Half-year Report

RNS Number : 8367A

Schroder AsiaPacific Fund PLC

03 June 2019

 

3 June 2019

Half Year Report

Schroder AsiaPacific Fund plc (the "Company") hereby submits its Half Year Report for the period ended 31 March 2019 as required by the UK Listing Authority's Disclosure Guidance and Transparency Rule 4.2. 

The Half Year Report is also being published in hard copy format and an electronic copy of that document will shortly be available to download from the Company's website www.schroders.co.uk/asiapacific. Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/8367A_1-2019-5-31.pdf

The Company has submitted a pdf of the hard copy format of its Half Year Report to the National Storage Mechanism and it will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

Enquiries:

Benjamin Hanley

Schroder Investment Management Limited                                           

Tel: [phone]

Half Year Report and Accounts for the six months ended 31 March 2019

Interim Management Report

Chairman's Statement

Performance

During the six month period ended 31 March 2019, the Company's net asset value ("NAV") produced a total return of 2.2% compared to a total return of 1.9% for the benchmark. The marginal outperformance was driven by stock selection.

Further analysis of performance may be found in the Manager's Review.

Management fee

Following its annual review of management arrangements, the board has agreed a reduction in management fee charged to shareholders. The first tier will be removed and fees will be charged at the rate of 0.80% per annum on the first £600 million of assets and 0.75% per annum thereafter, compared to the current fee of 0.90% per annum on the first £300 million, 0.80% on £300 million - £600 million and 0.75% thereafter. The fee will continue to be charged on the value of the Company's assets under management, net of current liabilities other than short-term borrowings.

This will result in a saving for the Company of £300,000 per annum and the change took effect from 1 April 2019.

Discount management

During the period, the board continued to monitor the discount and on 18 December 2018 repurchased 100,000 shares for cancellation. Over the period, the discount reduced from 12.7% at the start of the period to 9.7%. The reduction in the discount, and the share price total return of 6.0% reflects a pick up in interest in the Company's shares. 

Board appointment

The board continues to review its ongoing composition in line with its succession policy. As outlined in my statement in the 2018 annual report, during the period, the nomination committee undertook a search for a new director. I am pleased to welcome Vivien Gould to the board following her appointment by the board, as announced on 21 May 2019. In accordance with the Company's articles of association, a resolution to elect her as a director of the Company will be proposed at the 2020 Annual General Meeting.

Gearing

The Company was 2.6% geared at the beginning of the period, and as at 31 March 2019 the Company held 6.4% net cash. Average gearing during the period was 2.3%. The level of gearing continues to operate within pre-agreed levels so that net gearing does not represent more than 20% of shareholders' funds.

After the period end, on 24 April 2019 the Company renewed its loan facility, increasing the committed amount from £75 million to £100 million. This will allow the Company to continue to take advantage of attractive opportunities in the market as they arise.

Change in independent auditor

Following a competitive tender process which excluded the incumbent, PwC LLP, on the grounds of length of service, the board approved the appointment of Ernst & Young LLP as the Company's auditor for the financial year ending 30 September 2019.

The appointment of Ernst & Young LLP as auditor for the financial year ending 30 September 2020 will be subject to approval by shareholders at the Company's next Annual General Meeting, to be held in January 2020.  The board would like to thank PwC LLP, which formally ceased to hold office as the Company's auditor on 31 May 2019, for its professional service to the Company during its tenure in office. In accordance with legislative requirements, a copy of PwC's resignation letter, including a statement of its reasons for ceasing to hold office, is being circulated to all shareholders.

Outlook

There is a sense that the trade frictions between China and the US are approaching a pivotal moment.  While the outcome is hard to anticipate, and will remain a major influence on short-term market movements, we want the portfolio to stay true to what created its historic success: finding Asia's winners.

Asia is full of companies ideally placed to create or exploit the technologies of the future and the continued growth of the local economies. Your Company will continue to provide investors with a carefully selected portfolio of the best of them.

Nicholas Smith

Chairman

3 June 2019

Manager's Review

The net asset value per share of the Company recorded a total return of +2.2% over the six months to end March 2019. This was modestly ahead of the performance of the benchmark, which was up +1.9% over the same period. (Source: Morningstar, net of fees).

