Annual Financial Report

RNS Number : 9660M

Pacific Horizon Investment Tst PLC

24 September 2012

 

PACIFIC HORIZON INVESTMENT TRUST PLC

 

ANNUAL FINANCIAL REPORT

A copy of the Annual Report and Financial Statements for the year ended 31 July 2012 of Pacific Horizon Investment Trust PLC has been submitted electronically to the National Storage Mechanism and will shortly be available for inspection at http://www.hemscott.com/nsm.do

The Annual Report and Financial Statements for the year ended 31 July 2012 including the Notice of Annual General Meeting is also available on the Pacific Horizon's page of the Baillie Gifford website at:

www.pacifichorizon.co.uk

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 July 2012 which require to be published by DTR 4.1 is set out on the following pages.

Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement.

Baillie Gifford & Co

Company Secretaries

24 September 2012

Chairman's Statement

Performance

In the year to 31 July 2012 the Company's net asset value per share declined 3.7% compared to a decline in the comparative index, MSCI All Country Asia ex Japan Index (in sterling terms), of 10.2% over the same period. The share price declined by 9.4% and the discount widened from 7.6% to 13.1%. The Managers' Review contains a detailed explanation of performance along with thoughts on markets.

Gearing was not used during the year and, at the year end, cash and equivalents were equal to 1.6% of shareholders' funds. Earnings per share were largely unchanged year on year at 1.97p (1.98p for the previous year). The Board is recommending that a dividend of 1.50p should be paid, the same as last year.

The Board reviews portfolio performance at each Board meeting and the Company undertakes an annual strategy review. The Directors are satisfied that the Managers' investment process, philosophy and investment style, with a focus on stock selection rather than top down macro views on sectors and countries, is a sensible strategic approach for investing in the region. Having spoken with our major shareholders last year, the Board believes that this approach is endorsed by the majority of investors.

Share Buy Backs and Discount

During the year the Company bought back a total of 1,880,000 ordinary shares, representing 2.4% of the issued share capital as at 31 July 2011, at a cost of £2,768,000. At the forthcoming AGM we shall be asking shareholders to renew the mandate to repurchase up to 14.99% of the outstanding shares. The Board believes that it would be in the overall best interest of shareholders to commit to buying back shares in an opportunistic fashion rather than to establish and implement a published formula for redemptions.

Management Fee

As of 1 August 2012, the management fee paid by the Company has been amended from 1% of total assets less current liabilities, calculated on a quarterly basis, to 1% of net assets of the Company attributable to its shareholders, calculated on a quarterly basis. This change means that borrowings longer than one year in duration can be drawn without a management fee being levied against them and is therefore of benefit to shareholders.

Annual General Meeting

This year's AGM will take place on 31 October 2012 at the offices of Baillie Gifford & Co in Edinburgh at 10.45am. The Manager will make a presentation and, along with the Board, will answer any questions from shareholders. I hope to see as many of you as possible there.

Outlook

The slowing growth rate of the Chinese economy has been at the forefront of investors' minds over the last year. The Chinese leadership is well aware of this and has made moves to offset the effects of this economic deceleration. Notwithstanding these interventions, the Chinese stock market has been a poor performer over the period. At current levels, however, stock valuations appear attractive. In China, and elsewhere in the region, the export market has been hurt by the problems in the Eurozone, but there is a gradual shift from export-led growth to taking advantage of domestic expansion supported by increasing per capita wealth. The Asian region has demonstrated its resilience and is in a far better position than many Western economies. There are many attractive investment propositions in Asia, providing opportunities to buy into strongly financed companies, with sound management, at attractive valuations.

Jean Matterson

Chairman

10 September 2012

Past performance is not a guide to future performance.

