Schroder Asian Regulatory News (ATR)

11 September 2020

Half Year Report

Schroder Asian Total Return Investment Company plc hereby submits its Half Year Report for the period ended 30 June 2020 as required by the Financial Conduct Authority'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 webpage. Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/6786Y_1-2020-9-10.pdf

The Company has submitted a copy of 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:

Half year report and accounts for the six months ended 30 June 2020

Chairman's Statement

Performance

This is my first statement to shareholders as Chairman. The previous Chairman, David Brief, reported to shareholders in the annual report as at 31 December 2019, that since Schroders' appointment in March 2013, the Company's net asset value ("NAV") total return and share price total return had comfortably outperformed the Reference Index. The board would like to thank David for his contributions as director and Chairman.

I am extremely pleased to report that although it has been an exceptionally turbulent six months, with the global economy and stock markets facing disruption and uncertainty of a magnitude unprecedented in recent years, the Company has produced a NAV total return of 6.1% in the period to 30 June 2020, outperforming both the return of the Reference Index of 0.7% and of the peer group average of 3.1%, continuing the Company's record of outperformance. Strong stock selection has contributed significantly to this performance with quality stocks proving resilient, whilst some areas of focus in the portfolio, such as the internet and technology sectors, have proved to be beneficiaries of the business impact of the pandemic.

Further details on performance may be found in the Portfolio Managers' Review.

Promotion and discount control

Although the Company's shares were trading at a premium to NAV at the start of the period, the highly volatile trading conditions caused by the effects of the COVID-19 pandemic resulted in the share price falling to a discount of 3.5% as at 30 June 2020, with an average discount for the period of 2.5%.

The Company's discount management policy targets a discount to NAV of no more than 5% in normal market conditions and the board carefully monitors the share price in order to use the shareholder authority to buy back shares when appropriate. Following a spike in the discount in March, in the midst of market volatility caused by the pandemic, the Company began to purchase shares for holding in treasury. The first buyback was executed at a discount of just over 10% and the Company purchased shares on four subsequent occasions during the period, the last of which was at a discount of around 3.8%. Consequently the Company bought back 124,000 shares during the period and a further 56,508 shares have been bought back at a discount of around 3.5% since the end of the period. As at 9 September, the discount had narrowed to 2.0%.

Gearing

The portfolio managers have proactively utilised gearing over the period which has contributed to the strong performance. Although the level of gearing started the year at 2.2% this was increased close to the point that markets bottomed in late March to end the period at 11.3%. Having taken advantage of the very substantial rally in global markets during the second quarter of the year the level of gearing has subsequently been reduced to the current level of 8.1% (as at 9 September).

Shareholder engagement

Although the Company's AGM was held behind closed doors due to the government restrictions on public gatherings during the pandemic, the Company's portfolio manager prepared a presentation, which was made available on the Company's webpages (www.schroders.co.uk/satric).

Shareholders are welcome to get in touch with the board with any queries, through the Company Secretary (details on the back cover of the Half Year Report), and for regular news about the trust, shareholders are also encouraged to sign up to the Manager's investment trusts update by visiting the Company's website www.schroders.com/en/uk/private-investor/fund-centre/funds-infocus/investment-trusts/schroders-investmenttrusts/never-miss-an-update/.

Outlook

It is an achievement to have delivered positive returns in the last six months despite extremely challenging market conditions, but the repercussions of COVID-19 are likely to continue to have a negative impact on global economies and stock markets both for the remainder of this year and looking further forward. As news of the pandemic hopefully abates, the ongoing concern over US/China trade relations, national security issues in Hong Kong and the US elections in November are likely to continue to cause uncertainty.

The portfolio managers have become more cautious although trading conditions are unlikely to be as volatile as earlier in the year. Valuations for some specific sectors of the market now look steep following very strong performance, although there are still quality stocks to be found at reasonable value. Markets may have to digest successive downward revisions in corporate earnings as the effects of COVID-19 are reflected in company profit forecasts. However this environment provides ample opportunity for stock pickers as benchmark moves belie huge earnings dispersion both within and between sectors. In addition, the portfolio managers' focus on long-term fundamental growth companies in Asia with strong balance sheets and sound corporate governance should provide portfolio resilience, with the added benefit of being able to utilise capital protection against downside risk.