Pacific ex Japan equities ended slightly up over the period as a whole, but this disguises a high level of volatility. Concerns over tightening global liquidity, a stronger dollar, slower growth across developed markets outside the United States, slowing data from China, rising trade tensions and weaker trade trends weighed on regional markets in the latter months of 2018. 

Come the turn of the year, there was a sharp rebound despite little economic recovery being immediately evident and continued downward revisions in corporate earnings. However, valuations had fallen to historically attractive levels which under-pinned the case for modest recovery and a shift to a less hawkish stance by the US Federal Reserve (the "Fed") undoubtedly helped sentiment. Other factors included some signs of a loosening in credit conditions in China along with other measures including tax cuts and targeted infrastructure spending.

Indonesia, the Philippines and Hong Kong have been the outstanding performers. In the former, growing confidence over the Presidential election (which the more market friendly Jokowi indeed won) and stability in the currency supported returns. The Philippines has proved a 'safe haven' amid global economic uncertainty, while a more dovish outlook for interest rates and liquidity aided the asset heavy Hong Kong market. Weak performances in Korea and Taiwan reflected their trade sensitivity and, more specifically, the downturn in the semiconductor cycle. A combination of political uncertainty and weak external balances undermined Pakistan.

Performance and portfolio activity

Stock selection in Korea added significant value, while the Company benefitted from the overweight position in Hong Kong despite stock selection slightly lagging in that market. Underweights in Taiwan and Malaysia, along with the exposure to Australian resources also added value. Factors on the negative side included stock selection in Singapore, the out-of-index Vietnam exposure and the underweight in Indonesia. Underweights in India and China were headwinds, but in aggregate this was more than compensated for by robust stock performance.

Over the period as a whole, we moved from a modestly geared position to net cash, with sales particularly in China and Korea, and thus moving even more underweight in both markets. Amid volatile market conditions, we have sought to build up oversold high conviction holdings, funded from a number of smaller positions where, for a variety of reasons, our confidence has faded. Areas where we added included Hong Kong, Singapore and India. Among the major markets the Company closed the period overweight Hong Kong, underweight China and Korea, modestly underweight Taiwan and neutral in India. In sector terms key overweights are in information technology, consumer discretionary and (marginally) industrials, while being underweight communication services, consumer staples and utilities.

Outlook and policy

As mentioned above, a shift in policy stance from the Fed and the Chinese authorities towards more accommodative positions have marked a significant reversal in sentiment coming into 2019. A more dovish Fed commentary has significantly lowered market expectations for future interest rate increases, and long bond yields have come down from their November highs. A flattening yield curve, with short interest rates close to long bond yields, points to slower global growth, but as the US dollar remains the key reserve currency it allows Asian monetary authorities scope to adjust their own policy stances given that inflationary pressures are uniformly subdued.

There has also been an important shift in China's policy stance in the last few months. Reserve requirement ratios have been cut and banks have been encouraged to lend more aggressively to small and medium-sized enterprises ("SMEs") and the private sector. The sharp pick-up in total social financing in year-to-date data suggests that local financial institutions are responding to this top-down guidance. Fiscal spending also appears to be picking up to support growth, with lower taxes for consumers and SMEs being announced and an acceleration of some infrastructure spending coming through.

Having appeared to be progressing relatively smoothly, at the time of writing the trade negotiations have clearly hit something of an impasse. Conspiracy theories abound, and the one thing we can be sure of is that the various parties are putting the best spin possible to their own actions. It remains very unclear whether China has stepped back from what the US took to be firm promises, or whether strong domestic equity markets and economy emboldened Trump to seek more concessions. Irrespective of the causes, while regional markets do not look expensive severe trade disruption has the capacity to lead markets substantially lower, particularly as prospects for a reversal in negative earnings revisions recedes.

However, beyond the shorter-term shocks, both financial and economic, we remain confident in the underlying prospects for the region. Trade tension may well simply accelerate the longer-term trends on which regional prosperity will depend: the emergence of Asia (most specifically China and India) as massive domestic markets, with other lower cost economies round the region benefiting from relocation of manufacturing and rising fixed asset investment based on intra-regional competitive advantages. Furthermore, both national external balances and corporate cash generation and balance sheets are relatively strong. Given the portfolio's current net cash position, it is in a good position to take advantage of the potential volatility.