Managers' Review

Investment Environment

We are encouraged that economic performance across the region remains robust. Despite this, stock market performance over the year was disappointing with the MSCI All Country Asia ex Japan Index falling 10.2% in sterling terms in the twelve months to 31 July 2012. Much of the weakness in performance can be attributed to non-Asian issues although investors also became increasingly concerned by the rate and composition of Chinese economic growth, particularly towards the second half of the Company's financial year. 

Outside the region, developed economies continue to struggle as a result of the consequences of the global financial crisis, concerns regarding the future of Europe, and from the requirements of retrenchment necessary to restore financial equilibrium. Debt levels are high in aggregate and consequent falls in spending by governments and consumers have served to reduce global economic activity. For our investment universe the direct impact of consumer and government retrenchment has resulted in reduced demand for the products of some exporters and less availability of financing for those companies using some of the hardest hit banks. Whilst we believe that the portfolio is relatively well protected from these economic headwinds, investor sentiment remains negative and the desire for traditionally 'risky assets' has decreased.

Another reason for investor angst is whether or not the Chinese economy will suffer a sharp slowdown in growth. The general concern is that, as the Chinese economy successfully reduces its dependence on an investment-led growth model, the reduction in spending will be too severe to offset, at a time when China's leading export markets are also suffering. Although demand has yet to soften significantly, commodity companies (a minimal exposure for the Company) have performed poorly. We are more concerned by the additional effects that such a change in growth structure may present and consequently have minimal exposure to high end retailers and the property market.

We view the structural change in Chinese growth as the natural transition of an expanding economy. Whilst investment demand will necessarily fall, the long term aim for China is to foster a more sustainable development path. We would also highlight the willingness and ability of the Chinese leadership to stimulate economic growth and activity, should it be needed. Not only does the state remain in rude health financially, but with a change in leadership due later this year it is highly unlikely that a stumbling economy is the legacy the current leaders wish to pass on. There have already been reserve rate cuts for the banking system, careful easing of property measures and interest rate cuts, and Premier Wen has provided public assurances on more than one occasion. This is in addition to the continued investment in the seven appointed strategic industries and financial support being given to those companies struggling at the smaller end of the scale.

For many of the countries in which we invest it has been an interesting year on the political front. Elections in Korea and Taiwan were won by the incumbent parties which should mean continued progress on reform and will allow closer links with mainland China for the latter. Here we have already observed positive announcements regarding the relaxation of a number of cross-ownership rules and increased tourism ties, with expectations for more to follow. In China, we are still some time away from finding out who will make up the Politburo Standing Committee from the current top echelons of the Chinese Communist Party. Bo Xilai, the Chongqing party leader and previously a leading contender for a seat, has been unceremoniously deposed. He has lost his Chongqing seat and with it any chance of becoming one of China's next leaders. Whilst the detail is obscure it is clear that one of the more controversial contenders has been sidelined at an early stage. China is governed through a collective leadership, an important and unchanging principle.

Hong Kong has a new Chief Executive with a more populist manifesto than most of its business elite were hoping for. Coincident with his election, a fascinating legal case has been started against the owners of one of Hong Kong's largest property companies, Sun Hung Kai Properties. Although we are not investors in this company, we note that the traditional tycoon dominance of this Special Administrative Region may be under threat. Elsewhere, in India the ruling Congress alliance fared poorly in state elections.

There are two areas that present us with challenges: the investor euphoria surrounding some of the smaller emerging ASEAN markets, and the lack of suitable opportunities for investment in India.

In ASEAN markets, investor optimism is particularly noticeable in Indonesia and the Philippines where, despite a lack of real reform in recent years, investors have bid prices of both debt and equity markets to elevated levels. Whilst the quality of some of the companies within these markets is undeniable, we are wary of the sustainability of the macroeconomic environment which is currently booming due to lax central bank and government policies. During the period our portfolio weighting in Indonesia was reduced as we have sold holdings in two companies and our Philippine exposure has increased only due to strong results and a modest rerating of Security Bank. These two markets comprise only 5% of the Company's total assets.

