LONDON STOCK EXCHANGE ANNOUNCEMENT
Pacific Assets Trust plc
Unaudited Half Year Results For The Six Months Ended
31 July 2016
This Announcement is not the Company’s Half Year Report & Accounts. It is an abridged version of the Company’s full Half Year Report & Accounts for the six months ended 31 July 2016. The full Half Year Report & Accounts will be sent to shareholders on 6 October 2016. The full Half Year Report & Accounts, together with a copy of this announcement, will also shortly be available on the Company’s website at www.pacific-assets.co.uk where up to date information on the Company, including daily NAV, share prices and fact sheets, can also be found.
The Company's Half Year Report & Accounts for the six months ended 31 July 2016 has been submitted to the UK Listing Authority, and will shortly be available for inspection on the National Storage Mechanism (NSM): www.hemscott.com/nsm.do
For further information please contact: Mark Pope, Frostrow Capital LLP 020 3008 4913
|As at||As at|
|31 July||31 January|
|Net asset value per share||227.9p||191.2p||19.2|
|Premium/(discount) of share price to net asset value per share||0.9%||(1.1%)||—|
|Six months to||One year to|
|31 July||31 January|
|Share price (total return)*||23.1%||(2.5%)|
|Net asset value per share (total return)*||21.0%||(6.6%)|
|MSCI All Country Asia ex Japan Index (total return, sterling adjusted)*||23.9%||(13.1%)|
|* Source: Morningstar|
|Year ended||Year ended|
|31 January||31 January|
|Final dividend per share||2.2p||2.6p|
|Half Year’s Highs/Lows||High||Low|
|Net asset value per share||233.5p||177.5p|
|Premium/(discount) of share price to net asset value per share†||1.4%||(11.5%)|
|† Premium high – Widest premium in period
(Discount) low – Widest (discount) in period
“Your Board remains optimistic that the diverse Asia Pacific Region will continue to provide quality investment opportunities, which will reward patient investors over the long term.”
Asian markets have done well during the last six months, notwithstanding global volatility and uncertainty. The Company’s net asset value per share total return was +21.0%. The Asia Pacific benchmark rose by 23.9%. The Company is invested with a low correlation to this benchmark. The Company’s share price total return was 23.1% with the share price moving to a premium of 0.9% to the Company’s net asset value per share at 31 July 2016, compared to a discount of 1.1% at the beginning of the period.
There was a strong movement in Asian stock markets as part of the global rally that followed the vote by the United Kingdom to leave the European Union. The last two months of the period up to 31 July saw the Company’s net asset value rise by 20.4%, including a beneficial impact from the weakening of sterling (in which the Company’s shares are denominated) against most of the Asian currencies into which investments are made.
Several new positions were initiated by our Investment Manager during the half year. These are outlined in their report to shareholders. Our Investment Manager continues to find new companies that meet their exacting standards of quality, but as they explain in their report the breadth of suitable opportunities is not markedly increasing. These purchases have reduced the proportion of the Company’s assets that had been held in cash to £19.8 million (6.9% of the investment portfolio) as at 28 September 2016.
The net revenue of 1.6p generated during the period was in line with the same period last year. The Board reminds shareholders that it remains the Company’s policy to pursue capital growth for shareholders with income being a secondary consideration.
Following the retirement of Nigel Rich from the Board in June, the Board has appointed Robert Talbut as a Director with effect from 23 September 2016. He is a Director of a number of public companies and was formerly a Director and Chief Investment Officer at Royal London Asset Management Limited. The Board is delighted to have attracted an individual of Robert’s calibre and experience.
Our financial world remains locked in the extraordinary situation where zero or negative yields account for around half of the sovereign bonds in issue. Cash remains plentiful but not always in the places where it is most needed to restore economic vitality. Markets have been rising but without conviction, as investors have been discouraged from placing funds elsewhere.
