Annual Financial Report

RNS Number : 5585Z
Pacific Horizon Investment Tst PLC
23 September 2009
 

PACIFIC HORIZON INVESTMENT TRUST PLC


ANNUAL FINANCIAL REPORT AND PROPOSED NEW

ARTICLES OF ASSOCIATION


Copies of the Annual Report and Financial Statements for the year ended 31 July 2009 and the proposed new Articles of Association of Pacific Horizon have been submitted to the UK Listing Authority and will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility, which is situated at:


Financial Services Authority
25 The North Colonnade

Canary Wharf

London

E14 5HS

Tel: +44 (0)20 7066 1000


The Annual Report and Financial Statements for the year ended 31 July 2009 including the Notice of Annual General Meeting is also available on Pacific Horizon's page of the Baillie Gifford website at:


www.pacifichorizon.co.uk


At the Annual General Meeting to be held on 2 November 2009, it is proposed that new Articles of Association be adopted in order to update the Company's existing Articles of Association to take account of changes in UK company law brought about by the further implementation of the Companies Act 2006 on 1 October 2009. More detail on the proposed changes to the Articles of Association is set out in the Directors' Report, the Notice of Annual General Meeting and the Appendix to the Notice of Annual General Meeting within the Annual Report and Financial Statements for the year ended 31 July 2009. Copies of the new Articles of Association are available for inspection at Royal London House, 22-25 Finsbury Square, London EC2A 1DX and Calton Square, 1 Greenside Row, Edinburgh EH1 3AN.


The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 July 2009 which require to be published by DTR 4.1 is set out on the following pages. 


Baillie Gifford & Co

Company Secretaries

23 September 2009

PACIFIC HORIZON INVESTMENT TRUST PLC


CHAIRMAN'S STATEMENT


Performance


In the year to 31 July 2009 net asset value per share rose by 0.6%, compared with a rise of 8.3% in the MSCI All Country Far East ex Japan Index in sterling terms. 


Performance over the Company's year was disappointing, although the result hides a great deal of volatility during the period. Early in the year the Company's positions in businesses exposed to shipping, shipbuilding and offshore oil & gas exploration were particularly damaging. This exposure and some stock specific issues were the main reasons for the unsatisfactory result announced at the half year stage and more than offset the favourable impact of the purchase of some convertible bonds during the period, where valuations appeared attractive. On a positive note, performance in the second half of the Company's year has been more encouraging, with net asset value rising 48.8% against a rise of 37.7% in the comparative index. The main contributors to this strong result have been those companies that fell the most in the previous period, as well as some notable individual stock performances. The Managers' report below contains a more detailed explanation, together with a summary of the performance of the principal markets in which the Company is invested and the Managers' comments on them.


As mentioned above, the Company invested in some convertible bonds during the year. These were purchased at what were believed to be distressed prices caused by forced sellers, where the underlying businesses were known to be sound and capable of repaying the bonds when required. Subsequent strong performance of these bonds during the year has reduced their attractions and profits have been taken. At the year end the Company did not hold any convertible bonds. 


The Company was ungeared during the year and at the year end net current assets were equal to 1.9% of shareholders' funds. 


Earnings per share rose by 27.7% to 2.44p from 1.91p for last year. The Board is recommending that a dividend of 1.80p should be paid. 


Share Buy-Backs and Issuance


During the year we did not buy back any shares but market conditions may change and it may be the case that it will at some point in the future be to the advantage of shareholders for the Company to repurchase and cancel shares. We will therefore be asking shareholders to renew the mandate to repurchase up to 14.99% of the outstanding shares at the forthcoming Annual General Meeting. 


Your Board, as in previous years, is seeking shareholder approval to renew the 10% non-pre-emptive issuance authority which is sought annually. Issuance would only be undertaken at a premium to neasset value. This authority, if utilised, enhances net asset value per share for existing shareholders and improves liquidity in the Company's shares. 


  PACIFIC HORIZON INVESTMENT TRUST PLC


CHAIRMAN'S STATEMENT (continued)


Changes to the Board


One new Director has joined the Board during the year. As foretold in last year's Annual Report, in February we were joined by Gerald Smith, the Deputy Chief Investment Officer at Baillie Gifford & Co and the Company's former portfolio manager. His experience and expertise will strengthen the breadth and depth of your Board and I invite shareholders to ratify his appointment at the AGM. He will be subject to annual re-election.


Annual General Meeting


At the Annual General Meeting to be held on 2 November 2009, we are asking shareholders to approve a number of amendments to the Company's Memorandum and Articles of Association. Details of the changes are given in the Appendix to the Notice of Meeting on page 49 within the Annual Report and Financial Statements for the year ended 31 July 2009. 


Outlook


Unlike much of the developed world, the Asia Pacific region is largely in a position of strength and not weakness. Leverage, in aggregate, remains low and government actions appear to have been very sensible to date. Monetary and fiscal policies have been altered rapidly to accommodate the changing environment, and growth looks to be firmly on the agenda. Liquidity is ample and consumer confidence - the missing element noted at the interim results stage - appears to be recovering. Clearly there are still risks to the outlook in the short term. External demand remains weak, and recovery here is likely to take time. Corporate profitability has been hit and some companies are struggling in the current environment. However, even with these factors in mind, it does appear that the region is over the worst.