Schroder Investment Management Limited

3 June 2019

Principal risks and uncertainties

The principal risks and uncertainties with the Company's business fall into the following categories: strategy and competitiveness risk; investment management risk; financial and currency risk; accounting, legal and regulatory risk; custodian and depositary risk; and service provider risk, including cyber risk. A detailed explanation of the risks and uncertainties in each of these categories can be found on pages 12 and 13 of the Company's published Annual Report and Accounts for the year ended 30 September 2018.

These risks and uncertainties have not materially changed during the six months ended 31 March 2019.

Going concern

Having assessed the principal risks and uncertainties, and the other matters discussed in connection with the viability statement as set out on page 14 of the published Annual Report and Accounts for the year ended 30 September 2018, the directors consider it appropriate to adopt the going concern basis in preparing the accounts.

Related party transactions

There have been no transactions with related parties that have materially affected the financial position or the performance of the Company during the six months ended 31 March 2019.

Directors' responsibility statement

The directors confirm that, to the best of their knowledge, this set of condensed financial statements has been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (UK GAAP) and with the Statement of Recommended Practice, "Financial Statements of Investment Companies and Venture Capital Trusts" issued in November 2014 and updated in February 2018, and that this Interim Management Report includes a fair review of the information required by 4.2.7R and 4.2.8R of the FCA's Disclosure Guidance and Transparency Rules.

Income Statement

	(Unaudited) For the six months ended 31 March 2019			(Unaudited) For the six months ended 31 March 2018			(Audited) For the year ended 30 September 2018
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at fair value through profit or loss	-	16,575	16,575	-	46,740	46,740	-	26,589	26,589
Net foreign currency gains/(losses)	-	579	579	-	1,029	1,029	-	(2,644)	(2,644)
Income from investments	3,682	971	4,653	4,429	-	4,429	21,092	293	21,385
Other interest receivable and similar income	71	-	71	16	-	16	42	-	42
Gross return	3,753	18,125	21,878	4,445	47,769	52,214	21,134	24,238	45,372
Investment management fee	(800)	(2,399)	(3,199)	(891)	(2,673)	(3,564)	(1,748)	(5,243)	(6,991)
Administrative expenses	(505)	-	(505)	(474)	-	(474)	(1,022)	-	(1,022)
Net return before finance costs and taxation	2,448	15,726	18,174	3,080	45,096	48,176	18,364	18,995	37,359
Finance costs	(77)	(232)	(309)	(111)	(332)	(443)	(289)	(867)	(1,156)
Net return on ordinary activities before taxation	2,371	15,494	17,865	2,969	44,764	47,733	18,075	18,128	36,203
Taxation (note 3)	(256)	(770)	(1,026)	49	(1,270)	(1,221)	(1,190)	(529)	(1,719)
Net return on ordinary activities after taxation	2,115	14,724	16,839	3,018	43,494	46,512	16,885	17,599	34,484
Return per share (note 4)	1.26p	8.79p	10.05p	1.80p	25.96p	27.76p	10.08p	10.50p	20.58p

The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Company has no other items of other comprehensive income, and therefore the net return on ordinary activities after taxation is also the total comprehensive income for the period.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period.

Statement of Changes in Equity

For the six months ended 31 March 2019 (unaudited)

	Called-up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Warrant exercise reserve £'000	Share purchase reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
At 30 September 2018	16,757	100,956	3,387	8,704	31,575	646,421	17,242	825,042
Repurchase and cancellation of the Company's own shares	(10)	-	10	-	(412)	-	-	(412)
Net return on ordinary activities after taxation	-	-	-	-	-	14,724	2,115	16,839
Dividend paid in the period (note 5)	-	-	-	-	-	-	(15,910)	(15,910)
At 31 March 2019	16,747	100,956	3,397	8,704	31,163	661,145	3,447	825,559

For the six months ended 31 March 2018 (unaudited)