Your Board remains optimistic that the diverse Asia Pacific Region will continue to provide quality investment opportunities, which will reward patient investors over the long term. As has been demonstrated before, companies where managements take a sustainable approach to their business will be more likely to provide good returns. Our Investment Manager’s approach is to continue to seek out these investments for the Company’s investment portfolio.
Half Year Report & Accounts
In common with many other companies the Company is doing what it can to reduce its carbon foot print. As part of this strategy, and also to produce cost savings for the shareholders, the Company will after this year not be producing hard copies of its Half Year Report & Accounts. This document will, however, continue to be available on the Company’s website at www.pacific-assets.co.uk. The Company’s Annual Report & Accounts will also continue to be available in hard copy.
29 September 2016
Investment Manager’s Review
“Our job is to allocate our clients’ capital to good quality companies with sound growth prospects and strong management teams, ensuring we pay sensible prices for these investments.”
Empowering the End-Investor
A recent article in a well-known financial newspaper highlighted that there is an emerging trend of short-term investment decisions from a younger generation of investor “Millennials” or “Generation Y”, aged 18-351. The article cites the fact that one US fund manager polled 5,000 wealthy investors across 19 countries and fewer than 20% of “Gen Y” respondents said they would only be prepared to hold onto an ‘underperforming’ fund for more than a year before selling it. In contrast, three times as many investors over the age of forty said they would stick with a similar fund.
It is hard to see this situation remedying itself without a better example being set from the industry itself; in fact the situation is likely to continue to deteriorate along with the industry. The world of investment research (or more loosely “advice”) is an obvious target. To give some idea of what the end-investor might be reading on the Company itself, the last 18 months of research notes chosen from one broker, for consistency, provide worrying reading. Over that period, investors were advised to buy the Company in January 2015. The Company’s shares were then downgraded just three months later with a recommendation to switch into other trusts with larger discounts to net asset value (NAV) per share. The reason given was that strong performance from investments in India had driven the NAV per share, and that the discount had also moved to a small premium.
Within 5 months, the Company’s share price had declined and returned to a discount to the NAV per share and so the broker changed its recommendation again to a positive stance suggesting that investors should re-invest in shares of the Company because the end markets looked robust and the high cash balance would provide further investment opportunities. By early 2016, research highlighted that the Company’s share price had “lagged” other investment trusts and despite conviction in the fund manager, the high cash weighting that was seen as a positive just six months earlier, was now a risk to the share price performance of the Company!
But what is changing on the ground in Asia that warrants such hyperactivity? Often nothing. It is telling that when the research view on the Company turns negative, the reasons are often tactical and yet when the view turns positive the reasons are always strategic and based around the long-term potential of the end-markets of the underlying holdings.
Furthermore, when the share price is at a discount to the Company’s NAV per share, some see the high cash weighting as a positive and when the share price is at a premium, the high cash weighting is considered a negative. What is an end-investor to think? Imagine if some of the conglomerates in which the Company invests bought and sold assets based on a premium or discount to NAV per share or because they looked cheaper or more expensive than a similar asset in another industry or country; nothing would ever get done – there would never be any economic or social development, let alone investment returns.
As capital markets become increasingly dominated by lazy, passive structures like Exchange Traded Funds (ETFs) and closet-trackers, there ought to be a significant opportunity for actively managed investment trusts to shine. A strong and committed board will ensure that the end-investor’s pound is protected for the long term irrespective of the fund manager. Secondly the closed-end structure provided by an investment trust allows shareholders to invest in less liquid assets and markets than are readily available to them. And thirdly, being shareholders grants them a say in the destiny of their own trust. These are all characteristics that are increasingly less common in today’s financial markets. While these remain high-level discussion points based on ideas we have seen elsewhere in the corporate world, and implementation issues notwithstanding, we welcome any and all suggestions as to how we can achieve the goal of empowering the end-investor.