The longer term prospects for the Asia Pacific region remain encouraging. Structural factors underpinning future growth remain in place: urbanisation, industrialisation, further infrastructure build, the demographic profile and the likelihood of steadily increasing consumer demand, are individually and severally the likely drivers in the region. At the same time consumer, corporate and government balance sheets are in good shape, with savings levels remaining high. The number and quality of companies we can invest in is increasing all the time, and we see no shortage of investment prospects. With valuations remaining at attractive levels, we remain optimistic about the long term outlook.



Peter Mackay

14 September 2009


PACIFIC HORIZON INVESTMENT TRUST PLC


MANAGERS' OVERVIEW


In the year to 31 July 2009 the most striking feature has been the tremendous volatility in markets. Over the year, markets have posted reasonable returns, with the best performer in sterling terms being the Philippines followed by India. The poorest performing markets in sterling terms have been Korea, the only market to post a fall, followed by Singapore. However, this analysis hides significant falls towards the end of 2008 and subsequent strong performance. Taking the Hong Kong market as an example, the market fell 38.6% in the first 3 months of the Company's year only to recover 75.4% of this fall over the next nine months - a truly remarkable turnaround. Sterling weakness boosted returns in almost all markets, the exception being Korea. A geographical review can be found under the 'Managers' Portfolio Review' below. 


In terms of the distribution of assets by geography and industrial sector there were some notable changes. In particular, the weighting in stocks in Hong Kong and China has risen from 30.4% to 43.6%, which has been funded in the main through a decrease in stocks in Singapore and South Korea. By industrial sector there has been a significant fall in the weighting in industrial stocks, driven partly by poor performance but also some reductions over the year. The majority of this money has been reinvested in the Information Technology sector, but sizeable increases to the Consumer Services, Telecommunications and Financials sectors are also apparent. As ever, these changes are driven by the merits of individual stocks and not an overarching top down view.


At the start of the financial year, the Company held large positions in stocks likely to benefit from continued strong economic growth. Our assessment of the outlook transpired to be overly optimistic and a number of stocks tied to this view performed poorly. Investments in areas such as shipping, shipbuilding and offshore oil & gas exploration were particularly harmful, as were, for stock specific reasons, some other holdings such as Bakrie and Brothers, an Indonesian conglomerate. Given our strong belief that the companies we owned were well positioned to deliver strong performances over the medium to long term, we made limited changes to the portfolio during the worst of the falls. One tactical change we did make was to purchase a number of convertible bonds where valuations had been pushed to what we judged to be distressed levels following apparent forced selling. In addition to these convertible bonds we also maintained a higher than usual cash balance over this period, reflecting our cautious attitude.


After the severe market correction, the most prominent feature of markets was the tremendous volatility. Also noteworthy was that some of the strongest performances in the second half of the Company's year were posted by those stocks that fell the most in the first half. Outstanding performances from individual stocks were also very helpful, including the Company's largest holding CNPC Hong Kong which increased 206.9% in sterling terms over the period. We took advantage of the increased levels of volatility by making select investments in those companies with strong growth prospects and sustainable competitive advantages whilst trading at low valuations. These investments were funded mainly out of cash, but we also, after strong performance, decided to take profits progressively from the positions held in convertible bonds to fund the purchases. At the year end the Company held no convertible bonds and the cash balance was 1.9%.

PACIFIC HORIZON INVESTMENT TRUST PLC


MANAGERS' PORTFOLIO REVIEW


Hong Kong and China


At the start of the Company's year, investor confidence in the market, as with almost all markets in the region, was suffering, with the mainland Chinese stockmarket falling 38% to its low point for the year at the start of November. However, a combination of a proactive government, ample liquidity and low valuations resulted in the mainland Chinese stockmarket being one of the best performing markets globally from the start of 2009 to the end of July, up 87.4% in local currency terms. In record time the Chinese government turned from trying to restrict growth to being aggressively expansionary, with easy monetary policy and strong fiscal support. The four trillion Renminbi stimulus package amounting to 13% of GDP was a ringing endorsement of government will. Following close behind was aggressive bank lending, providing sizeable liquidity. As a result of these measures, economic growth appears to have already troughed - growth in the second quarter of 2009 was 7.9% against the rate of growth in the first quarter of 6.1%. Currently it is the export sector that continues to struggle, with domestic demand appearing robust and investment spending firmly underpinned. 


In Hong Kong, the stockmarket resembles ever more a Chinese listing centre, rather than a true reflection of Hong Kong itself, with almost 60% of the market capitalisation accounted for by mainland enterprises. This is perhaps unsurprising given Hong Kong's position as arguably the premier financial hub for China. If anything this position has been further strengthened over the year with initial attempts to internationalise the Renminbi taking a notable step forward. The domestic market in Hong Kong is, however, looking interesting in its own right - ample liquidity and very low interest rates are a potent combination should consumer confidence continue to rebound.


