Half Year Report

Schroder AsiaPacific Fund plc (the "Company") hereby submits its half year report for the period ended 31 March 2022 as required by the FCA's Disclosure Guidance and Transparency Rule 4.2. 

The half year report is also being published in hard copy format and an electronic copy of that document will shortly be available to download from the Company's website www.schroders.co.uk/asiapacific. Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/4983M_1-2022-5-23.pdf

The Company has also submitted its half year report to the National Storage Mechanism and it will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

Enquiries:

Benjamin Hanley

Schroder Investment Management Limited

Tel: 020 7658 3847

Half Year Report and Accounts

Chairman's Statement

Performance

The Company outperformed its Benchmark for the six months ended 31 March 2022 in an extremely challenging period for Asian markets. Over the half year, the Company's net asset value ("NAV") and share price produced total returns of -4.2% and -5.2%, respectively, compared to the Benchmark's total return of -6.9%.

Further analysis of performance may be found in the Manager's Review.

Discount management

The discount widened slightly from 9.8% at the start of the period to 10.8% as at 31 March 2022. The Board continues to monitor closely the Company's discount levels and regularly reviews share buyback policy. During the period under review the Company bought back 1,320,000 shares for cancellation.

Between 31 March 2022 and 20 May 2022 the Company has bought back an additional 735,000 shares.

Gearing

The Company was 0.6% geared at the beginning of the period, and as at 31 March 2022 held 0.3% net cash. As at 20 May 2022 the Company was 0.1% geared. The level of gearing continues to be well within the gearing limit of 20%.

Outlook

Many of the geopolitical and economic risks that weighed on returns during the period remain relevant at the time of writing. While direct trade between the region and Russia is extremely limited (and none of the Company's investments have significant exposure to Russia or Ukraine in terms of revenues or assets), it is the indirect consequences of the tragic conflict that weigh on the outlook for the region. The prospect of sustained inflation across a number of commodities, most notably oil and gas, as well as headwinds to global growth and therefore exports from the region pose the greatest near-term challenges for Asia as a whole. Additionally, China's struggles with COVID and its associated zero COVID policy continue to challenge the region's largest economy.

Despite this seemingly gloomy backdrop there are reasons for optimism for Asian equity investors. Markets across the region seem to have priced in many of these challenges and Asian valuations now look significantly more attractive than they did a year ago; not only relative to their historic averages but also relative to current valuations in other key global markets.  In an environment like this it is important to focus on identifying the companies best positioned to weather a range of macro-economic environments and deliver strong long-term shareholder returns. Your Investment Manager's bottom-up stock picking process seeks to do just this and the Board remains confident in the Manager's ability to continue to deliver consistent returns for our shareholders.

James Williams

Chairman

Manager's Review

The net asset value per share of the Company recorded a total return of -4.2% over the six months to end March 2022. This was ahead of the performance of the Benchmark, the MSCI All Country Asia ex Japan Net Dividends Reinvested Index in GBP, which was down 6.9% over the same period. (Source: Morningstar).

Asian markets were volatile over the six months to end March 2022, with a number of headwinds globally and regionally weighing on sentiment. The Russian invasion of Ukraine towards the end of the period is a tragedy that has created a humanitarian crisis which will have long lasting impacts. In Asia the period was dominated by ongoing elevated levels of regulation in China (particularly amongst the internet names), the health of the Chinese economy and weakness of the property market, the potential impact of Omicron and the knock-on effects of global concerns over supply chain issues, rising inflation and the outlook for interest rates. Later in the period some easing measures from the Chinese authorities, signalling an apparent shift in focus towards 'stability', initially helped underpin sentiment.

However, Chinese stocks came under significant pressure in March as these concerns combined with worries over China's stance with respect to the conflict and a renewed focus on the potential delisting of Chinese ADRs from the US exchanges. This sell-off was followed by a top official coming out with a market-calming announcement addressing many of the issues in a bid to bolster confidence.

With the potential for a more sustained higher level of inflation globally, there was renewed concern over the potential for higher interest rates. This saw some of the more highly rated growth stocks come under pressure, especially the less profitable names, with value stocks outperforming growth stocks over the period.

