Scottish Oriental Smaller Companies Trust plc (Scottish Oriental) recently published their semi-annual investor update for the period ended December 31, 2018. The report provides an update on changes to the portfolio over the period, insights about existing holdings as well as their outlook and positioning in the current environment. Worth a read.

For more on Scottish Oriental, see our initial (but now dated) write-up here.

Some excerpts below (wording taken directly from the report with some slight paraphrasing):

• Portfolio consolidation: There were 58 companies in the portfolio at year-end compared to 78 companies three years ago. They would like to have an even more concentrated portfolio but current valuations stop this from happening. They give the example of Marico, which they say exemplifies what they look for in a company. It was the trust’s largest holding three years ago but is now no longer in the portfolio. On 20x earnings Marico would probably be a 6% or even a 7% position. They would be happy to own it on 30x earnings. 40x earnings is expensive but they would perhaps still have a toehold. But at 50x earnings there is too much valuation risk for them to stomach as the potential for significant capital loss is high.
• Building new positions: They rarely initiate a holding in a stock above 1%. Tend to start with a toehold position – if a company is relatively new to them, they will follow it for a period whilst increasing their conviction. Being on the shareholder register also gives them better access to management. If a company is not new to them then it is likely that the catalyst to initiate a position will be a fall in the share price making its valuations more attractive. When this happens, they tend to nibble rather than go “all-in” immediately. Sometimes they don’t get past a toehold. They believe if an investment case is promising then it is reasonable to take a small position. Sometimes, after further due diligence, they can change their minds. 
• Cash levels: They would like for the trust to be fully invested but have not yet achieved this objective. Valuations have compelled them to sell or reduce a number of positions in the portfolio, resulting in a higher cash level than 6 months ago. For context, despite the market weakness, the portfolio still trades at a median price earnings ratio of 17x for the current year. To put this in perspective, the average over the trust’s history has been 13x with a low of 7x and a high of 20x. Therefore not all of the market weakness has flowed through to cheaper valuations.
• Outlook: Main concern remains the valuations that equity markets are trading on. As a rule, paying too much for investments leads to reduced returns. Positioning of the portfolio is broadly unchanged with significant investments in India, Indonesia and the Philippines (47% of the portfolio combined) as well as holdings in companies based in several other countries with large domestic markets and attractive demographics.