A full analysis of the financial risks facing the Company is set out in note 22 to the accounts on pages 90 to 95 of the 2022 Annual Report.

Viability statement

The Directors have assessed the viability of the Company over the five year period ending 31 December 2027, taking into account the Company's position at 31 December 2022 and the potential impact of the principal and emerging risks and uncertainties it faces for the review period. This is further detailed in the Chairman's Statement, Portfolio Managers' Review and principal and emerging risks and uncertainties sections of this report. The Directors have assessed the Company's operational resilience and they are satisfied that the Company's outsourced service providers will continue to operate effectively.

The Board believes that a period of five years reflects a suitable time horizon for strategic planning, taking into account the investment policy, liquidity of investments, potential impact of economic cycles, nature of operating costs, dividends and availability of funding. In its assessment of the viability of the Company, the Directors have considered each of the Company's principal and emerging risks and uncertainties detailed on pages 52 to 54 of the 2022 Annual Report and in particular the impact of a significant fall in regional equity markets on the value of the Company's investment portfolio.

In preparing these financial statements the Directors have considered the impact of the Company's emerging risks as set out on page 52 of the 2022 Annual Report , and have concluded that there was no further impact to be taken into account as investments are valued based on market pricing. In line with FRS102 investments are valued at fair value, which for the Company are quoted bid prices for investments in active markets at the statement of financial position date and therefore reflect market participants' views of emerging risks on the investments held.

The Directors considered the beneficial tax treatment the Company is eligible for as an investment trust. If changes to these taxation arrangements were to be made it would affect the viability of the Company to act as an effective investment vehicle.

The Directors reviewed a stress test in which the Company's NAV dropped by 50% and noted that, based on the assumptions in the test, the Company would continue to be viable over a five year period.

The Directors have also considered the Company's income and expenditure projections and the fact that the Company's investments comprise readily realisable securities which can be sold to meet funding requirements if necessary. Based on the Company's processes for monitoring operating costs, the Board's view that the Manager has the appropriate depth and quality of resource to achieve superior returns in the longer term, the portfolio risk profile, limits imposed on gearing, counterparty exposure, liquidity risk and financial controls, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of their assessment.

Going concern

The Directors have assessed the principal and emerging risks and uncertainties (including whether there are any emerging risks) and the matters referred to in the viability statement. The Directors noted the Company's portfolio is comprised of liquid stocks, and the Company's operating expenses are predominantly variable costs, which would fall pro-rata in the event of a severe market downturn. Based on the work the Directors have performed, they have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Company's ability to continue as a going concern for the period assessed by the Directors, being the period to 31 March 2024 which is at least 12 months from the date the financial statements were authorised for issue.

By order of the Board

Schroder Investment Management Limited

Company Secretary

15 March 2023

Statement of Directors' Responsibilities

The Directors are responsible for preparing the annual report, and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising Financial Reporting Standard (FRS) 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland" and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the return or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

-  select suitable accounting policies and then apply them consistently;

-  make judgements and accounting estimates that are reasonable and prudent;

-  state whether applicable UK Accounting Standards, comprising FRS 102, have been followed, subject to any material departures disclosed and explained in the financial statements;

-  notify the Company's shareholders in writing about the use of disclosure exemptions in FRS 102, used in the preparation of the financial statements; and

-  prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Manager is responsible for the maintenance and integrity of the webpage dedicated to the Company. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the Directors, whose names and functions are listed on pages 56 and 57 of the 2022 Annual Report, confirm that to the best of their knowledge:

-  the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and net return of the Company;

-  the Strategic Report contained in the report and accounts includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal and emerging risks and uncertainties that it faces; and