The vagaries of the market and of the broader industry do nothing but focus our minds on the core elements of our philosophy, on which we remain committed. At the heart of this is the concept of stewardship. We believe our job is to allocate our clients’ capital to good quality companies with sound growth prospects and strong management teams, ensuring we pay sensible prices for these investments. Each investment is a decision to purchase, on behalf of our clients, not a piece of paper or an electronic ticker, but part of a real business with all the rights and responsibilities that go with this. We take these rights and responsibilities seriously. We also believe the way we behave as investment professionals and the role we play in the broader industry are important in this regard.
1 Financial Times – ‘Flighty’ millennials look to switch out of funds
During the period we initiated positions in Lupin, Sundaram Finance, Koh Young Technology, Unicharm, Cipla, Delta Brac Housing Finance Corporation, Mahanagar Gas and Oversea-Chinese Banking Corporation. It is worth covering a few of these in more detail.
Lupin is the third largest Indian pharmaceutical company with manufacturing facilities in both India and Japan. They are engaged in the production, development and marketing of branded and generic drugs, and active pharmaceutical ingredients (APIs), producing drugs for over 100 countries worldwide. While not perfect, they have executed exceptionally well over the past decade, both in the US and India, and have always delivered consistent growth. Management are professionals with good governance records, conservative capital allocation and discipline with acquisitions; we are backing them over the long term to build a solid pharmaceutical business.
Sundaram Finance is one of the oldest and largest non-banking financial Companies in India with an impressive track record that spans over 60 years. Expanding from its roots as a commercial vehicle lender in South India, it now has a pan-Indian presence with interests in auto financing, mortgages, general insurance and asset management. It is similar to Housing Development Finance in that it started as a specialised lender but has slowly evolved into a financial conglomerate. It maintains a long track record of profitable growth, funded by internal cash flows rather than frequent visits to the market like many of their peers. Borrowers have been rewarded with credit at affordable rates, depositors have never had to worry about the safety of their savings, shareholders have been rewarded by steady dividends and the company has shown it can survive a crisis (unaided) on multiple occasions.
Koh Young Technology is a Korean maker of 3D inspection systems. The founder and management are aligned and interested in technology, helping to establish an innovation-driven culture. It maintains a broad client base but remain ambitious and is venturing into the world of robotic surgery in a bid to diversify its product offering. It is likely to be a beneficiary of sustainability tailwinds in terms of minimising costs and waste on behalf of customers, adding efficiency to the production process and catering to the long-term structural demand for electronics.
Cipla is one of India’s oldest family-owned pharmaceutical companies that has successfully proven its ability to sell in regulated markets through its manufacturing capabilities in generic drugs. Recent structural changes suggest the business is moving in the right direction and that there is capacity for interesting growth opportunities, particularly in the US where it has been slow to enter compared to its peer group.
We sold out of Swire Properties having lost conviction in the quality of the franchise given its extensive exposure to property in Hong Kong and China. We also sold out of Asustek Computer due to growing concerns over its supply chain and the general quality of franchise when up against low-cost Chinese manufacturers and high-end Korean or American brands. We sold Globe Telecom having been reducing our position for some time as valuations became too expensive. We became concerned about the franchise when the threat of a new entrant emerged. Whilst the threat has since disappeared, ongoing industry headwinds continue alongside a rapidly changing political backdrop.
We sold out of MTR Corp because the core business of operating the Hong Kong metro system is less relevant given its extensive Hong Kong property exposure and continued challenges with the greater China strategy and Singapore Post where the CEO we have been backing stepped down. This was combined with some material governance issues emerging towards the end of last year. We do not feel these have been addressed correctly.
Outlook: Quality must prevail
Only in very superficial terms can it be argued that Asian markets look reasonably valued. Many large capitalisation companies of questionable quality with justifiably lower valuations bring down aggregate multiples. But this doesn’t help us very much, because those average valuations mask the fact that we remain in a similar position now to that of the past three years which is that quality remains very expensive.