We have made a number of transactions during the Company's year in Hong Kong & China. Before the drastic sell off in markets we had decided to reduce our position in property stocks given a less favourable outlook. We also made select reductions at this time to some of those companies likely to fare worse in a world where capital was less freely available. New positions taken included a basket of Chinese Internet names - well capitalised businesses with the prospects of many years of strong growth - and some of the telecommunications businesses in China, such as China Unicom, China Mobile and ZTE. Over the course of the year purchases of several convertible bonds were made, which, after strong performance, were then sold to fund new positions. These new purchases were across a variety of names, including technology company, Ju Teng and consumer stocks such as Gome and Bosideng. We have also started to buy some of the Hong Kong property names again following the large falls and a much better outlook driven by the ample liquidity and low interest rates noted above.


  PACIFIC HORIZON INVESTMENT TRUST PLC


MANAGERS' PORTFOLIO REVIEW (continued)


Taiwan 


Possibly the most significant news in the region over the course of the Company's year was in Taiwan. In late April China Mobile announced a proposed investment in FarEasTone, a Taiwanese mobile phone operator, and UMC announced its plans to increase its investment in He Jian, a Chinese subsidiary. These landmark deals coincided with Taiwan allowing direct investment in money market instruments by Chinese residents and China agreeing to Taiwan's representation at some UN bodies - something unthinkable only a few years ago. Subsequent to these changes, the number of 'cross-strait' deals announced has been encouraging. The change of government we noted at this time last year appears to be delivering on its mandate, albeit more slowly than expected. As a result of these changes, we decided to purchase a new holding in MediaTek, the integrated circuit design house specialising in mobile phone chipsets for the Chinese market. Other new purchases over the year have included the purchase of Asustek, the company behind the first netbook, and Prime View, the company behind the screen technology of the highly successful Kindle book reader from Amazon.


Korea


In sterling terms, Korea was the worst performing market. A combination of export reliance and a banking industry struggling against a backdrop of deteriorating asset quality were key issues. The currency was also under pressure over the course of the year, with a 'dollar shortage' causing ripples in financial markets. We decided to reduce a number of our Korean holdings at this time given our negative outlook for the Won. A notable new buy in the portfolio has been Samsung Electronics, the technology company with leading positions in memory, LCD panels and mobile phones, and it is currently the second largest holding in the portfolio. More recent activity has included the purchase of Hyundai Development, a leading house builder.


Singapore


In local currency terms the Singaporean market posted one of the worst returns in the region, however Singaporean dollar strength helped sterling returns. With the economy heavily reliant on exports and financial markets, it is perhaps unsurprising that Singapore has been one of the hardest hit, with GDP growth falling at an annualised rate of 20% in the first quarter of 2009. However, with negative real rates and improving financial markets there are reasons for optimism. On stock news, an offer for Singapore Petroleum was made by PetroChina during the year which has been accepted. 


Indonesia


Indonesia was a very strong performer from the start of 2009 to the end of the Company's year, as investors realised that Indonesia, along with China and India, will be one of few economies to post growth this year. As inflationary concerns have abated, falling interest rates have fed through to higher expectations for consumption and several stocks exposed to that theme have performed strongly. Political worries have also subsided with the incumbent President being re- elected with a larger share of the vote. Over the course of the year we made additions to PT

PACIFIC HORIZON INVESTMENT TRUST PLC


MANAGERS' PORTFOLIO REVIEW (continued)


Indonesia (continued)


Telekomuniksi, the leading telecoms company, and have taken new holdings in Perusahaan Gas, a growth utility, and Bank Mandiri and Bank Rakyat, two of the leading commercial banks.

Malaysia


Despite the economy's heavy reliance on exports, the Malaysian market was one of the better performers, with strong outperformance when regional markets were falling. Subsequent performance has, however, been less impressive. Changes to the portfolio have been limited with reductions to Digi and Sime Darby to fund better opportunities elsewhere.


Thailand


Towards the start of the Company's year Thailand once again descended into political shambles with the airport seized by activists and three of the coalition parties eventually found guilty of election fraud. Further rumblings continued throughout the year and politics will remain a key area of risk in the future. Valuations continue to appear cheap, although many investors have shied away given the political issues. The main change to the portfolio has been the purchase of two of the banks - Siam Commercial Bank, a leader in retail lending, and Bank of Ayudhya, on expectations of operational improvements.


India


The election result was the big news in India over the year. Whilst the Congress-led United Progressive Alliance won as expected, the scale of victory took the market by surprise. Expectations now are for easier enactment of reforms, and likely sales of stakes in government owned companies - a process that has already begun. These positives are, perhaps, still offset by the difficult fiscal position the country struggles with and higher valuations of companies. However, we are finding opportunities to make select investments - HDFC, the mortgage provider, and Mahindra & Mahindra, the industrial conglomerate, are two such examples.


Philippines

 

The Philippines was the strongest performer over the year in sterling terms. This is despite continued concerns surrounding overseas remittances (a substantial source of capital inflow) and the fiscal position. During the year one of our holdings, e-Telecare, was bought by another of our holdings, Ayala Corp.


Vietnam


The Vietnamese market was one of the stronger performers over the financial year, with sterling weakness contributing significantly. The emerging bubble from excess credit growth seems to have dissipated satisfactorily and economic growth is expected to remain resilient despite the situation in the rest of the world. The long term prospects for the country remain attractive and valuations, once high, now look more appropriate. We made a small addition to one of the closed ended funds we hold, allowing us access to the market at a healthy discount.

