Schroder Oriental Income Fund - capturing the AI opportunity in Asia
Artificial intelligence (AI) has become a major force in global stock markets, driving significant returns over the past couple of years. Although much of the attention has focused on Nvidia, the US technology company that designs the advanced chips which are essential for AI processing, there is a robust ecosystem of other technology companies that contribute to the AI value chain. Asia is a pivotal hub in this AI revolution and whilst the AI related revenues for many of these Asian companies are starting from a low base, it is a fast-growing area often utilising leading-edge products and technologies thus enhancing returns for companies that can successfully supply into the space. These include companies that not only produce and package the chips but also those that can supply the high-end servers required or fabricate parts and components to meet the demands of AI. The Schroder Oriental Income Fund is strategically positioned to capitalise on this growing AI opportunity.
It should be remembered that whilst AI should continue to be a positive driver for the IT sector it is not the only driver and the industry should continue to benefit longer term from positive trends around digitisation, cloud and 5G.
With around 30% of its portfolio allocated to the Information Technology sector, the Schroder Oriental Income Fund is well ahead of its benchmark index. In recent years, this positioning has added value through outperformance and as a strong source of dividend growth.
Key technology holdings
As at 31 July 2024, the portfolio’s largest holding is in Taiwan Semiconductor Manufacturing Company (TSMC), which is viewed by many as the bellwether of Asian technology stocks. TSMC has performed well in recent years and strong corporate governance standards in Taiwan ensures that shareholders are well-rewarded in terms of dividends.
TSMC’s global leadership in advanced semiconductor technologies and strong relationships with customers such as Nvidia have seen it become a key player in the AI industry, supplying essential components for AI systems and thriving on growing demand for these burgeoning technologies.
Meanwhile, Samsung Electronics, is the second largest holding in the portfolio. Key drivers include its continued dominance in semiconductor memory chips. Samsung’s diversified business model also means it has exposure to the mobile, display and foundry sectors.
Elsewhere amongst the portfolio holdings is Hon Hai, a manufacturer of servers, key to the growth of AI and MediaTek, which has successfully forged a position as a global leader in mobile chipsets, which have the potential for greater AI-driven applications. As an asset light, cash generative business, it has also been steadily growing its dividend as it returns significant cash to shareholders.
Can the AI boom continue?
Although returns from Asian technology stocks have been strong in recent years, the key question for investors right now is, can the growth continue? Some industry commentators worry that the stock market’s enthusiasm for AI may have fuelled an investment bubble, similar to that associated with the internet boom in the late 1990s.
For Richard Sennitt, Manager of the Schroder Oriental Income Fund, there are reasons for cautious optimism.
“We remain positive about the role that Asian technology companies can play in AI’s continued development. We are still in the early chapters of the AI story, and there is plenty of growth and innovation still to come, with implications for all industries. This will inevitably drive risk as well as opportunity. However, expectations in parts of the IT sector related to AI are now high and longer-term question marks around the monetisation of the technology remain. Therefore, one must be disciplined when assessing stocks associated with the theme. Whilst Asia remains an interesting way for investors to gain exposure to the AI theme the broader sector also has longer term attractions and on balance, valuations for Asian technology stocks as a whole have not yet responded to the extent that they have in the US.”
Discipline is key
Nevertheless, investors should be mindful of potential volatility in the near term. Although Asian technology stocks have not risen as far or as fast as those in the US, they are unlikely to be immune should US tech stocks suffer a correction.
The best protection against this risk is a long-term, disciplined investment approach. Richard and his team focus on quality companies that have strong management, appropriate balance sheets and sustainable long-term competitive advantages. He draws on Schroders’ extensive research resources in Asia, where on-the-ground analysts engage directly with company management teams, ensuring that the fund remains focused on opportunities that can deliver attractive dividend profiles.
Having grown its dividend every year since its launch, this approach has served the Trust well in the past. Richard comments.
“We have a robust and repeatable investment process. The disciplined focus on valuation ensures we can adapt to evolving market conditions, allowing the portfolio to deliver its continued focus on income, while still being able to capture some of the best opportunities in Asia.”
Click here to find out more about the Schroder Oriental Income Fund Limited