Sarah MacAulay

Chairman

10 September 2020

Portfolio Managers' Review

Performance

The first half of 2020 saw some of the most volatile movements in stock market history as the world battled with the coronavirus pandemic. As the virus outbreak spread in February from a China issue to a global problem, most Asian countries went into some form of economic lockdown. Investors witnessed the end of a 10 year record-breaking stock market bull run in the USA, which was followed in March by one of the sharpest market crashes in history. Nevertheless, despite the still uncertain near-term economic outlook, markets from early April rebounded strongly as investors were willing to look through the current slump in earnings and towards a more normalized operating environment in 2021. This widespread optimism in markets was also underpinned by the unprecedented efforts by global governments and central banks who stepped in with rounds of fiscal and monetary stimulus to backstop the economy and financial markets.

The portfolio suffered a sharp pull-back in Q1 as the broader market corrected sharply and braced for the uncertain economic impact from measures to combat the COVID-19 pandemic. This was followed by an equally sharp recovery in Q2 as investors' panic started easing on signs of the infection "curves" flattening in most European, North American and Asian countries. After a difficult Q1, the portfolio's performance rebounded strongly, recouping all of the Q1 losses by early June and then putting on some net gains for the first half of 2020. Overall the NAV returned 6.1% versus the Reference Index's 0.7% (MSCI AC Asia Pacific ex Japan index, source Morningstar).

Over the six months, stock selection in China, Taiwan, Singapore and Australia was amongst the notable positive contributors. Companies in the internet and technology sectors generally held up better during the initial sell-off given the limited impact from the lockdowns on their business models. These sectors then led the subsequent rebound as the markets expect to see an accelerated shift to more online activities and technology usage as a result of the pandemic.

Many of our technology holdings such as Sea, Seek, Tencent, MediaTek, Chroma Ate, and TSMC performed well and were among the key contributors. In Australia, performance was helped by strong performance from healthcare names (Cochlear, ResMed, CSL). A key positive was also the limited exposure to oil and gas, banking and heavy industrial stocks which were the weakest performing. Similarly, due to our long-term concerns on competitiveness, the portfolio only owns a handful of Indian and ASEAN stocks which were the weakest markets, finishing the first half in negative territory.

The exposure to domestic Hong Kong was negative owing to worries over collateral damage from the heightened Sino-US tensions, especially following the enactment of the controversial National Security Law in the city. Finally, not holding some of the second-tier or emerging Chinese E-commerce names such as Meituan and Pinduoduo also slightly dragged on performance relative to the Reference Index, as these share prices more than doubled, driven partly by retail sentiment as markets turned increasingly frothy.

On capital protection, our small position in put options on the HK and Chinese indices helped offset a little of the negative returns during the sell-off (puts being an option to sell assets at an agreed price). As the crisis unfolded and markets priced in an increasingly negative outlook, we closed most of the hedges. At the end of March our model readings turned strongly positive on markets and we raised gearing levels moderately to a peak of around 12%, which allowed a fuller participation in the subsequent market recovery.

Post the end of the period covered in this report, markets have continued to bounce strongly despite the cautious outlook on corporate earnings for many sectors. We have reduced gearing and are now starting to look to add some level of protection via put options.

Outlook

With COVID-related demand destruction still very prevalent, given the rapid spread of COVID-19 in many emerging countries and the risks of secondary spikes in developed countries, profits in many sectors in Asia will continue to face significant near term headwinds. Nevertheless, the recent sharp recovery in markets shows that many investors are instead placing a great deal of hope on a 2021 recovery, along with the reassurance that central bankers and politicians will do "whatever it takes" to backstop the economy and markets. Or perhaps many investors now correctly recognise that if doing whatever it takes means money printing, then equities may be preferable to cash…

The recent optimism has led to some outsized gains within selected parts of the markets. In particular Chinese A-shares have been looking increasingly frothy since May, and this froth has now spilled over into the broader China markets (as proxied by the MSCI China index in the chart below) and now appears to be spreading to parts of the Taiwanese and Korean equity markets.