We frequently debate our strategy of focusing on high quality with high valuations versus moving down the quality spectrum at more reasonable valuations and yet this is something that does not sit well with any of us. We do not believe that we should sacrifice the long-term quality of the portfolio for the short-term valuation of the portfolio and we do not believe that this would be a prudent strategy now or in a time of crisis. We will opportunistically add to positions in companies we like when valuations move into acceptable ranges and similarly we would look to reduce positions when valuations become unbearable. Outside of that, we try to minimise tinkering.
We must also continue to avoid listening to the increasing volume of noise being generated. Over the past 12 months we have seen a flurry of companies come to market, some good, most not. While we assess every opportunity on its absolute merits, we must remain committed to our strategy of quality first. The past 12 months has seen our investment process systematically reject several initially interesting ideas: A seemingly decent owner-manager pharmacy threw us a governance curveball which saw their valuation drop significantly within weeks. A medical device company that seemed to be on the cusp of a strategic and governance turnaround was aggressively acquired by its private equity owners. An Indian IPO (initial public offering of shares) with an interesting franchise had a director that shared a name with a local politician who at the age of nearly 70 had only 10 years of work experience none of which was explained in the prospectus or by the bankers. One Hong Kong/China IPO document even threw up the implication that they use child labour!
While all this happens, we watch with dismay across the world as some of our favourite companies are acquired for various reasons, both strategic and nefarious. Now sadly we live in a world where good listed companies are being removed and poor quality companies are coming to market to replace them; little wonder average valuations are lower. The challenge for us in the coming year will be to avoid the pitfalls which emerge as noise levels increase and focus solely on what we know and believe in, that quality and long-termism have to prevail.
29 September 2016
Contribution by Investment
Six months ended 31 July 2016
Top and bottom 10 contributors to absolute performance.
Top 10 contributors to absolute performance
|Taiwan Semiconductor Manufacturing||1.39|
|E.Sun Financial Holdings||0.78|
|Kotak Mahindra Bank||0.65|
|Bottom 10 contributors to absolute performance|
|Mahindra Lifespace Developers||0.03|
* Stock not held at end of period
as at 31 July 2016
|Vitasoy International Holdings||Consumer Staples||17,304||6.4||Hong Kong|
|Tech Mahindra||Information Technology||14,444||5.3||India|
|Standard Foods||Consumer Staples||10,565||3.9||Taiwan|
|Taiwan Semiconductor Manufacturing||Information Technology||10,256||3.8||Taiwan|
|Chroma Ate||Information Technology||8,733||3.2||Taiwan|
|Kotak Mahindra Bank||Financials||8,256||3.0||India|
|Dr. Reddy's Laboratories||Health Care||8,108||3.0||India|
|Ten largest investments||111,165||40.9|
|E.Sun Financial Holdings||Financials||6,921||2.5||Taiwan|
|Delta Electronics (Thailand)||Information Technology||6,237||2.3||Thailand|
|Housing Development Finance||Financials||5,766||2.1||India|
|Bank of the Philippine Islands||Financials||5,665||2.1||Philippines|
|Idea Cellular||Telecommunication Services||5,477||2.0||India|
|Dabur India||Consumer Staples||5,101||1.9||India|
|China Mengniu Dairy||Consumer Staples||5,016||1.8||China|
|PT XL Axiata Tbk||Telecommunication Services||4,733||1.7||Indonesia|
|Twenty largest investments||166,900||61.3|
|DGB Financial Group||Financials||4,122||1.5||Korea|
|Tube Investments Of India||Consumer Discretionary||4,053||1.5||India|
|Sheng Siong Group||Consumer Staples||3,948||1.5||Singapore|
|Giant Manufacturing||Consumer Discretionary||3,059||1.1||Taiwan|
|Marico Bangladesh||Consumer Staples||2,865||1.1||Bangladesh|
|Thirty largest investments||203,637||74.8|
|Oversea-Chinese Banking Corporation||Financials||2,821||1.0||Singapore|
|Pchome Online||Information Technology||2,797||1.0||Taiwan|
|Delta Electronics (Taiwan)||Information Technology||2,691||1.0||Taiwan|
|Selamat Sempurna||Consumer Discretionary||2,634||1.0||Indonesia|
|Expeditors International of Washington||Industrials||2,634||1.0||United States1|
