At the Company’s recent AGM shareholders have voted to accept the Board’s proposal to change the Comparative Index from MSCI Asia All Countries Ex Japan index to MSCI All Country Asia ex Japan Small Cap Index.
The new small capitalisation benchmark will be adopted from 1 February 2020.
The Company’s Board has, in conjunction with Fidelity and the Company’s Broker, been reviewing the Company’s Comparative Index. The Company uses a Comparative Index against which the variable management fee is calculated, and which is one of the indices against which performance is illustrated in various reports published by the Company. Currently this is the MSCI All Countries Asia ex Japan Index total return. This benchmark is extensively used by the Company’s current peers and is effectively a mid- to mega-cap index.
The Company is able to invest in companies of any size of capitalisation and its objective is “to achieve long term capital growth principally from the stockmarkets of the Asian Region excluding Japan”. The Portfolio Manager, Nitin Bajaj, looks to find strong businesses, run by trustworthy people and to buy them at a sensible price. The universe of possible investment is not constrained by size of company or by its weighting in any benchmark index. However, smaller companies are favoured as they provide an opportunity to find mispriced businesses, the “winners of tomorrow”, before they become well known.
The Board has therefore been considering adopting a smaller companies Comparative Index and identified the MSCI All Countries Asia ex Japan Small Cap Index total return as a suitable benchmark. The intention remains that smaller companies are only favoured in order to achieve the Company’s objective of long-term capital growth principally from the stockmarkets of the region. Other reference points, such as achieving long-term capital growth and outperforming all-cap markets in the region generally would continue to be relevant measures for the Board and for investors.
Market Capitalisation Breakdown of the Company
The chart below was used in Nitin’s presentation to shareholders at the recent AGM to highlight that the market capitalisation breakdown of the Company is more similar to the newly adopted small capitalisation Comparative Index compared to the previous large capitalisation Comparative Index.
Association of Investment Companies (AIC) Sector Classification
With effect from 28 May 2019, the AIC Asia Pacific sector has been subdivided into Asia Pacific, Asia Pacific Smaller Companies and Asia Pacific Income sub-sectors. The AIC automatically included the Company in the Asia Pacific sub-sector. However, in light of the considerations outlined above, the Board feels that for simplicity and consistency it would be more appropriate for the Company to be included in the Asia Pacific Smaller Companies sub-sector. This change has therefore been requested with the AIC.
Variable Management Fee
The Company operates a variable management fee arrangement which is currently calculated by referencing performance relative to the MSCI All Countries Asia ex Japan Index in Sterling terms.
The change of one benchmark to the other at the half year period will mean that performance will be measured against a hybrid/chain-linked benchmark. The Company’s portfolio, and its performance, are expected to correspond more closely with the new Comparative Index over time, leading to reduced volatility in the amount of the variable management fee.
Further details of the calculation of the variable management fee can be found in the Annual Report.
The change in the Comparative Index from MSCI Asia All Countries Ex Japan index to MSCI All Country Asia ex Japan Small Cap Index will have no impact on the way the portfolio is managed. The Board has consulted with its largest investors on this matter and feedback from the consultation process was overwhelmingly in favour of making these changes.
The new Comparative Index will be adopted from 1 February 2020 - which is the start of the second half of the Company’s reporting year.