Since adding India to our investment universe in 2006, we have struggled to find many companies with valuations that compare favourably to those available elsewhere. Despite the many positive factors, such as the demographic profile of the country and the high barriers to entry in many industries, the government has not delivered any meaningful reforms, resulting in 'political paralysis' being the catch phrase of the moment. Our exposure to India over the period has fallen, reflecting this lack of suitable opportunities.

Portfolio Review

Much of the Company's outperformance relative to the comparative index is as a result of good individual stock selection rather than asset allocation decisions. With our stock picking style, themes are generally difficult to identify although a number of technology companies have been strong performers. These include Samsung Electronics, an electronics company and the single largest portfolio holding, ASM Pacific Technology, a semiconductor equipment manufacturer, Phison Electronics, a Taiwanese semiconductor products business, and Alibaba.com, an internet business which was subject to a privatisation offer during the period at a healthy premium. Other strong contributors to performance over the period have included top ten holdings Kunlun Energy, a Chinese energy business, Hyundai Glovis, a Korean logistics company and also Security Bank, a small Philippine bank, and Orion Corp, a Korean consumer conglomerate.

The continued focus on Hong Kong as a beneficiary of Renminbi liberalisation is likely to be positive for one of our new holdings, Bank of China (Hong Kong) Limited, given its links to the mainland via its parent company (Bank of China). This bank is now a top ten holding for the Company. We have also taken holdings in Airtac International Group and Hiwin Technologies, both Taiwanese automation companies, as excellent ways to benefit from increased factory automation in China. Tencent Holdings, a Chinese social media platform, has been added to the portfolio given the opportunity to increase monetisation across its range of products and NHN, a Korean internet business, has also been purchased given the long term opportunities available to the business. The other new buys are SFA Engineering, a factory automation and logistics systems manufacturer, which should benefit from continued high investment in next generation technology by the leading semiconductor companies, and Niko Resources, an oil and gas producer with exploration potential in Indonesia.

With concerns over continued investment overspend in China, it is perhaps unsurprising that some of the worst performers over the period are those companies most exposed to this area. China National Building Material, a Chinese building materials manufacturer, Angang Steel, a leading steel manufacturer and Dongfang Electric, a leading power equipment business were all amongst the worst contributors to performance. Stock specific issues have also affected some holdings. Niko Resources, an oil and gas producer, fared badly as reserves were revised down significantly in the Indian part of their business and shares in Ports Design, a fashion retailer, fell sharply following a lengthy suspension which led to additional disclosure of related party transactions. We have also suffered from the poor performance of two companies, Real Gold Mining and Focus Media, due to allegations of fraudulent activity. This is a subject that has come into greater focus in recent months, driven primarily by research companies targeting US-listed Chinese businesses. Whilst determining the accuracy of the claims is often impossible, the implication of fraud is often enough for share prices to react sharply. Both of these holdings have been sold during the period, although in Focus Media's case the sale was for reasons not relating to the allegations.

With the Company's long term investment horizon it should be unsurprising that transactions during the year have been modest. Our turnover level is currently low relative to historical activity. During the year we made 7 new purchases and 17 complete sales, maintaining a low degree of overlap with the comparative index. There has been a conscious decision to reduce the number of holdings (from 79 to 69) to ensure a manageable portfolio whilst not compromising the benefits of diversification. Complete sales have focused on those businesses where we feel the original investment case has been undermined, either through management issues or a change in the investment fundamentals.

The overall shape of the portfolio was little changed over the past year. Our largest absolute positions remain in Hong Kong and China, and Korea, with the Philippines and Vietnam being the smallest. The weighting in Taiwan has increased the most following new purchases of the two automation companies and also good performance from a number of the technology companies held there. Indonesia has reduced the most as we have sold PT Telekomunikasi, a telecommunications business, and Perusahaan Gas, a gas utility. By sector, information technology and financials are the largest in absolute terms, accounting for 28.5% and 28.1% of the Company respectively. Over the year the largest increase has been to the technology weighting due both to new purchases of Tencent Holdings and NHN and good performances by companies already held. The portfolio continues to be focussed on domestic demand and growth companies; this explains our low exposure to sectors such as materials and utilities.