|Commercial Bank of Ceylon||Financials||2,593||1.0||Sri Lanka|
|Godrej Consumer Products||Consumer Staples||2,382||0.9||India|
|Delta Brac Housing Finance Corporation||Financials||2,129||0.8||Bangladesh|
|Forty largest investments||229,089||84.2|
1 Economic activity takes place principally in Asia Pacific Region.
|Cholamandalam Investment And Finance||Financials||2,054||0.8||India|
|Info Edge||Information Technology||1,981||0.7||India|
|SQUARE Pharmaceuticals||Health Care||1,926||0.7||Bangladesh|
|Hemas Holdings||Industrials||1,997||0.7||Sri Lanka|
|Dialog Axiata||Telecommunication Services||1,924||0.7||Sri Lanka|
|City Union Bank||Financials||1,730||0.6||India|
|Koh Young Technology||Information Technology||1,546||0.6||Korea|
|Fifty largest investments||247,948||91.1|
|Bank OCBC NISP||Financials||1,489||0.5||Indonesia|
|Bata Shoe||Consumer Discretionary||1,466||0.5||Bangladesh|
|Weifu High-Technology Group||Consumer Discretionary||1,327||0.5||China|
|CT Holdings||Consumer Staples||1,215||0.5||Sri Lanka|
|Mahindra Lifespace Developers||Financials||1,176||0.4||India|
|Container Corporation of India||Industrials||1,129||0.4||India|
|ASM Pacific Technology||Information Technology||1,130||0.4||Hong Kong|
|Sixty largest investments||261,072||95.9|
|Net current assets||370||0.1|
|Total net assets||272,192||100.0|
for the six months ended 31 July 2016
|(Unaudited) Six months ended 31 July 2016||(Unaudited) Six months ended 31 July 2015|
|Gains/(losses) on investments held at fair value through profit or loss||—||45,066||45,066||—||(10,684)||(10,684)|
|Exchange differences on currency
|Income (note 2)||2,753||—||2,753||2,656||—||2,656|
|Investment management and
management fees (note 3)
|Return/(loss) on ordinary
activities before taxation
|Taxation on ordinary activities||(198)||—||(198)||(187)||(3)||(190)|
|Return/(loss) after taxation
attributable to equity shareholders
|Return/(loss) per ordinary
share (p) (note 4)
The Total column of this statement represents the Company’s Income Statement.
The Revenue and Capital columns are supplementary to this and are both prepared under guidance published by the Association of Investment Companies (AIC).
All revenue and capital items in the Income Statement derive from continuing operations.
The Company had no recognised gains or losses other than those declared in the Income Statement.
All of the profit/(loss) and total comprehensive income for the period is attributable to the owners of the Company.
Statement of Changes in Equity
for the six months ended 31 July 2016
|Six months||Six months|
|31 July 2016||31 July 2015|
|Opening shareholders’ funds||228,326||242,063|
|Shares issued in period||—||2,939|
|Return for the year||46,494||(10,333)|
|Closing shareholders’ funds||272,192||231,631|
Statement of Financial Position
as at 31 July 2016
|As at||As at|
|31 July||31 January|
|Investments held at fair value through profit or loss||261,085||205,366|
|Cash at bank||10,737||23,590|
|Creditors (amounts falling due within one year)||(1,797)||(714)|
|Net current assets||11,107||22,960|
|Capital and reserves|
|Share premium account||4,713||4,713|
|Capital redemption reserve||1,648||1,648|
|Equity shareholders’ funds||272,192||228,326|
|Net asset value per ordinary share (p) (note 5)||227.9||191.2|
Notes to the Accounts
1. Basis of preparation
The condensed Financial Statements for the six months to 31 July 2016 comprise the statements set out on pages 11 to 14 together with the related notes below. They have been prepared in accordance with FRS 104 ‘Interim Financial Reporting’, the AIC’s Statement of Recommended Practice issued in November 2014 (‘New SORP’), UK Generally Accepted Accounting Principles (‘UK GAAP’) and using the same accounting policies as set out in the Company’s Annual Report and Financial Statements at 31 January 2016.