The divergence of returns across the regional markets continued to be high with China lagging due to a combination of ongoing regulatory fears, concern over defaults in the property sector and weaker economic growth, partly as a result of its continuing "Zero Covid" policy. Korea was also weak with the semiconductor memory sector stocks in the doldrums and some of the internet names under pressure, not only from rising rates impacting valuations, but also uncertainty over regulation given the presidential election which took place in early March. Of the larger markets Taiwan, India and Singapore all outperformed. Taiwan saw a recovery in some of the oversold IT names, as well as strength in other areas including financials. India demonstrated ongoing resilience despite elevated valuations in some areas buoyed by resilient earnings, favourable liquidity and domestic fund flows.

The other ASEAN markets performed better, helped initially by potential for opening up, as well as value stocks outperforming, in which they tend to have higher weightings.

Sector returns across the region also saw a large spread of returns. Beneficiaries of rising commodity prices did well, with energy and, to a lesser extent, materials outperforming, and the prospect for higher interest rates meant financials also outperformed. Sectors with a high growth component were sold off including the healthcare names dragged down by the high multiple biotechnology stocks, as were a number of the e-commerce and internet related names.

Performance and portfolio activity

The Company's NAV total return of -4.2% over the period compared favourably with that of the Benchmark which fell -6.9% over the period. From a relative perspective, our country positioning added value with our significant underweight to, and to a lesser extent stock selection in China adding value. The regulatory clampdown and concern over the slowing economy in China resulted in negative returns with growth names, including internet and healthcare where we are underweight in aggregate, most impacted. The overweight to Hong Kong via financials and real estate was also positive. Our investments in Australia and Vietnam also added value. Conversely, our exposure to Singapore and Taiwan was a drag. The internet name we held in Singapore was in part impacted by higher interest rates which resulted in a greater focus on the timeline for profitability from its fast growing e-commerce business; whilst a lack of exposure to the domestic financials in Taiwan resulted in negative stock selection.

The recovery in global growth and the potential for interest rates to start to move up favoured some of the more economically sensitive sectors such as financials and materials, at the expense of the more expensive growth names. Consequently, our positioning in financials and materials added value. In financials this was driven by the holdings in banks which, in general, benefitted from a firming of interest rate expectations combined with their lowly valuations. In materials our out of index position in Australian resources was positive thanks to higher commodity prices driven by the global recovery. Information technology remains a large exposure for the Company, where our overweight position and stock selection particularly in hardware names in Taiwan and the IT Services names in India, was helpful. Some of the more expensive growth areas lagged significantly including healthcare names, especially those in China. Our stock selection in, and underweight to, the sector was a positive contributor to performance. 

The geographic exposure in the Company's portfolio continues to be mainly spread between Taiwan, China, Hong Kong, Korea and India. China remains a substantial underweight but is, in part, offset by the overweight to Hong Kong. As throughout much of 2021, changes to the composition of the portfolio were made to take advantage of the valuation spread across industries, reducing stocks that performed particularly strongly, and looked more fully valued, in favour of those names that had lagged or corrected in the growth-orientated sell-off. For instance, over the period we started to add to some names in China and Hong Kong that had been sold down, in part, on the prospect of higher interest rates. These included initiating a position in a Chinese solar panel producer and adding to positions in an innovative power tool manufacturer. However, in aggregate the portfolio remains underweight in e-commerce names where we still have concerns over both regulation and the strength of consumption. Elsewhere, we reduced positions in some of the more expensive domestic names in India that had rerated up, whilst adding to some of the IT Service companies which we believe are long-term winners. Otherwise, in ASEAN we added to holdings in Singapore where we are overweight.

In terms of sectors we continued in aggregate to add to information technology, which remains the biggest sectoral exposure in the Company's portfolio. We continue to see some strong long-term drivers for growth around digitisation and the roll out of 5G and the "Internet of Things", with our focus on Taiwanese and Korean hardware companies. However, we did sell out of a position in a semiconductor equipment manufacturer that had performed well but, in our view, looked increasingly fully valued. Selectively, we continued to add to financials, including in Singapore, where valuations still look relatively attractive given the prospect of higher interest rates and subdued credit costs. Exposure to consumer-related stocks continue to be an important feature of the investment portfolio. We added selectively to names that had sold off on concerns over weaker consumer demand in the US, but continued to be wary of adding back to the e-commerce names.