THIRTY LARGEST EQUITY HOLDINGS at 31 July 2012 (unaudited)

Name	Country	Business	Value £'000	% of total assets‡
Samsung Electronics	Korea	Electronics company	9,015	7.0
Taiwan Semiconductor Manufacturing	Taiwan	Semiconductor manufacturer	5,262	4.1
Kunlun Energy Company	HK/China	Energy business	4,778	3.7
Hyundai Mobis	Korea	Automotive parts producer	3,821	3.0
CNOOC	HK/China	Oil and gas exploration and production	3,491	2.7
Baidu	HK/China	Internet search provider	3,384	2.6
Hyundai Glovis	Korea	Logistics company	3,185	2.5
Ping An Insurance	HK/China	Life insurance provider	3,133	2.4
Bank of China (Hong Kong) Limited	HK/China	Commercial bank	3,026	2.3
ASM Pacific Technology	HK/China	Semiconductor equipment manufacturer	2,974	2.3
China Mobile	HK/China	Wireless telecommunications provider	2,903	2.2
Hon Hai Precision Industries	Taiwan	Electronic manufacturing services company	2,798	2.2
Li & Fung	HK/China	Supply chain management	2,726	2.1
Security Bank	Philippines	Commercial bank	2,682	2.1
China Life Insurance (Taiwan)	Taiwan	Life insurance provider	2,547	2.0
Singapore Exchange	Singapore	Stock exchange	2,546	2.0
Tencent Holdings	HK/China	Internet business	2,517	1.9
Kuala Lumpur Kepong	Malaysia	Palm oil producer and refiner	2,489	1.9
Hyundai Marine and Fire Insurance	Korea	Non-life insurance provider	2,405	1.9
Sembcorp Marine	Singapore	Shipbuilder	2,266	1.8
MediaTek	Taiwan	Integrated circuit design house	2,164	1.7
Orion Corp	Korea	Consumer conglomerate	2,160	1.7
Samsung Fire & Marine	Korea	Non-life insurance provider	2,077	1.6
CapitaMall Trust	Singapore	Real estate investment trust	1,874	1.5
Ports Design	HK/China	Apparel retailer	1,851	1.4
China Petroleum & Chemical Corporation	HK/China	Integrated oil and gas producer	1,720	1.3
Ascendas Real Estate	Singapore	Real estate investment trust	1,690	1.3
Siam Commercial Bank	Thailand	Commercial bank	1,685	1.3
Phison Electronics	Taiwan	Semiconductor products	1,665	1.3
Bangkok Bank	Thailand	Commercial bank	1,607	1.2
			86,441	67.0

HK/China denotes Hong Kong and China

All stocks are listed overseas.

‡ Total assets less current liabilities.

DISTRIBUTION OF ASSETS

		At 31 July 2012 %		At 31 July 2011 %
Equities:	Hong Kong and China	33.3		34.9
	Korea	20.7		21.0
	Taiwan	15.4		13.4
	Singapore	9.8		10.0
	Malaysia	5.2		5.0
	Thailand	3.8		3.2
	India	3.3		4.3
	Indonesia	2.9		4.8
	Philippines	2.1		1.2
	Vietnam	1.9		1.1
Total equities		98.4		98.9
Net current assets		1.6		1.1
Total assets at fair value‡		100.0		100.0

‡ Total assets less current liabilities.

