Schroder Oriental Income (SOI ) has picked up positions in sold-off Chinese companies after an underweight exposure to the country propelled the trust’s returns ahead of the index over the last 12 months.

Citywire A-rated portfolio manager Richard Sennitt said that while he would not lift the £710m dividend-paying portfolio’s exposure to China and Hong Kong in line with the index, the valuations had looked very attractive just before the government’s more coordinated response to the ailing economy kicked off a huge rally in September.

Over the year to the end of August, Sennitt bought a new position in NetEase, a videogame company that operates in an increasingly consolidated marketplace and has improved its shareholder return policy. Given the cheap valuation, the company has the potential to benefit from its upcoming pipeline of game launches, he believes.

Other additions include sportswear manufacturer Shenzhou, which had been sold down on a weaker outlook, and regional insurer AIA, which improved its shareholder return policy after having been sold down dramatically on concerns over the Hong Kong business. He sold out of Hong Kong property investors  Fortune Reit and Kerry Properties, which had done relatively well. 

However, Sennitt told Citywire that Chinese valuations could disappoint investors as the recent rally has already started to discount further fiscal easing, such as rate cuts.

‘We have seen some stimulus in the Chinese economy, which is positive at the margin and has helped put a floor under it, but it wasn’t until September that we saw a more coordinated approach. This was quickly reflected in the stock market, with valuations rising from the low end of the historical range to middle, but they are already pricing in more action coming through,’ Sennitt (pictured) said.

He added that Hong Kong, which is not only affected by the Chinese economy but also by US interest rates, had seen valuations rise slightly but they still looked relatively cheap to where they normally trade.

Since the year end, Sennitt increased exposure to China from 13% to 15%, which remains well short of the benchmark index’s 33%. Meanwhile, Hong Kong exposure has been lifted from 8% to 9%, which is double the benchmark’s 4.4%, according to the most recent factsheet. 

Chinese internet companies, which make up a large chunk of the index, are out of bounds for the 4.4%-yielding portfolio, given they do not pay income. 

The large China underweight drove performance over the year, as did stock selection in Taiwan, Korea and Hong Kong, with underlying returns totalling 18%, while the MSCI AC Pacific ex Japan index benchmark gained 9%, annual results showed. The shares advanced 15% over the period.

Sennitt pointed out that corporate governance reforms that initially kicked off in Japan had spread to China and South Korea, where companies are being encouraged to improve shareholder returns, either through share buybacks or dividends.

Technology companies exposed to AI were among the top performers, including Taiwanese foundry TSMC and manufacturer Hon Hai'>Hon Hai, branded white-goods maker Midea, and Hong Kong-based telecom operator HKT Trust & HKT Ltd.

Sennitt held a positive outlook for the Asia Pacific sector as US interest rate cuts and a weaker dollar have historically been a tailwind, while the region has also seen exports pick up, boosting underlying earnings growth.

The board paid a 12p per share dividend over the year – a 1.8% increase – but a slight pullback in earnings across more cyclical areas such as Australian resources and other economically sensitive industries meant some of the trust’s revenue reserves were required to make up the balance. 

While the trust’s underweight to China has held back returns since the financial year end, with underlying returns of 3% trailing the benchmark’s 8%, according to Morningstar, long-term performance remains strong.

Over five years shareholder returns of 34% outpace the benchmark’s 31%, while 10-year shareholder returns of 118% trump the index’s 84%.

Shares in the trust have gained 1.7% to 274.6p over the last week, putting them on an 8% discount. The board bought back 11.4 million shares over the period.