Outlook and policy

At the time of writing (April) the tragic conflict unfolding in Ukraine has created a humanitarian crisis resulting in suffering for millions of people. This crisis also has implications for the global economy and stock markets. The conflict demonstrates the unpredictability of geopolitics and its impact on commodity prices will have ramifications for inflation, trade balances, nominal GDP and earnings growth globally as well impacting markets. Although direct impacts on Asia are relatively limited, rising commodity prices and any impact on global growth are headwinds. China's relationship with Russia is also likely to continue to be a focus. Unfortunately this crisis has exacerbated some of the trends that were already there in relation to rising prices and shortages. It has also reinforced the need for self-sufficiency; a desire that will inevitably have implications for globalisation.

This backdrop means that Asian markets are likely to remain volatile, with the path of the conflict in Ukraine a key driver of markets. None of the Company's investments having significant exposure to Russia or Ukraine from a revenue or asset perspective, and direct trade between the region and Russia is extremely limited. However, it is the indirect impacts that are potentially more significant, specifically the pressure that the conflict has had on commodity prices which were already rising. Higher prices will eat into consumers' real incomes globally and hence consumption, potentially hurting demand for Asian products. Asia, in aggregate, is a net importer of many commodities, including energy, and thus rising prices will act as a drag on economic growth and trade balances. Furthermore, Asian companies in general will find their raw material costs rising which will potentially squeeze profitability unless companies are able to pass them through in end prices. Nevertheless, although painful for certain countries' external accounts, and many companies' input costs, volatility in commodity prices is a risk investors are used to dealing with in Asia and creates winners as well as losers.

With price rises being seen globally in many areas, the question whether inflation will be transitory or more structural remains but for now the path for rate expectations has moved higher. Therefore, it is likely that we see renewed concerns over tightening and tapering going forward. Although most economies in Asia remain better placed than in 2013, when we last saw a prolonged QE tapering episode, thanks to improved external accounts and higher real interest rate differentials with the US, valuations in some 'high growth' areas may come under pressure. Beneficiaries of higher prices and firmer interest rates include materials companies and financials, both areas where we have exposure.

The other trend that the crisis has reinforced has been the need for increased self-sufficiency. The need for diversified supply chains was something that the COVID crisis had highlighted following the disruption the pandemic caused. With security of supply already a focus in areas such as semiconductor production owing to ongoing US-China tensions and the concentration of advanced manufacturing in Taiwan, the Ukraine conflict has also highlighted the vulnerability of nations to energy supply dependency. All this will likely lead to further localisation of supply chains and an era of reduced globalisation.

Regionally, a number of other issues have been weighing on sentiment. Although globally most countries are starting 'to live' with COVID, in part thanks to high rates of vaccination, China remains an outlier in continuing to pursue a zero COVID policy. The Omicron variant has proven to be very difficult to control, with a deadly 5th wave impacting Hong Kong. At the time of writing various parts of China including Shanghai are locked down, with estimates that around 200 million people are under full or partial lockdown. Although the overall vaccination rate is high in China, there still remains a large tranche of the very elderly that are unvaccinated, which means a move away from zero COVID in the near term is unlikely and that these rolling shutdowns are likely to continue and potentially weigh heavily on growth.

From an economic perspective, there were already concerns over the strength of the economy in China given the weakness of the property sector and the generally lacklustre consumer. This combined with the ongoing regulatory scrutiny being faced by many of the internet names had already seen the government shift policy onto an easing track, with a focus on stability. These latest lockdowns are likely to see renewed pressure to take further stimulative actions especially if global growth, and thus exports, start to slow.

All of the above paints a pretty negative backdrop. However, this has in part been reflected in market action with valuations today looking much less frothy than they did a year ago, particularly versus global equities. Although it is likely we will see further downward revisions to earnings, aggregate valuations for the region are now trading at or below long-term averages and at the lower end of the range versus the rest of the world.

To conclude it is worth remembering that as investors we buy companies not countries. We are mindful of the impact political and macroeconomic factors can have on equities and returns, but we are bottom-up stock-pickers first and foremost, focusing on the company's return prospects and valuation. We do not try to pick companies which will do well based purely on a particular macro environment which we have forecast; rather we try to pick well-managed companies which have structural advantages allowing them to survive (and hopefully thrive!) in as wide a range of external conditions as possible. Therefore, a focus on attractive bottom-up ideas, in our view, remains essential.

Country Weights - Company vs. Benchmark

* Vietnam, Italy and a UK unit trust.