 

RELATED PARTY TRANSACTIONS

The Directors' fees for the year are detailed in the Directors' Remuneration Report in the Annual Report and Financial Statements. 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. Mr GTE Smith, who was appointed as a Director of the Company on 1 February 2009 and retired on 17 October 2011, is a partner of Baillie Gifford & Co. Baillie Gifford & Co are appointed as investment managers and secretaries to the Company. The Managers may terminate the Management Agreement on six months' notice and the Company may terminate on three months' notice. The fee in respect of each quarter is 0.25% of total assets less current liabilities. With effect from 1 August 2012 the management fee will be 0.25% of net assets in respect of each quarter. The details of the management fee are as follows:

	2012 £'000		2011 £'000
Investment management fee	1,282		1,394

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 on an ongoing basis.

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 2012 no such transactions were entered into.

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

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. The Company had no borrowings in the year to 31 July 2012 or 31 July 2011.

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 2012	Investments £'000	Cash and deposits £'000	Other debtors and creditors* £'000	Net exposure £'000
Hong Kong dollar	39,539	1,630	-	41,169
Korean won	26,773	-	3	26,776
Taiwan dollar	19,886	258	150	20,294
Singapore dollar	12,908	-	183	13,091
Malaysian ringgit	6,704	154	16	6,874
US dollar	6,117	-	(3)	6,114
Thai baht	4,335	-	-	4,335
Indonesian rupiah	3,729	2	-	3,731
Indian rupee	3,260	7	20	3,287
Other overseas currencies	3,744	-	19	3,763
Total exposure to  currency risk	126,995	2,051	388	129,434
Sterling	-	10	(347)	(337)
	126,995	2,061	41	129,097

*      Includes net non-monetary assets of £14,000.

At 31 July 2011	Investments £'000	Cash and deposits £'000	Other debtors and creditors* £'000	Net exposure £'000
Hong Kong dollar	42,325	1,242	-	43,567
Korean won	28,853	-	3	28,856
Taiwan dollar	18,480	-	373	18,853
Singapore dollar	14,034	-	79	14,113
Malaysian ringgit	6,869	-	16	6,885
US dollar	7,467	-	-	7,467
Thai baht	3,649	-	-	3,649
Indonesian rupiah	6,625	-	31	6,656
Indian rupee	5,937	-	23	5,960
Other overseas currencies	1,646	-	66	1,712
Total exposure to  currency risk	135,885	1,242	591	137,718
Sterling	-	207	(575)	(368)
	135,885	1,449	16	137,350

*      Includes net non-monetary assets of £17,000.

Currency Risk Sensitivity

At 31 July 2012, 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 2011.

	2012 £'000		2011 £'000
Hong Kong dollar	2,058		2,178
Korean won	1,339		1,443
Taiwan dollar	1,015		943
Singapore dollar	655		706
Malaysian ringgit	344		344
US dollar	306		373
Thai baht	217		182
Indonesian rupiah	186		333
Indian rupee	164		298
Other overseas currencies	188		86
	6,472		6,886

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.

Interest Rate Risk Sensitivity

The sensitivity analysis 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 (2011 - 100 basis points) and all other variables were held constant, the Company's total net assets and total return on ordinary activities for the year ended 31 July 2012 would increase/decrease by £21,000 (2011 - increase/decrease by £14,000). 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 10 and 11 in the Annual Report and Financial Statements. In addition, a geographical analysis of the portfolio, an analysis of the investment portfolio by broad industrial or commercial sector are shown on page 12 of the Annual Report and Financial Statements

98.4% (2011 - 98.9%) of the Company's net assets are invested in quoted equities. A 5% (2011 - 5%) increase in quoted equity valuations at 31 July 2012 would have increased total assets and total return on ordinary activities by £6,349,000 (2011 - £6,793,000). 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. All liabilities are repayable on demand at a consideration equal to the carrying value shown in the financial statements.

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.

Credit Risk

This is the risk that a failure of a 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 Company's custodian, The Bank of New York Mellon SA/NV (acting as agent). 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 Managers.