Under FRS 102 and FRS 104 investments have been classified using the following fair value hierarchy:
Level 1 – Quoted market prices in active markets
Level 2 – Prices of a recent transaction for identical instruments
Level 3 – Valuation techniques that use:
(i) observable market data; or
(ii) non-observable data
All of the Company’s investments fall into Level 1 for the periods reported.
|Six months||Six months|
|31 July||31 July|
3. Investment Management and Management fees
Six months ended 31 July 2016
Six months ended 31 July 2015
|Investment management fee –
|Management fee – Frostrow||48||143||191||44||133||177|
4. Return/(loss) per ordinary share
The total return per ordinary share price is based on the return attributable to shareholders of £46,494,000 (six months ended 31 July 2015: loss of £10,333,000) and on 119,448,386 shares (six months ended 31 July 2015: 117,666,262), being the weighted average number of shares in issue.
The revenue return per ordinary share price is calculated by dividing the net revenue return attributable to shareholders of £1,953,000 (six months ended 31 July 2015: £1,893,000) by the weighted average number of shares in issue as above.
The capital return/(loss) per ordinary share price is calculated by dividing the net capital loss attributable to shareholders of £44,541,000 (six months ended 31 July 2015: loss of £12,226,000) by the weighted average number of shares in issue as above.
5. Net asset value per ordinary share
The net asset value per ordinary share is based on the net assets attributable to shareholders of £272,192,000 (31 January 2016: £228,326,000) and on 119,448,386 shares in issue (as at 31 January 2016: 119,448,386).
6. 2016 accounts
These are not statutory accounts in terms of Section 434 of the Companies Act 2006 and are unaudited. Statutory accounts for the year to 31 January 2016, which received an unqualified audit report, have been lodged with the Registrar of Companies. No statutory accounts in respect of any period after 31 January 2016 have been reported on by the Company’s auditor or delivered to the Registrar of Companies.
Earnings for the first six months should not be taken as a guide to the results for the full year.
Interim Management Report
Principal Risks and Uncertainties
The Company’s principal area of risk relates to its investment activity and strategy, including currency risk in respect of the markets in which it invests. Other risks faced by the Company include financial, shareholder relations and operational (including corporate governance, accounting, legal and regulatory). These risks, and the way in which they are managed, are described in more detail under the heading Risk Management within the Strategic Report in the Company's Annual Report for the year ended 31 January 2016. The Company's principal risks and uncertainties have not changed materially since the date of that report and are not expected to change materially for the remaining six months of the Company's financial year.
Related Party Transactions
During the first six months of the current financial year no material transactions with related parties have taken place which have affected the financial position or the performance of the Company during the period.
The Directors believe, having considered the Company’s investment objectives, risk management policies, capital management policies and procedures, and the nature of the portfolio and its expenditure projections, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future. For these reasons, they consider there is reasonable evidence to continue to adopt the going concern basis in preparing the accounts.
The Board of Directors confirms that, to the best of its knowledge:
the condensed set of financial statements contained within the Half Year Report has been prepared in accordance with Financial Reporting Standard 104 (Interim Financial Reporting); and
the interim management report includes a fair review of the information required by 4.2.7R and 4.2.8R of the UK Listing Authority Disclosure Guidance and Transparency Rules.
In order to provide these confirmations, and in preparing these financial statements, the Directors are required to:
select suitable accounting policies and then apply them consistently;
make judgments and accounting estimates that are reasonable and prudent;
state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business;
and the Directors confirm that they have done so.
The Half Year Report has not been reviewed or audited by the Company’s auditor.
29 September 2016
Frostrow Capital LLP