-  the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

On behalf of the Board

Sarah MacAulay
Chairman

15 March 2023

Income Statement

for the year ended 31 December 2022

	2022			2021
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments held at fair value through profit or loss	-	(86,397)	(86,397)	-	35,882	35,882
Net gains/(losses) on derivative contracts	-	9,487	9,487	-	(7,881)	(7,881)
Net foreign currency losses	-	(5,341)	(5,341)	-	(502)	(502)
Income from investments	16,278	63	16,341	12,195	3,338	15,533
Other interest receivable and similar income	34	-	34	84	-	84
Gross return/(loss)	16,312	(82,188)	(65,876)	12,279	30,837	43,116
Investment management fee	(809)	(2,427)	(3,236)	(913)	(2,740)	(3,653)
Performance fee	-	-	-	-	(133)	(133)
Administrative expenses	(720)	-	(720)	(793)	-	(793)
Net return/(loss) before finance costs and taxation	14,783	(84,615)	(69,832)	10,573	27,964	38,537
Finance costs	(300)	(903)	(1,203)	(122)	(352)	(474)
Net return/(loss) before taxation	14,483	(85,518)	(71,035)	10,451	27,612	38,063
Taxation	(1,017)	1,129	112	(642)	(1,110)	(1,752)
Net return/(loss) after taxation	13,466	(84,389)	(70,923)	9,809	26,502	36,311
Return/(loss) per share	12.47p	(78.13)p	(65.66)p	9.25p	24.99p	34.24p

The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Company has no other items of other comprehensive income, and therefore the net return/(loss) after taxation is also the total comprehensive income/(loss) for the year.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.

Statement of Changes in Equity

for the year ended 31 December 2022

	Called-up		Capital
	share	Share	redemption	Special	Capital	Revenue
	capital	premium	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 December 2020	5,047	74,075	11,646	29,182	344,467	19,131	483,548
Issue of shares	392	38,929	-	-	-	-	39,321
Net return after taxation	-	-	-	-	26,502	9,809	36,311
Dividend paid in the year	-	-	-	-	-	(7,435)	(7,435)
At 31 December 2021	5,439	113,004	11,646	29,182	370,969	21,505	551,745
Issue of shares	17	1,652	-	-	-	-	1,669
Repurchase of the Company's own shares into treasury	-	-	-	-	(15,742)	-	(15,742)
Net (loss)/return after taxation	-	-	-	-	(84,389)	13,466	(70,923)
Dividend paid in the year	-	-	-	-	-	(9,275)	(9,275)
At 31 December 2022	5,456	114,656	11,646	29,182	270,838	25,696	457,474

Statement of Financial Position

at 31 December 2022

	2022	2021
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	499,305	600,002
Current assets
Debtors	517	667
Cash at bank and in hand	5,161	2,876
Derivative financial instruments held at fair value through profit or loss	-	182
	5,678	3,725
Current liabilities
Creditors: amounts falling due within one year	(47,509)	(50,142)
Derivative financial instruments held at fair value through profit or loss	-	(730)
	(47,509)	(50,872)
Net current liabilities	(41,831)	(47,147)
Total assets less current liabilities	457,474	552,855
Non current liabilities
Deferred taxation	-	(1,110)
Net assets	457,474	551,745
Capital and reserves
Called-up share capital	5,456	5,439
Share premium	114,656	113,004
Capital redemption reserve	11,646	11,646
Special reserve	29,182	29,182
Capital reserves	270,838	370,969
Revenue reserve	25,696	21,505
Total equity shareholders' funds	457,474	551,745
Net asset value per share	434.60p	507.24p

The accounts were approved and authorised for issue by the Board of Directors on 15 March 2023 and signed on its behalf by:

Sarah MacAulay
Chairman

Registered in England and Wales as a public company limited by shares.