Source: Schroders, MSCI.

Schroder Investment Management Limited

Half Year Report

Principal risks and uncertainties

The principal risks and uncertainties with the Company's business fall into the following categories: strategy and competitiveness risk; investment management risk; financial and currency risk; accounting, legal and regulatory risk; custodian and depositary risk; service provider risk; and cyber. A detailed explanation of the risks and uncertainties in each of these categories can be found on pages 18 and 20 of the Company's published annual report and accounts for the year ended 30 September 2021.

These risks and uncertainties have not materially changed during the six months ended 31 March 2022. However, the Board undertook a review of principal and emerging risks for the Company while reviewing these accounts. The Directors noted that geopolitical risk and climate change risk continued to develop. In particular, for geopolitical risk, the war in Ukraine was affecting political relationships, supply chains and inflation. In addition, sanctions against individuals and companies, for various reasons, are increasing. There is increasing awareness of the potential effects of climate change on company returns and also the increased risk of cyber attacks. These developments will continue to be monitored and reported on in the next annual report as appropriate.

Going concern

Having assessed the principal risks and uncertainties, and the other matters discussed in connection with the viability statement as set out on page 20 of the published annual report and accounts for the year ended 30 September 2021, the Directors consider it appropriate to adopt the going concern basis in preparing the accounts.

Related party transactions

There have been no transactions with related parties that have materially affected the financial position or the performance of the Company during the six months ended 31 March 2022.

Directors' responsibility statement

The Directors confirm that, to the best of their knowledge, this set of condensed financial statements has been prepared in accordance with United Kingdom Generally Accepted Accounting Practice, in particular with Financial Reporting Standard 104 "Interim Financial Reporting" and with the Statement of Recommended Practice, "Financial Statements of Investment Companies and Venture Capital Trusts" issued in April 2021, and that this half year report includes a fair review of the information required by 4.2.7R and 4.2.8R of the FCA's Disclosure Guidance and Transparency Rules.

Income Statement

for the six months ended 31 March 2022 (unaudited)

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 period.

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

Statement of Changes in Equity

For the six months ended 31 March 2022 (unaudited)

For the six months ended 31 March 2021 (unaudited)

For the year ended 30 September 2021 (audited)

Statement of Financial Position

at 31 March 2022

Notes to the Accounts

1.      Financial Statements

The information contained within the accounts in this half year report has not been audited or reviewed by the Company's independent auditor.

The figures and financial information for the year ended 30 September 2021 are extracted from the latest published accounts of the Company and do not constitute statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included the report of the auditor which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

2.      Accounting policies

Basis of accounting

The accounts have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice, in particular with Financial Reporting Standard 104 "Interim Financial Reporting" and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued by the Association of Investment Companies in April 2021.

All of the Company's operations are of a continuing nature.

The accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 30 September 2021.

3.      Taxation

The Company's effective corporation tax rate is nil, as deductible expenses exceed taxable income. The taxation charge comprises irrecoverable overseas withholding tax on dividends receivable, and overseas capital gains tax.

4.      Return/(loss) per share

5.      Dividends paid

No interim dividend has been declared in respect of the six months ended 31 March 2022 (2021: nil).

6.      Called-up share capital

7.      Net asset value per share

Net asset value per share is calculated by dividing shareholders' funds by the number of shares in issue at 31 March 2022 of 163,540,716 (31 March 2021: 166,670,716 and 30 September 2021: 164,860,716).

8.      Financial instruments measured at fair value

The Company's financial instruments within the scope of FRS 102 that are held at fair value comprise its investment portfolio.

FRS 102 requires that financial instruments held at fair value are categorised into a hierarchy consisting of the three levels below. A fair value measurement is categorised in its entirety on the basis of the lowest level input that is significant to the fair value measurement.

Level 1 - valued using unadjusted quoted prices in active markets for identical assets.

Level 2 - valued using observable inputs other than quoted prices included within Level 1.

Level 3 - valued using inputs that are unobservable.

The Company's investment portfolio was categorised as follows:

There have been no transfers between Levels 1, 2 or 3 during the period (period ended 31 March 2021 and year ended 30 September 2021: nil).

9.      Events after the interim period that have not been reflected in the financial statements for the interim period

The Directors have evaluated the period since the interim date and have not noted any significant events which have not been reflected in the financial statements.