The driver of the recent moves in the Chinese and North Asian markets has principally been domestic retail investors. As shown in Chart 3 and 4 the turnaround in domestic retail sentiment in Asia has been quite dramatic since the end of March, with significant retail investor buying. Margin balances are also rising sharply (Chart 5) and some of the recent IPOs in Hong Kong are running at oversubscription rates of 200-300 times, the typical levels at the peak of past speculative fervours (Chart 6) in Asia. It would be fair to say the traffic lights are very much flashing amber - and we believe caution is warranted at this point.

With bubbles seemingly spreading in pockets of the market, we need to ask ourselves a few questions:

1. So how big is the bubble?

2. How dangerous is the bubble?

3. How long might it last?

How big is the bubble?

The bubble at the moment is not that broad-based, but in some sectors this froth has now become worrying as prices appear to have risen to unsustainable levels. This bubble has some parallels with the TMT bubble of 1999/2000, and it appears to be concentrated in stocks related to the "BEVI" sectors:

B - Biotech and any related pharma stocks - ideally those with no revenues and just a pipeline of hopes and dreams.

EV - Any stock that makes a widget, valve, semiconductor, or battery that might be used in an electric car - and of course particularly a Tesla. It doesn't matter if they have orders, just as long as they can talk about potential ones at an indeterminate date in the future.

I - Internet and any tech companies that can claim they have an internet, cloud, e-commerce, working from home, mobile gaming angle. Ideally, you want companies where losses are still expanding, ideally even faster than revenues and where the model is "new" and untested, but just bound to be loved by Generation Z.

For those who can recall 1999/2000, the current environment will bring back memories of the TMT bubble. And of course, true to form, the ever-creative sell side are creating new valuation measures and challenging each other to come up with sillier price targets for many stocks in these sectors.

The bubble-like conditions in these sectors are quite big for some individual stocks. Biotech stocks are probably the silliest. There are plenty of examples, but a couple stood out for us. One has quadrupled its market cap since its IPO in mid-June; it has no revenues and just a pipeline of which only one or two drugs look potentially material as of today.

Another biotech firm's share price has risen over 20 times this year. We've struggled to find much information about its business, but this firm with a market cap of $6 billion appears to have 60 employees and no revenues.

How dangerous is this bubble?

Up until early July, the excesses were mostly concentrated in second tier companies, so we were reasonably relaxed that the downside risk overall was not huge. However, we are getting increasingly concerned about the internet sector, particularly in China. China is c.40-50% of most of the standard benchmarks used by Asian funds and internet stocks on their own are around 40-45% of the MSCI China index. So a bubble spreading to this sector does create risks of significant market falls.

Initially, with Chinese tech giants Alibaba and Tencent not participating in the froth, we felt relaxed that overall market risks was not serious, but these two have now joined the party. In the first week of July Alibaba's market value rose by US$120bn, approximately the combined value of HSBC Bank and Jardine Matheson.

So alarm bells are ringing. At least for Alibaba and Tencent, the network effects and investment strategies of these companies may justify some of the strength in their share prices. For many other internet names, though, a clear speculative fervour has taken hold. We question whether network effects that you get in e--commerce, online media etc. are anywhere near as strong in bike-sharing, taxis, food delivery, hotel booking, group buying and so on. Certainly in the US it is very much the case that "not all internet stocks are created equal". Will China be so different?

Many other sectors are moribund. ASEAN markets are struggling, Australia is doing nothing; property, banks, cyclicals, industrials, oil & gas remain very out of favour. This again is similar to the bubble at the turn of the century. The retail investor only wants to chase hot themes and stories.

So how worried should we be and how long might these conditions last?

As highlighted above, with the froth spreading to wider areas of internet and technology, we are now concerned about risks to the downside. Our feeling, purely based on past experience of retail bubbles in Asia, is this will get bigger before it bursts. We would expect, however, the bubbly conditions to remain pretty confined to the BEVI sectors.

For those willing to look away from the herd, opportunities in Asia are to be had, such as in great bank franchises or quality resource stocks offering a 7% dividend yield… but that is so passé of course…

So what are your portfolio managers doing?

At current levels, our model is forecasting flat markets. Our valuation indicators are also back at neutral levels as the rerating in the internet, technology and pharma sectors offsets the optically "cheap" sectors such as banks, property, insurance, commodities and industrials.