• 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:

	2012 £'000	2011 £'000
Cash and short term deposits	2,061	1,449
Debtors and prepayments	409	612
	2,470	2,061

The maximum exposure in cash during the year was £2,638,000 (2011 - £4,036,000) and the minimum (£67,000) (2011 - (£330,000)). 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.

Investments

31 July 2012	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Listed equity	126,972	-	-	126,972
Unlisted equities	-	-	23	23
Total financial asset  investments	126,972	-	23	126,995

31 July 2011	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Listed equity	135,551	-	312	135,863
Unlisted equities	-	-	22	22
Total financial asset  investments	135,551	-	334	135,885

Investments in securities are financial assets designated at fair value through profit or loss on initial recognition. In accordance with Financial Reporting Standard 29 'Financial Instruments: Disclosures', the preceding tables provide an analysis of these investments based on the fair value hierarchy described below, which reflects the reliability and significance of the information used to measure their fair value.

Fair Value Hierarchy

The fair value hierarchy used to analyse the fair values of financial assets is described below. The levels are determined by the lowest (that is the least reliable or least independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:

Level 1 - investments with quoted prices in an active market;

Level 2 - investments whose fair value is based directly on observable current market prices or is indirectly being derived from market prices; and

Level 3 - investments whose fair value is determined using a valuation technique based on assumptions that are not supported by observable current market prices or are not based on observable market data.

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 1159 of the Corporation Tax Act 2010 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 1159 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.

Major regulatory change could impose disproportionate compliance burdens on the Company. In such circumstances representation is made to ensure that the special circumstances of investment trusts are recognised.

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 Managers have a comprehensive business continuity plan which facilitates continued operations of the business in the event of a service disruption or major disaster. 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 buy back its own shares.

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 11 and the reserves in note 12 in the Annual Report and Financial Statements. It is managed in accordance with its investment policy in pursuit of its investment objective, both of which are detailed on page 14 in the Annual Report and Financial Statements. Shares may be issued and/or repurchased as explained on pages 19 and 20 in the Annual Report and Financial Statements.

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

The Directors are responsible for preparing the Annual Report 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.

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 laws and regulations, the Directors are responsible for preparing a Directors' Report (including a Business Review), a Directors' Remuneration Report and a 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.

The work carried out by the Auditor does not involve any consideration of these matters and, accordingly, the Auditor accepts no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

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 net return 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 and uncertainties that it faces.

By order of the Board

JEAN MATTERSON

Chairman

10 September 2012

INCOME STATEMENT

	For the year ended 31 July 2012				For the year ended 31 July 2011
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total £'000
(Losses)/gains on investments	-	(5,919)	(5,919)		-	11,172	11,172
Currency gains/(losses)	-	89	89		-	(76)	(76)
Income (note 2)	3,234	-	3,234		3,441	-	3,441
Investment management fee  (note 3)	(1,282)	-	(1,282)		(1,394)	-	(1,394)
Other administrative expenses	(302)	-	(302)		(307)	-	(307)
Net return on ordinary activities before taxation	1,650	(5,830)	(4,180)		1,740	11,096	12,836
Tax on ordinary activities	(159)	-	(159)		(194)	-	(194)
Net return on ordinary activities after taxation	1,491	(5,830)	(4,339)		1,546	11,096	12,642
Net return per ordinary share (note 4)	1.97p	(7.71p)	(5.74p)		1.98p	14.23p	16.21p

 The total column of this 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.