Company registration number: 02153093

Cash Flow Statement

for the year ended 31 December 2022

	2022	2021
	£'000	£'000
Net cash inflow from operating activities	11,019	7,996
Investing activities
Purchases of investments	(151,044)	(224,921)
Sales of investments	165,507	174,268
Net cash flows on derivative instruments	8,938	(6,386)
Net cash inflow/(outflow) from investing activities	23,401	(57,039)
Net cash inflow/(outflow) before financing	34,420	(49,043)
Financing activities
Dividends paid	(9,275)	(7,435)
Interest paid	(1,122)	(451)
Net bank loans drawn down	18,237	-
Issue of shares	1,669	39,321
Repurchase of the Company's own shares into treasury	(15,451)	-
Net cash (outflow)/inflow from financing activities	(5,942)	31,435
Net cash inflow/(outflow) in the year	28,478	(17,608)
Cash at bank and in hand at the beginning of the year	(23,107)	(5,205)
Net cash inflow/(outflow) in the year	28,478	(17,608)
Exchange movements	(210)	(294)
Cash at bank and in hand at the end of the year	5,161	(23,107)

Dividends received during the year amounted to £16,365,000 (2021: £16,218,000) and deposit interest receipts amounted to £31,000 (2021: £84,000).

Notes to the Accounts

1.  Accounting Policies

Schroder Asian Total Return Investment Company plc ("the Company") is registered in England and Wales as a public company limited by shares. The Company's registered office is 1 London Wall Place, London EC2Y 5AU.

The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ("UK GAAP"), in particular in accordance with Financial Reporting Standard (FRS) 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (the "SORP") issued by the Association of Investment Companies in July 2022. All of the Company's operations are of a continuing nature.

The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments and derivative financial instruments held at fair value through profit or loss. The Directors believe that the Company has adequate resources to continue operating to 31 March 2024, being at least 12 months from the date of approval of these accounts. In forming this opinion, the Directors have taken into consideration: the controls and monitoring processes in place; the Company's level of debt and other payables; the low level of operating expenses, comprising largely variable costs which would reduce pro rata in the event of a market downturn; and that the Company's assets comprise cash and readily realisable securities quoted in active markets. In forming this opinion, the Directors have also considered any potential adverse consequences of the COVID pandemic and climate change on the viability of the Company. Further consideration of Directors' considerations regarding this are given in the Chairman's Statement, Portfolio Managers' Review, Going Concern Statement, Viability Statement and under the Principal and Emerging Risks and Uncertainties heading on page 52 of the 2022 Annual Report.

In preparing these financial statements the Directors have considered the impact of climate change on the value of the listed investments that the company holds. As the portfolio consists of listed equities, which are valued using quoted bid prices for investments in an active market, then fair value reflects market participants view of climate change risk.

The accounts are presented in sterling and amounts have been rounded to the nearest thousand.

The accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 31 December 2021.

No significant judgements, estimates or assumptions have been required in the preparation of the accounts for the current or preceding financial year.

2.  Income

	2022	2021
	£'000	£'000
Income from investments:
Overseas dividends	15,480	11,214
Overseas special dividends	735	971
Stock dividend	63	10
	16,278	12,195
Other interest receivable and similar income
Interest received from HMRC on corporation tax recovered	-	84
Deposit interest	34	-
	34	84
	16,312	12,279
Capital:
Special dividend allocated to capital	63	3,338

3.  Investment management fee and performance fee

		2022			2021
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Investment management fee	809	2,427	3,236	913	2,740	3,653
Performance fee	-	-	-	-	133	133
	809	2,427	3,236	913	2,873	3,786

The bases for calculating the investment management and performance fees are set out in the Report of the Directors on pages 58 and 59 of the 2022 Annual Report and details of all amounts payable to the Manager are given in note 19 on page 89 of the 2022 Annual Report.

4.  Dividends

Dividends paid and declared

	2022	2021
	£'000	£'000
2021 final dividend of 8.5p (2020: 7.1p), paid out of revenue profits1	9,275	7,435
	2022	2021
	£'000	£'000
2022 final dividend proposed of 11.0p (2021: 8.5p), to be paid out of revenue profits2	11,579	9,246

¹ The 2021 final dividend amounted to £9,246,000. However the amount actually paid was £9,275,000 due to share issues after the accounting date but prior to the dividend Record Date.

