Rippingall warns on China small caps

The manager of the £228.1m Scottish Oriental Smaller Companies trust, who is set to retire in April, said smaller companies in Asia had done well and that investors needed to be cautious in the short term.

Scottish Oriental was ranked as the seventh-best-performing trust in the Winterflood quarterly review of the end of 2012, with a total share price return of 15.6 per cent. It has been consistently top quartile of the Asia Pacific excluding Japan Sector during the past 10 years, as the best or second best-performing trust in the sector.

“There are issues in smaller companies,” Ms Rippingall said.

“Asia is in vogue and smaller companies have done well but it makes me nervous in the short term.” In the past six months, the MSCI China Small Cap index has risen 35.2 per cent, compared to a rise of 15.5 per cent for the MSCI World index.

Ms Rippingall said Scottish Oriental was underweight China as it held a 17.7 per cent weighting in the country compared to the MSCI Asia ex-Japan index’s weighting of 24.6 per cent. She said a Chinese economic slowdown was “looming in the background” in spite of the recent rally in domestic companies’s shares.

“We won’t see [economic] growth now of more than 12 per cent and that’s looming in the background,” she said.

The manager added that labour costs in Asia had become less competitive due to wage inflation, which meant areas such as the automotive sector were now relocating production.

“Labour costs [in Asia] mean that US factories are reopening,” Ms Rippingall said.

“The auto industry is taking money back to the States and while I don’t see a massive exodus from Asia I don’t see an increase either.”

Elsewhere, Ms Rippingall said her caution in terms of investing in India had been flawed.

“India was the first country I ever looked at and I know how painful the downs have been,” she said.

“I was wrong and we missed out through the portfolio being underweight India because the expensive companies got more expensive.”

As at December, the trust was very underweight India, with a 1.5 per cent exposure to the country compared to the 8.9 per cent index average weight.

But the manager said she hoped her successors would approach the country with fresh eyes.

Ms Rippingall will step down from the trust in April after 13 years and the group has said Wee-Li Hee, Scott McNab and Angus Tulloch will become co-managers of the portfolio at that time.

Mr McNab has been co-manager of the trust since 2004 and Ms Hee has also been involved as well as work closely with Angus Tulloch in the management of First State’s Asia Pacific fund.

Ms Hee is due to take maternity leave in June but will regain her duties on the trust when she returns.

In terms of changes she has seen in the region during her tenure, Ms Rippingall said the dividend culture in Asia had improved as had corporate balance sheets.

She said she still found Bangladesh problematic because of issues surrounding corruption and a lack of infrastructure but viewed Taiwan as an opportunity because of the lower production costs relative to China.