BALANCE SHEET

	At 31 July 2012		At 31 July 2011
	£'000	£'000	£'000	£'000
FIXED ASSETS Investments held at fair value through profit or loss		126,995		135,885
CURRENT ASSETS
Debtors	409		612
Cash and short term deposits	2,061		1,449
	2,470		2,061
CREDITORS: Amounts falling due within one year	(368)		(596)
NET CURRENT ASSETS		2,102		1,465
TOTAL NET ASSETS		129,097		137,350
CAPITAL AND RESERVES
Called up share capital		7,505		7,693
Share premium		3,166		3,166
Special distributable reserve		8,252		11,020
Capital redemption reserve		18,288		18,100
Capital reserve		86,391		92,221
Revenue reserve		5,495		5,150
SHAREHOLDERS' FUNDS		129,097		137,350

NET ASSET VALUE PER ORDINARY SHARE	172.01p	178.53p
ORDINARY SHARES IN ISSUE	75,052,002	76,932,002

The Financial Statements of Pacific Horizon Investment Trust PLC (Company Registration Number.02342193) were approved and authorised for issue by the Board and signed on 10 September 2012.

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

 

For the year ended 31 July 2012

	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 2011		7,693	3,166	11,020	18,100	92,221	5,150	137,350
Net return on ordinary activities after taxation		-	-	-	-	(5,830)	1,491	(4,339)
Shares purchased for cancellation	7	(188)	-	(2,768)	188	-	-	(2,768)
Dividends paid during the year	5	-	-	-	-	-	(1,146)	(1,146)
Shareholders' funds at 31 July 2012		7,505	3,166	8,252	18,288	86,391	5,495	129,097

For the year ended 31 July 2011

	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 2010		7,829	3,166	13,233	17,964	81,125	4,622	127,939
Net return on ordinary activities after taxation		-	-	-	-	11,096	1,546	12,642
Shares purchased for cancellation	7	(136)	-	(2,213)	136	-	-	(2,213)
Dividends paid during the year	5	-	-	-	-	-	(1,018)	(1,018)
Shareholders' funds at 31 July 2011		7,693	3,166	11,020	18,100	92,221	5,150	137,350

*The capital reserve balance at 31 July 2012 includes investment holding gains on fixed asset investments of £36,971,000 (2011 - £37,635,000).

CASH FLOW STATEMENT
		For the year ended 31 July 2012			For the year  ended 31 July 2011
	Note	£'000	£'000		£'000		£'000
NET CASH INFLOW FROM OPERATING ACTIVITIES	8			1,547			1,560
FINANCIAL INVESTMENT
Acquisitions of investments		(18,009)				(38,027)
Disposals of investments		20,899				38,345
Realised currency gain/(loss)		89				(76)
NET CASH INFLOW FROM FINANCIAL INVESTMENT				2,979			242
EQUITY DIVIDEND PAID	5			(1,146)			(1,018)
NET CASH INFLOW BEFORE FINANCING				3,380			784
FINANCING
Shares bought back	7	(2,768)				(2,213)
NET CASH OUTFLOW FROM FINANCING				(2,768)			(2,213)
INCREASE/(DECREASE) IN CASH				612			(1,429)
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS
Increase/(decrease) in cash in the year				612			(1,429)
MOVEMENT IN NET FUNDS IN THE YEAR				612			(1,429)
NET FUNDS AT 1 AUGUST				1,449			2,878
NET FUNDS AT 31 JULY				2,061			1,449

NOTES
1.	The financial information within this preliminary announcement has been extracted from the unaudited financial statements for the year to 31 July 2012 and has been prepared on the basis of the accounting policies set out in the Company's Annual Financial Statements at 31 July 2011. In accordance with The Financial Reporting Council's guidance on going concern and liquidity risk the Directors have undertaken a rigorous review of the Company's ability to continue as a going concern. The Company's assets, the majority of which are investments in quoted securities which are readily realisable, exceed its liabilities significantly. The Company has no loans. In accordance with the Company's Articles of Association, shareholders have the right to vote on the continuance of the Company, every five years, the next vote being in 2016. The Directors have no reason to believe that the continuation resolution will not be passed in 2016. After making enquiries and considering the future prospects of the Company and notwithstanding the above, the financial statements have been prepared on the going concern basis as it is the Directors' opinion that the Company will continue in operational existence for the foreseeable future. The Directors consider the Company's functional currency to be sterling as the Company's shareholders are predominantly based in the UK and the Company is subject to the UK's regulatory environment.
		2012 £'000		2011 £'000
2.	Income
	Income from investments	3,234		3,441
3.	Baillie Gifford & Co are employed by the Company as Investment Managers and Secretaries under a management agreement which is terminable by the Managers on six months' notice and by the Company on three months' notice. The fee in respect of each quarter is 0.25% of the total assets less current liabilities. With effect from 1 August 2012 the management fee will be 0.25% of net assets in respect of each quarter.
		2012 £'000		2011 £'000
4.	Net return per ordinary share
	Revenue return on ordinary activities after taxation	1,491		1,546
	Capital return on ordinary activities after taxation	(5,830)		11,096
	Total net return	(4,339)		12,642
	Weighted average number of ordinary shares in issue	75,638,600		77,973,139
	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.