  PACIFIC HORIZON INVESTMENT TRUST PLC  


THIRTY LARGEST EQUITY HOLDINGS

at 31 July 2009



 


Name



Country



Business


Value

£'000

% of total

assets






CNPC Hong Kong

HK/China

Oil and gas exploration and production

6,746

6.4

Samsung Electronics

Korea

Semiconductor manufacturer

4,900

4.6

Taiwan Semiconductor Manufacturing

Taiwan

Semiconductor manufacturer

3,591

3.4

Singapore Exchange

Singapore

Stock exchange

3,068

2.9

ASM Pacific Technology

HK/China

Semiconductor equipment manufacturer

3,018

2.8

ZTE

HK/China

Telecommunications equipment provider

2,833

2.7

PT Telekomunikasi

Indonesia

Diversified telecommunications provider

2,763

2.6

Parkson Holdings

Malaysia

Department store owner and operator

2,619

2.5

China Unicom

HK/China

Diversified telecommunications provider

2,499

2.4

Hon Hai Precision Industries

Taiwan

Electronic manufacturing services company

2,338

2.2

Li & Fung

HK/China

Supply chain management

2,178

2.1

Hang Seng Bank

HK/China

Banking services

2,090

2.0

CNOOC

HK/China

Oil and gas exploration and production

2,039

1.9

China Resources Enterprise

HK/China

Consumer conglomerate

1,839

1.7

Dongfang Electric

HK/China

Power equipment manufacturer

1,795

1.7

China National Building Material

HK/China

Building materials manufacturer

1,765

1.7

CapitaMall Trust

Singapore

Real estate investment trust

1,655

1.6

Pacific Basin Shipping

HK/China

Shipping company

1,619

1.5

Hidili Industry International 

  Development


HK/China


Coal producer


1,567


1.5

Samsung Fire & Marine

Korea

Non-life insurance provider

1,480

1.4

Hong Kong Exchanges and Clearing

HK/China

Stock exchange

1,411

1.3

China Mobile

HK/China

Wireless telecommunications provider

1,401

1.3

Yuanta Financial

Taiwan

Financial holding company

1,393

1.3

Ayala Corp

Philippines

Investment holding company

1,355

1.3

China Shenhua Energy

HK/China

Coal producer

1,334

1.3

Kuala Lumpur Kepong

Malaysia

Palm oil producer and refiner

1,307

1.2

MobileOne

Singapore

Wireless telecommunications provider

1,290

1.2

Prime View International

Taiwan

Electronic components

1,262

1.2

Wumart Stores

HK/China

Supermarket

1,238

1.2

Mermaid Maritime

Thailand

Oil services

1,204

1.1




65,597

62.0


HK/China denotes Hong Kong and China

All stocks are listed overseas.

‡ Total assets less current liabilities and deferred tax.


PACIFIC HORIZON INVESTMENT TRUST PLC


DISTRIBUTION OF ASSETS

 




At 31 July 

2009

%


At 31 July 2008

%

Equities:

Hong Kong and China

43.6


30.4


Taiwan

11.4


9.0


Korea

11.3


16.1


Singapore

10.2


14.3


Indonesia

5.6


4.7


Malaysia

5.5


7.9


Thailand

5.0


5.7


India

3.2


3.6


Philippines

1.3


1.7


Vietnam

1.0


1.4

Total equities

98.1


94.8

Net liquid assets

1.9


5.2

Total assets at fair value

100.0


100.0



‡ Total assets less current liabilities and deferred tax.


  PACIFIC HORIZON INVESTMENT TRUST PLC


RELATED PARTY TRANSACTIONS


The Directors' fees for the year are detailed in the Directors' Remuneration Report. No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under section 412 of the Companies Act 2006 other than Mr GTE Smith, who was appointed as a Director of the Company on 1 February 2009, is a partner of Baillie Gifford & Co. Baillie Gifford & Co are employed by the Company as Managers and Secretaries under a management agreement which is terminable on not less than twelve months' notice, or on shorter notice in certain circumstances. The fee in respect of each quarter is 0.25% of the total assets less current liabilities. The details of the management fee are as follows:


2009

£'000


2008

£'000

Investment management fee

814


1,249


PRINCIPAL RISKS AND UNCERTAINTIES


As an Investment Trust, the Company invests in equities and makes other investments so as to achieve its investment objective of maximising capital appreciation, from a focused and actively managed portfolio of investments from the Asia-Pacific region including the Indian Sub-continent. In pursuing its investment objective, the Company is exposed to various types of risk that are associated with the financial instruments and markets in which it invests.


These risks are categorised here as market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. The Board monitors closely the Company's exposures to these risks but does so in order to reduce the likelihood of a permanent loss of capital rather than to minimise short term volatility. Risk provides the potential for both losses and gains. In assessing risk, the Board encourages the Managers to exploit the opportunities that risk affords.


The risk management policies and procedures outlined in this note have not changed substantially from the previous accounting period.


