FAV: questions for the 2022 AGM on 23 November

In this note, we ask the questions we would ask the FAV board at the forthcoming AGM, on 23 November 2022. To offer a perspective, we also give the answers that we would give, if we were asked the same questions. We believe they fall into three key areas, and we ask i) why has the trust outperformed over the long term, ii) what are the short-term prospects, especially bearing in mind the market’s appetite for small-cap, value companies in Asia, the trust’s exposure to Chinese and financial businesses, and sentiment risks, and iii) how the trust is managed in terms of its discount/buyback, the large dividend increase, and its conservative approach to gearing.

• Asia’s appeal: The IMF’s October World Economic Outlook update once again highlights the superior economic prospects (and lower downside revisions) seen in FAV’s investment horizon. We also see new trade agreements, reduced regulation, long-term socio-demographic trends and urbanisation all creating opportunities.
• Trust-specific appeal: FAV uses in-depth research to identify good businesses at fair prices, rather than making macro calls. Despite headwinds for many years, when market appetite was for large-cap, growth companies, FAV outperformed. More recently, market appetite has turned sharply in FAV’s favour.
• Valuation: FAV is trading at a 12% discount to NAV – broadly in line with its peers in the AIC Asia Pacific Smaller Companies Index (average discount 13%) and the broader Asia Pacific sector (average 10%), even though its one-year performance has been ca.16% better than the latter. Most assets are listed, making the NAV “real”.
• Risks: Geopolitical and economic tensions may affect investments, and also sentiment. If growth/momentum stocks are in favour (as they have been for much of the period since 2016), FAV faces a relative headwind, which it has usually, but not always, overcome. Volatility of returns is likely to be high.
• Investment summary: FAV has delivered superior long-term returns by being in attractive growth markets and adding incremental value using structured, in-depth analysis to identify mis-priced investments. Its “value” investments have actually delivered higher earnings growth than an average Asian “growth” company, as well as being lower-rated and providing a higher return on equity. FAV is actively managed, and divergence from the benchmark performance, often for sustained periods, is to be expected.