² The proposed final dividend amounting to £11,579,000 (2021: £9,246,000) is the amount used for the basis of determining whether the Company has satisfied the distribution requirements of Section 1158 of the Corporation Tax Act 2010. The revenue available for distribution by way of dividend for the year is £13,466,000 (2021: £9,809,000).

5.  (Loss)/return per share

	2022	2021
	£'000	£'000
Revenue return	13,466	9,809
Capital (loss)/return	(84,389)	26,502
Total (loss)/return	(70,923)	36,311
Weighted average number of shares in issue during the year	108,005,903	106,058,048
Revenue return per share	12.47p	9.25p
Capital (loss)/return per share	(78.13)p	24.99p
Total (loss)/return per share	(65.66)p	34.24p

6.  Called-up share capital

	2022	2021
	£'000	£'000
Allotted, called-up and fully paid:
Ordinary shares of 5p each:
Opening balance of 108,774,651 (2021: 100,934,651) shares	5,439	5,047
Issue of 340,000 (2021: 7,840,000) new shares	17	392
Repurchase of 3,851,448 (2021: nil) shares into treasury	(193)	-
Subtotal of 105,263,203 (2021: 108,774,651) shares	5,263	5,439
3,851,448 (2021: nil) shares held in treasury	193	-
Closing balance1	5,456	5,439

¹ Represents 109,114,651 (2021: 108,774,651) shares of 5p each, including 3,851,448 (2021: nil) held in treasury.

During the year, a total of 340,000 new shares were issued to the market to satisfy demand, at an average price of 490.9p per share, for a total consideration of £1,669,000.

During the year, the Company repurchased 3,851,448 of its own shares, nominal value £193,000, to hold in treasury, representing 3.5% of the shares outstanding at the beginning of the year. The total consideration paid for these shares amounted to £15,742,000. The reason for these purchases was to seek to manage the volatility of the share price discount to NAV per share.

7.  Net asset value per share

	2022	2021
Total equity shareholders' funds (£'000)	457,474	551,745
Shares in issue at the year end	105,263,203	108,774,651
Net asset value per share	434.60p	507.24p

8.  Transactions with the Manager

Under the terms of the Alternative Investment Fund Manager Agreement, the Manager is entitled to receive management, secretarial and performance fees. Details of the basis of these calculations are given in the Directors' Report on pages 58 and 59 of the 2022 Annual Report. If the Company invests in funds managed or advised by the Manager, any fees earned by the Manager are rebated to the Company. The management fee payable in respect of the year ended 31 December 2022 amounted to £3,236,000 (2021: £3,653,000) of which £799,000 (2021: £966,000) was outstanding at the year end.

No performance fee (2021: £133,000) is payable in respect of the year, and nil (2021: 133,000) was outstanding at the year end.

The secretarial fee payable for the year amounted to £75,000 (2021: £75,000) of which £19,000 (2021: £19,000) was outstanding at the year end.

No Director of the Company served as a Director of any company within the Schroder Group at any time during the year.

9.  Related party transactions

Details of the remuneration payable to Directors are given in the Directors' Remuneration Report on page 67 of the 2022 Annual Report and details of Directors' shareholdings are given in the Directors' Remuneration Report on page 68 of the 2022 Annual Report. Details of transactions with the Manager are given in note 19 of the 2022 Annual Report. There have been no other transactions with related parties during the year (2021: nil).

10. Status of announcement

2021 Financial Information

The figures and financial information for 2021 are extracted from the published Annual Report and Accounts for the year ended 31 December 2021 and do not constitute the statutory accounts for that year. The 2021 Annual Report and Accounts have been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

2022 Financial Information

The figures and financial information for 2022 are extracted from the Annual Report and Accounts for the year ended 31 December 2022 and do not constitute the statutory accounts for the year. The 2022 Annual Report and Accounts include the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The 2022 Annual Report and Accounts will be delivered to the Registrar of Companies in due course.

Neither the contents of the Company's webpages nor the contents of any website accessible from hyperlinks on the Company's webpages (or any other website) is incorporated into, or forms part of, this announcement.

 

END

 

 

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