Market Risk


The fair value or future cash flows of a financial instrument or other investment held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - currency risk, interest rate risk and other price risk. The Board of Directors reviews and agrees policies for managing these risks and the Company's Investment Managers both assess the exposure to market risk when making individual investment decisions and monitor the overall level of market risk across the investment portfolio.


The Company may, from time to time, enter into derivative transactions to hedge specific market, currency or interest rate risk. During the year to 31 July 2009 no such transactions were entered into.


The Company's Managers may not enter into derivative transactions without the prior approval of the Board.

PACIFIC HORIZON INVESTMENT TRUST PLC


PRINCIPAL RISKS AND UNCERTAINTIES (continued)


Currency Risk


The majority of the Company's assets, liabilities and income are denominated in currencies other than sterling (the Company's functional currency and that in which it reports its results). Consequently, movements in exchange rates may affect the sterling value of those items.


The Investment Managers monitor the Company's exposure to foreign currencies and report to the Board on a regular basis. The Investment Managers assess the risk to the Company of the foreign currency exposure by considering the effect on the Company's net asset value and income of a movement in the rates of exchange to which the Company's assets, liabilities, income and expenses are exposed. However, the country in which a company is listed is not necessarily where it earns its profits. The movement in exchange rates on overseas earnings may have a more significant impact upon a company's valuation than a simple translation of the currency in which the company is quoted.


Foreign currency borrowings can limit the Company's exposure to anticipated future changes in exchange rates which might otherwise adversely affect the value of the portfolio of investments.


Exposure to currency risk through asset allocation, which is calculated by reference to the currency in which the asset or liability is quoted, is shown below.




At 31 July 2009


Investments

£'000


Cash and deposits

£'000

Other debtors and creditors*

£'000


Net exposure

£'000

Hong Kong dollar

43,009


1,053

-


44,062

Taiwan dollar

12,020


-

232


12,252

Korean won

12,006


-

6


12,012

Singapore dollar

11,831


926

83


12,840

Indonesian rupiah

5,927


-

7


5,934

Malaysian dollar

5,781


-

8


5,789

Other overseas currencies

13,257


11

1


13,269

Total exposure to currency risk

103,831


1,990

337


106,158

Sterling

-


129

(436)


(307)


103,831


2,119

(99)


105,851

  • Includes net non-monetary assets of £10,000.



    At 31 July 2008


    Investments

    £'000


    Cash and deposits

    £'000

    Other debtors and creditors*

    £'000


    Net exposure

    £'000

    Hong Kong dollar

    31,956


    -

    -


    31,956

    Taiwan dollar

    9,442


    684

    318


    10,444

    Korean won

    16,979


    -

    -


    16,979

    Singapore dollar

    16,521


    -

    33


    16,554

    Indonesian rupiah

    4,890


    -

    -


    4,890

    Malaysian dollar

    8,291


    -

    11


    8,302

    Other overseas currencies

    11,617


    -

    7


    11,624

    Total exposure to currency risk

    99,696


    684

    369


    100,749

    Sterling

    -


    5,025

    (606)


    4,419


    99,696


    5,709

    (237)


    105,168

Includes net non-monetary assets of £11,000.


PACIFIC HORIZON INVESTMENT TRUST PLC


PRINCIPAL RISKS AND UNCERTAINTIES (continued)


Currency Risk Sensitivity 

At 31 July 2009, if sterling had strengthened by 5% in relation to all currencies, with all other variables held constant, total net assets and total return on ordinary activities would have decreased by the amounts shown below. A 5% weakening of sterling against all currencies, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts. The analysis is performed on the same basis for 2008.



2009

£'000


2008

£'000

Hong Kong dollar

2,203


1,598

Taiwan dollar

613


522

Korean won

601


849

Singapore dollar

642


827

Indonesian rupiah

297


245

Malaysian dollar

289


415

Other overseas currencies

663


581


5,308


5,037


Interest Rate Risk


Interest rate movements may affect directly:


• the fair value of any investments in fixed interest rate securities;

• the level of income receivable on cash deposits;

• the fair value of any fixed-rate borrowings; and

• the interest payable on any variable rate borrowings.


Interest rate movements may also impact upon the market value of investments outwith fixed income securities. The effect of interest rate movements upon the earnings of a company may have a significant impact upon the valuation of that company's equity.


The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions and when entering borrowing agreements.


The Board reviews on a regular basis the amount of investments in cash and fixed income securities and the income receivable on cash deposits, floating rate notes and other similar investments.


The Company may finance part of its activities through borrowings at approved levels. The amount of any such borrowings and the approved levels are monitored and reviewed regularly by the Board. Movements in interest rates, to the extent that they affect the market value of the Company's fixed rate borrowings, may also affect the amount by which the Company's share price is at a discount or a premium to the net asset value, on the assumption that the share price is unaffected by movements in interest rates.


The cash deposits generally comprise call or short term money market deposits of less than one month which are repayable on demand. The benchmark rate which determines the interest payments received on cash balances is the bank base rate.

