Sleeping with one eye open

We know from prospect theory, a study within the behavioural economics field, that people value monetary gains and losses disproportionately, placing a greater weight on the potential for loss than the probability of gain. Put another way, losses hurt more than gains elate.

It stands to reason, then, that successful investing shouldn’t only involve capturing big gains; just as much weight should be put on protecting against losses. That’s particularly true when investing in regions such as Asia.

Developing Asian markets are more prone to geopolitical risk and the waxing and waning of investor sentiment driving share prices than more developed Western markets: witness the rollercoaster ride investors in China have been on over the past five years.

Some may, therefore, conclude that investors seeking a less bumpy ride from their equity investments should eschew such places in favour of more predictable sources of return. Yet, this would mean missing out on a dynamic and thriving region. Asia necessarily comes with higher levels of volatility, but that doesn’t necessarily have to mean taking on much higher levels of risk.

It is possible to construct a portfolio of Asian stocks capable of both capturing the potentially higher rewards that come with investing in a more volatile region alongside having a keen eye on the downside.

Schroder Asian Total Return (ATR) is leading the way in this regard, with a series of stand-out features that help differentiate it from its peer group and make it a compelling option for investors looking to gain exposure to the exciting growth opportunities of the Asian market while seeking to protect capital, in our view.

Managers Robin Parbrook and King Fuei Lee combine bottom-up stock selection, aimed at identifying high-quality companies able to capture the region’s growth potential, with a top-down overlay to help mitigate downside risk.

High-quality growth

As ATR has no formal benchmark, Robin and King Fuei are agnostic to the trust’s reference index, the MSCI AC Asia Pacific ex Japan, particularly when it comes to positioning. Instead, they focus on finding the best-quality franchises in the region, that they believe can outperform throughout the cycle, and judging them on their own credentials.

The portfolio is diversified across 40 to 70 companies with sound balance sheets, professional management teams and capital allocation policies that are aligned with the interests of minority shareholders. Since some of the most exciting growth opportunities can often be found in the small and mid-cap segments of the market, ATR tends to have a bias to this area versus the reference index.

The managers consider their universe in four investment clusters: cluster one is Korea and Taiwan; cluster two is Australia and Singapore; cluster three is China and Hong Kong; and cluster four is India and ASEAN. These specific clusters are designed to help the managers capture a diverse range of areas with different drivers, such as Korea and Taiwan’s tech companies, as well as the region’s two more developed countries, Australia and Singapore. The managers’ low historic allocation to China and Hong Kong has narrowed in the past year as they have added to existing holdings given attractive valuations levels following the market turmoil.

The hedging strategies used by ATR are built using an in-house, quantitative model, which looks at a series of valuation inputs and helps provide an overlay as to where risks could emerge on both a country and regional basis. If the managers identify certain risks, they use derivatives such as index futures and options to provide some downside protection to the overall portfolio.

They also have the flexibility to exit selected equity holdings and go into cash or cash equivalents to provide downside protection in cases where the managers view markets as significantly overpriced or facing risks of a substantial correction. Theoretically, in extreme circumstances and subject to board approval, most, or even all, the trust’s assets could be held in cash or near-cash equivalents.

Tried and tested

In practice, a broadly neutral view on the region and the high cost of hedging means ATR’s use of these strategies has been limited in 2025, though the managers did have some put options on the Indian market coming into the recent sell-off we’ve seen, which was beneficial to performance.

Robin and King Fuei’s tried and tested approach has been proven over the 17 years they have been working together on the strategy, which includes 12 years on ATR. Indeed, ATR has outperformed the MSCI AC Asia Pacific ex Japan in seven of the past nine full calendar years, with an average outperformance of 6.6 percentage points.

Cumulative performance, then, looks impressive with an annualised 10-year net asset value (NAV) total return of 12.4% and annualised share price total return of 13.1%, as at 31/08/2025, versus an annualised return of 9.2% from its reference index. ATR’s five-year annualised NAV and share price total returns are 7.4% and 6.7% respectively, versus 5.3% for the reference index. This culminated in ATR being awarded a Kepler Growth Rating for 2025.

In the 12 months to 13/10/2025, ATR’s NAV total return was 11.1%, below the reference index’s 14.6%, though ATR’s share price total return was better, at 17.1%. Returns were held back by ATR not holding domestically focused consumer stocks, which Robin and King Fuei argue are driven by unpredictable, temporary factors and therefore they don’t own them.

ATR shows that it is possible to create a high-growth, high-conviction portfolio of Asian stocks while providing shareholders with a smoother ride along the way by controlling the downside risks.

The discount, at 2.7% as of 07/10/2025, is the lowest in its peer group, but that reflects the quality of the portfolio and management’s track record. In addition, with the open-ended version soft closed, ATR is the only way to access this strategy, adding to the appeal, in our view.