			2012	2011	2012		2011
					£'000		£'000
5.	Ordinary Dividends
	Amounts recognised as distributions in the period:
	Previous year's final (paid 24 October 2011)		1.50p	1.30p	1,146		1,018
	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 1158 of the Corporation Tax Act 2010 are considered. The revenue for the year available for distribution by way of dividend for the year is £1,491,000 (2011 - £1,546,000).
	Dividends paid and proposed in respect of the financial year:
	Proposed final dividend per ordinary share (payable 2 November 2012)		1.50p	1.50p	1,126		1,154
	Adjustment to previous year's final dividend re shares bought back				-		(8)
			1.50p	1.50p	1,126		1,146
	If approved, the proposed final dividend of 1.50p per ordinary share for the year ended 31 July 2012 will be paid on 2 November 2012 to shareholders on the register at the close of business on 12 October 2012. The ex-dividend date is 10 October 2012. The Company's Registrar offers a Dividend Reinvestment Plan and the final date for election for this dividend is 19 October 2012.
6.	The Company had no borrowings at 31 July 2012 or 31 July 2011.
7.	The Company has authority to allot shares under Section 551 of the Companies Act 2006. 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 years to 31 July 2012 and 31 July 2011 no shares were issued. The Company has authority to buy back its ordinary shares. The authority was last renewed at the Annual General Meeting on 17 October 2011 in respect of 11,453,409 shares (equivalent to 14.99% of its issued share capital at that date). In the year to 31 July 2012 a total of 1,880,000 (2011 - 1,355,000) ordinary shares with a nominal value of £188,000 (2011 - £135,500) were bought back at a total cost of £2,768,000 (2011 - £2,213,000). At 31 July 2012 the Company had authority to buy back a further 10,098,409 ordinary shares.
				2012 £'000				2011 £'000
8.		RECONCILIATION OF NET RETURN BEFORE TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES
		Net return on ordinary activities before taxation		(4,180)				12,836
		Losses/(gains) on investments		5,919				(11,172)
		Currency (gains)/losses		(89)				76
		Decrease/(increase) in accrued income		319				(225)
		Decrease/(increase) in debtors		6				(1)
		(Decrease)/increase in creditors		(228)				217
		Overseas tax suffered		(200)				(171)
		NET CASH INFLOW FROM OPERATING ACTIVITIES		1,547				1,560
9.	The Company incurred transaction costs on purchases of £31,000 (2011 - £84,000) and on sales of £68,000 (2011 - £89,000), being £99,000 (2011 - £173,000) in total.
10.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 July 2012. The financial information for 2011 is derived from the statutory accounts for 2011. Those accounts have been delivered to the Registrar of Companies. The Auditors have reported on the 2011 accounts, their report was unqualified and did not contain a statement under Section 495, 496 and 497 of the Companies Act 2006. The statutory accounts for 2012 will be finalised on the basis of the financial information presented in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting.
11.	The Report and Accounts will be available on the Company's page on the Managers' website www.pacifichorizon.co.uk on or around 24 September 2012‡.
‡ Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement. None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

- ends -

 

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