PACIFIC HORIZON INVESTMENT TRUST PLC


PRINCIPAL RISKS AND UNCERTAINTIES (continued)


Interest Rate Risk Sensitivity


The sensitivity analyses below have been determined based on the exposure to interest rates at the balance sheet date and with the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates. If interest rates had been 100 basis points higher or lower and all other variables were held constant, the Company's profit for the year ended 31 July 2009 would increase/decrease by £21,000 (2008 - increase/decrease by £57,000). This is mainly due to the Company's exposure to interest rates on its floating rate cash balances.


Other Price Risk


Changes in market prices other than those arising from interest rate risk or currency risk may also affect the value of the Company's net assets. The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Investment Managers. The Board meets regularly and at each meeting reviews investment performance, the investment portfolio and the rationale for the current investment positioning to ensure consistency with the Company's objectives and investment policies. The portfolio does not seek to reproduce the index. Investments are selected based upon the merit of individual companies and therefore performance may well diverge from the comparative index.


Other Price Risk Sensitivity


Fixed asset investments are valued at bid prices which equate to their fair value. A full list of the Company's investments is given on pages 14 and 15 of the Annual Report. In addition, a geographical analysis of the portfolio, an analysis of the investment portfolio by broad industrial or commercial sector and a list of the 30 largest equity investments by their aggregate market value are contained in the Managers' Portfolio Review Section in the Annual Report.


98.1% of the Company's net assets are invested in equities. A 5% increase in quoted equity valuations at 31 July 2009 would have increased total assets and total return on ordinary activities by £5,192,000 (2008 - £4,985,000). A decrease of 5% would have had an equal but opposite effect.


Liquidity Risk


This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.


Liquidity risk is not significant as the majority of the Company's assets are investments in quoted securities that are readily realisable. The Board provides guidance to the Investment Managers as to the maximum exposure to any one holding and to the maximum aggregate exposure to substantial holdings. The Company has the power to take out borrowings, which give it access to additional funding when required.



PACIFIC HORIZON INVESTMENT TRUST PLC


PRINCIPAL RISKS AND UNCERTAINTIES (continued)


Credit Risk


This is the risk that a failure of counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss.


This risk is managed as follows:


  • Where the Investment Managers make an investment in a bond or other security with credit risk, that credit risk is assessed and then compared to the prospective investment return of the security in question.

  • The Company's listed investments are held on its behalf by The Bank of New York Mellon acting as agent, the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed. The Investment Managers monitor the Company's risk by reviewing the custodian's internal control reports and reporting its findings to the Board.

  • Investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the Investment Managers. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations before any transfer of cash or securities away from the Company is completed.

  • The creditworthiness of the counterparty to transactions involving derivatives, structured notes and other arrangements, wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest, are subject to rigorous assessment by the Investment Manager.

  • Cash is only held at banks that have been identified by the Managers as reputable and of high credit quality.


Credit Risk Exposure

The exposure to credit risk at 31 July was:



2009

£'000

2008

£'000

Cash and short term deposits

2,119

5,709

Debtors and prepayments

350

382


2,469

6,091


The maximum exposure in cash during the year was £7,630,000 (2008 - £8,170,000) and the minimum £728,000 (2008 - £664,000).


None of the Company's financial assets are past due or impaired.


Fair Value of Financial Assets and Financial Liabilities


The Directors are of the opinion that the financial assets and liabilities of the Company are stated at fair value in the balance sheet.

PACIFIC HORIZON INVESTMENT TRUST PLC


PRINCIPAL RISKS AND UNCERTAINTIES (continued)


Capital Management


The Company does not have any externally imposed capital requirements. The capital of the Company is the ordinary share capital as detailed in note 13 in the Annual Report. It is managed in accordance with its investment policy in pursuit of its investment objective, both of which are detailed on page 19 of the Annual Report. Shares may be issued and/or repurchased as explained on pages 25 and 26 of the Annual Report. 


Other Risks

Other risks faced by the Company include the following:


Regulatory Risk - failure to comply with applicable legal and regulatory requirements could lead to suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report. Breach of section 842 of the Income and Corporation Taxes Act 1988 could lead to the Company being subject to tax on capital gains. The Managers monitor investment movements and the level of forecast income and expenditure to ensure the provisions of section 842 are not breached. Baillie Gifford's Heads of Business Risk & Internal Audit and Regulatory Risk provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes.


Operational/Financial Risk - failure of the Managers' accounting systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. The Board reviews the Managers' Report on Internal Controls and the reports by other key third party providers are reviewed by the Managers on behalf of the Board.


Discount Volatility - the discount at which the Company's shares trade can widen. The Board monitors the level of discount and the Company has authority to buyback its own shares.




PACIFIC HORIZON INVESTMENT TRUST PLC


STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS


The Directors are responsible for preparing the Annual Report and Accounts and the Financial Statements in accordance with applicable law and regulations.


Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:


  • select suitable accounting policies and then apply them consistently;

  • make judgements and accounting estimates that are reasonable and prudent; and

  • state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements respectively. 


The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 


Under applicable law and regulations the Directors are also responsible for preparing a Directors' Report (including a Business Review), Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations. 


The Directors have delegated responsibility to the Managers for the maintenance and integrity of the Company's page of the Managers' website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.