Despite the froth in the BEVI sectors, much of the broader market is still lagging and remains reasonably valued. We therefore haven't been rushing to buy significant hedging, instead we remain disciplined and have trimmed stocks we hold that got pushed above our fair values on thematic excesses. If the bubble gets bigger and spreads to other sectors, we will look to add to hedging.

Meanwhile, in the short-term as we position the Company more defensively, this could mean potentially some periods of underperformance versus the Reference Index if frothy conditions continue.

Robin Parbrook, Lee King Fuei

10 September 2020

Principal risks and uncertainties

The principal risks and uncertainties with the Company's business fall into the following categories: strategic risk; investment management risk; custody risk; financial and currency risk; gearing and leverage risk; accounting, legal and regulatory risk; service provider risk; and cyber risk. A detailed explanation of the risks and uncertainties in each of these categories can be found on pages 31 to 33 of the Company's published annual report and accounts for the year ended 31 December 2019.

The board has continued to keep under review the effect of the COVID-19 pandemic on the Company's principal risk and uncertainties. Although it was assessed to be an emerging risk in the annual report, the board now considers that the Company's existing principal risks and uncertainties are sufficiently comprehensive. COVID-19 continues to affect the Company, affecting the value of the Company's investments due to the disruption of supply chains and demand for products and services, increased costs and cash flow problems, and changed legal and regulatory requirements for companies. The pandemic has had a significant impact on prospects for global growth as measured by GDP and it continues to create uncertainty in many sectors.

The board notes the Manager's investment process has been unaffected by the COVID-19 pandemic. The Manager continues to focus on long-term company fundamentals and detailed analysis of current and future investments. Nevertheless, the degree of uncertainty relating to investment management risk has increased due to COVID-19, and the board will be keeping this under close review.

COVID-19 also affected the Company's service providers, who implemented business continuity plans in line with government recommendations. However, the board has been pleased to note that to date the Company's service providers have been able to operate on a business as usual basis, despite the pandemic.

Except with respect to the degree of uncertainty relating to investment management risk, the Company's principal risk and uncertainties have not materially changed during the six months ended 30 June 2020.

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 34 of the published annual report and accounts for the year ended 31 December 2019, as well as considering the effect of COVID-19 on those risks and, where appropriate, action taken by the Company's service providers in relation to those risks, detailed above, 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 30 June 2020.

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 ("UK GAAP") and with the Statement of Recommended Practice, "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued in October 2019 and that this half year report includes a fair review of the information required by 4.2.7R and 4.2.8R of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.

Income Statement

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 on ordinary activities after taxation is also the total comprehensive income 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 30 June 2020 (Unaudited)

For the six months ended 30 June 2019 (Unaudited)

For the year ended 31 December 2019 (Audited)

Statement of Financial Position

Registered in England and Wales

Company registration number: 02153093

Cash Flow Statement

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 auditor.

The figures and financial information for the year ended 31 December 2019 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 auditors 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 ("UK GAAP") and with the Statement of Recommend Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued by the Association of Investment Companies in October 2019.

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 31 December 2019.

3. Taxation on ordinary activities

The Company has reached an agreement with HMRC to recover £1,320,000 of corporation tax paid in relation to financial years 2007 and 2008. This represents a favourable outcome for the Company, following a dispute with HMRC over the treatment of overseas income.

The Company's effective corporation tax rate is nil, as deductible expenses exceed taxable income.

4. Return per share

5. Dividend paid

No interim dividend has been declared in respect of the year ended 31 December 2020 (2019: nil).

6. Called-up share capital

7. Net asset value per share

8. Reconciliation of total return on ordinary activities before finance costs and taxation to net cash inflow from operating activities

9. Financial instruments measured at fair value

The Company's financial instruments that are held at fair value include its investment portfolio and derivative financial instruments.

FRS 102 requires that these financial instruments are categorised into a hierarchy consisting of the following three levels:

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 following table sets out the fair value measurements using the above hierarchy:

1 Participatory notes, which are valued using the quoted bid prices of the underlying securities, have been allocated to Level 2 as, strictly, these are not identical assets.

10. 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.