Each of the Directors, whose names and functions are listed within the Directors and Managers section confirm that, to the best of their knowledge:

  • the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

  • the Directors' Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks uncertainties that it faces.


By order of the Board

PETER MACKAY

14 September 2009

PACIFIC HORIZON INVESTMENT TRUST PLC


INCOME STATEMENT



For the year ended

31 July 2009


For the year ended

31 July 2008


Revenue

£'000

Capital

£'000

Total

£'000


Revenue

£'000

Capital

£'000

Total

£'000


Losses on investments



(1,017)


(1,017)




(26,078)


(26,078)

Currency gains/(losses) 

803 

803 


(51)

(51)

Income from investments and interest receivable


3,579 



3,579 



3,602 



3,602 

Investment management fee

(814)

(814)


(1,249)

(1,249)

Recovered VAT (note 2)


Other administrative expenses


(249)

(249)


(263)

(263)

Net return on ordinary activities before taxation


2,516 


(214)


2,302 



2,099 


(26,129)


(24,030)


Tax on ordinary activities


(601)



(601)



(608)



(608)

Net return on ordinary activities after taxation


1,915 


(214)


1,701 



1,491 


(26,129)


(24,638)

Net return per ordinary share

(note 3)


2.44p


(0.27p)


2.17p



1.91p


(33.49p)


(31.58p)



The total column of the Income Statement is the profit and loss account of the Company.


All revenue and capital items in this statement derive from continuing operations. No operations were acquired or discontinued during the year.


A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement.

    

  PACIFIC HORIZON INVESTMENT TRUST PLC


BALANCE SHEET


 
  At 31 July 2009
  At 31 July 2008
 
£'000
£'000
£'000
£'000
 
FIXED ASSETS
Investments held at fair value through profit or loss
 
 
 
103,831
 
 
 
99,696 
CURRENT ASSETS
 
 
 
 
Debtors
350 
 
382 
 
Cash and short term deposits
2,119 
 
5,709 
 
 
2,469 
 
6,091 
 
CREDITORS
Amounts falling due within one year 
 
(449)
 
 
(541)
 
NET CURRENT ASSETS
 
2,020
 
5,550 
 
TOTAL ASSETS LESS CURRENT LIABILITIES
 
 
105,851
 
 
105,246 
PROVISIONS FOR LIABILITIES AND CHARGES
 
 
 
 
Deferred taxation 
 
-
 
(78)
 
 
105,851
 
105,168 
 
CAPITAL AND RESERVES
 
 
 
 
Called-up share capital
 
7,829
 
7,829 
Share premium
 
3,166
 
3,166 
Special distributable reserve
 
13,233
 
13,233 
Capital redemption reserve
 
17,964
 
17,964 
Capital reserve 
 
58,923
 
59,137  
Revenue reserve
 
4,736
 
3,839 
SHAREHOLDERS' FUNDS
 
105,851
 
105,168 



NET ASSET VALUE PER ORDINARY SHARE
 
135.21p
 
134.34p
 
ORDINARY SHARES IN ISSUE 
(note 6)
 


78,287,002 
 


78,287,002



 

PACIFIC HORIZON INVESTMENT TRUST PLC


RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS



For the year ended 31 July 2009 



Note

Called-up share capital

£'000


Share premium 

£'000

Special distributable reserve

£'000 

Capital redemption reserve

£'000


Capital reserve 

£'000


Revenue reserve

£'000


Shareholders' funds

£'000

Shareholders' funds at 1 August 2008


7,829

3,166

13,233

17,964

59,137 

3,839 

105,168 

Net return on ordinary activities after taxation


-

-

-

-

(214)

1,915 

1,701 

Dividends paid during the year

4

-

-

-

-

(1,018)

(1,018)

Shareholders' funds at 31 July 2009


7,829

3,166

13,233

17,964

58,923 

4,736 

105,851 






For the year ended 31 July 2008 



Note

Called-up

share capital

£'000


Share premium 

£'000

Special distributable reserve

£'000 

Capital redemption reserve

£'000


Capital reserve

£'000


Revenue reserve

£'000


 Shareholders' funds

£'000

Shareholders' funds at 1 August 2007 


7,794

2,615

13,233

17,964

85,266 

3,205 

130,077 

Net return on ordinary activities after taxation


-

-

-

-

(26,129)

1,491 

(24,638)

Shares issued in the year 

6

35

551

-

-

586 

Dividends paid during the year

4

-

-

-

-

(857)

(857)

Shareholders' funds at 31 July 2008


7,829

3,166

13,233

17,964

59,137 

3,839 

105,168 







PACIFIC HORIZON INVESTMENT TRUST PLC


CASH FLOW STATEMENT




For the year ended

31 July 2009

For the year ended

31 July 2008


Note

£'000

£'000

£'000

£'000

NET CASH INFLOW FROM OPERATING ACTIVITIES





2,886 




1,740 


TAXATION







Corporation tax paid


(632)



(549)


TOTAL TAX PAID



(632)



(549)


FINANCIAL INVESTMENT







Acquisitions of investments


(39,589)



(67,549)


Disposals of investments


34,763 



70,620 



NET CASH (OUTFLOW)/INFLOW FROM FINANCIAL INVESTMENT





(4,826)





3,071 


EQUITY DIVIDEND PAID

4


(1,018)



(857)


NET CASH (OUTFLOW)/ INFLOW BEFORE FINANCING





(3,590)





3,405 


FINANCING







Shares issued

6



586 


NET CASH INFLOW FROM FINANCING





586 

(DECREASE)/INCREASE IN CASH



(3,590)



3,991 








RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS







(Decrease)/increase in cash in the year 



(3,590)



3,991 

MOVEMENT IN NET FUNDS IN THE YEAR



(3,590)



3,991 


NET FUNDS AT 1 AUGUST




5,709 




1,718 


NET FUNDS AT 31 JULY 




2,119 




5,709 








RECONCILIATION OF NET RETURN BEFORE FINANCE COSTS AND TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES







Net return on ordinary activities before finance costs and taxation




2,302 




(24,030)

Losses on investments - securities



1,017 



26,078 

Currency (gains)/losses



(803)



51 

Amortisation of fixed interest book cost



(326)



Decrease/(increase) in accrued income



39 



(151)

Increase in debtors





46 

Decrease in creditors



(6)



(77)

Realised currency gain/(loss)



803 



(51)

Overseas tax suffered



(140)



(126)

NET CASH INFLOW FROM OPERATING ACTIVITIES




2,886




1,740 


PACIFIC HORIZON INVESTMENT TRUST PLC


NOTES






1.

The financial statements for the year to 31 July 2009 have been prepared on the basis of the accounting policies set out in the Company's Annual Financial Statements at 31 July 2009, which are unchanged from the prior year and have been applied consistently.



2.

Recovered VAT

In 2007 the European Court of Justice ruled that investment trust management fees should be exempt from VAT. Since then HMRC has accepted the Managers' repayment claims for the periods from 1990 to 1996 and from 2000 to 2007. £9,000 of VAT together with £6,000 of interest was received by the Managers on behalf of the Company in respect of these periods. These amounts have been paid to the Company and were recognised in the year to 31 July 2008.





2009

£'000


2008

£'000






3.

Net return per ordinary share





Revenue return

1,915 


1,491 


Capital return

(214)


(26,129)


Total return

1,701 


(24,638)



Weighted average number of ordinary shares in issue



78,287,002




78,025,936 



Net return per ordinary share figures are based on the above totals for revenue and capital and the weighted average number of ordinary shares in issue each period.


There are no dilutive or potentially dilutive shares in issue.




2009

2008

2009

2008





£'000

£'000

4.

Ordinary Dividends






Amounts recognised as distributions in the period:






Previous year's final (paid 31 October 2008)

1.30p

1.10p

1,018

857








We also set out below the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of section 842 of the Income and Corporation Taxes Act 1988 are considered. The revenue available for distribution by way of dividend for the year is £1,915,000 (2008 - £1,491,000).




2009

2008

2009

2008





£'000

£'000


Dividends paid and proposed in respect of the financial year:






Proposed final dividend per ordinary share (payable 4 November 2009)


1.80p


1.30p


1,409


1,018








If approved, the proposed final dividend of 1.80p per ordinary share for the year ended 31 July 2009 will be paid on 4 November 2009 to shareholders on the register at the close of business on 9 October 2009. The ex-dividend date is 7 October 2009. 



5.

The Company had no borrowings at 31 July 2009 or 31 July 2008. 



PACIFIC HORIZON INVESTMENT TRUST PLC


NOTES (Continued)


6.

The Company has authority to allot shares under section 80 of the Companies Act 1985. The Board has authorised the use of this authority to issue new shares at a premium of not less than 5% in order to enhance the net asset value per share for existing shareholders and improve the liquidity of the Company's shares. In the year to 31 July 2009 no shares were issued. In the year to 31 July 2008 a total of 350,000 ordinary shares of 10p each fully paid were issued for cash amounting to £586,000 of which £35,000 has been applied in increasing the share capital and £551,000 in increasing the share premium account.


The Company has authority to buy back its ordinary shares. The authority was last renewed at the Annual General Meeting on 29 October 2008 in respect of 11,735,221 shares (equivalent to 14.99% of its issued share capital at that date). In the year to 31 July 2009 no ordinary shares were bought back. As a result at 31 July 2009 the Company's authority to buy back shares remains unchanged at 11,735,221 ordinary shares.  


7.

The Company incurred transaction costs on purchases of £84,000 (2008 - £129,000) and on sales of £79,000 (2008 - £173,000).


8.

The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 July 2009. The financial information for 2008 is derived from the Financial Statements for 2008. Those accounts have been delivered to the Registrar of Companies. The Auditors have reported on the 2008 and 2009 accounts, their reports for both years were unqualified and, for the 2008 Accounts, did not contain a statement under section 237(2) or (3) of the Companies Act 1985 and, for the 2009 Accounts, did not contain a statement under sections 495 to 497 of the Companies Act 2006. The statutory accounts for 2009 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.


9.

None of the views expressed in this document should be construed as advice to buy or sell a particular investment.


10.

The Annual Report and Financial Statements including the Notice of Annual General Meeting will be available on the Managers' website www.pacifichorizon.co.uk on or around 23 September 2009. 





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