	Called-up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Warrant exercise reserve £'000	Share purchase reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
At 30 September 2017	16,757	100,956	3,387	8,704	31,575	628,822	9,741	799,942
Net return on ordinary activities after taxation	-	-	-	-	-	43,494	3,018	46,512
Dividend paid in the period (note 5)	-	-	-	-	-	-	(9,384)	(9,384)
At 31 March 2018	16,757	100,956	3,387	8,704	31,575	672,316	3,375	837,070

For the year ended 30 September 2018 (audited)

	Called-up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Warrant exercise reserve £'000	Share purchase reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
At 30 September 2017	16,757	100,956	3,387	8,704	31,575	628,822	9,741	799,942
Net return on ordinary activities after taxation	-	-	-	-	-	17,599	16,885	34,484
Dividend paid in the year (note 5)	-	-	-	-	-	-	(9,384)	(9,384)
At 30 September 2018	16,757	100,956	3,387	8,704	31,575	646,421	17,242	825,042

Statement of Financial Position

	(Unaudited) 31 March 2019 £'000	(Unaudited) 31 March 2018 £'000	(Audited) 30 September 2018 £'000
Fixed assets
Investments held at fair value through profit or loss	772,996	873,130	851,031
Current assets
Debtors	3,797	2,641	2,128
Cash at bank and in hand	52,601	10,809	20,439
Derivative financial instruments held at fair value through profit or loss	885	-	-
	57,283	13,450	22,567
Current liabilities
Creditors: amounts falling due within one year	(4,366)	(49,510)	(48,556)
Derivative financial instruments held at fair value through profit or loss	(354)	-	-
	(4,720)	(49,510)	(48,556)
Net current assets/(liabilities)	52,563	(36,060)	(25,989)
Total assets less current liabilities	825,559	837,070	825,042
Net assets	825,559	837,070	825,042
Capital and reserves
Called-up share capital (note 6)	16,747	16,757	16,757
Share premium	100,956	100,956	100,956
Capital redemption reserve	3,397	3,387	3,387
Warrant exercise reserve	8,704	8,704	8,704
Share purchase reserve	31,163	31,575	31,575
Capital reserves	661,145	672,316	646,421
Revenue reserve	3,447	3,375	17,242
Total equity shareholders' funds	825,559	837,070	825,042
Net asset value per share (note 7)	492.96p	499.53p	492.35p

Notes to the Accounts

1.         Financial Statements

The information contained within the accounts in this half year report has not been audited or reviewed by the Company's independent auditor.

The figures and financial information for the year ended 30 September 2018 are extracted from the latest published accounts of the Company and do not constitute statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included the report of the auditor which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

2.         Accounting policies

Basis of accounting

The accounts have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice and with the Statement of Recommend Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued by the Association of Investment Companies in November 2014 and updated in February 2018.

All of the Company's operations are of a continuing nature.

The accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 30 September 2018.

3.         Taxation

The Company's effective corporation tax rate is nil, as deductible expenses exceed taxable income. The taxation charge comprises irrecoverable overseas withholding tax on dividends receivable, and overseas capital gains tax.

4.         Return per share

	(Unaudited) Six months ended 31 March 2019	(Unaudited) Six months ended 31 March 2018	(Audited) Year ended 30 September 2018
Revenue return (£'000)	2,115	3,018	16,885
Capital return (£'000)	14,724	43,494	17,599
Total return (£'000)	16,839	46,512	34,484
Weighted average number of shares in issue during the period	167,513,024	167,570,716	167,570,716
Revenue return per share	1.26p	1.80p	10.08p
Capital return per share	8.79p	25.96p	10.50p
Total return per share	10.05p	27.76p	20.58p

5.         Dividends paid

	(Unaudited) Six months ended 31 March 2019 £'000	(Unaudited) Six months ended 31 March 2018 £'000	(Audited) Year ended 30 September 2018 £'000
2018 final dividend paid of 9.50p (2017: 5.60p)	15,910	9,384	9,384

No interim dividend has been declared in respect of the six months ended 31 March 2019 (2018: nil).

6.         Called-up share capital

	(Unaudited) Six months ended 31 March 2019	(Unaudited) Six months ended 31 March 2018	(Audited) Year ended 30 September 2018
Ordinary shares of 10p each, allotted, called-up and fully paid:
Opening balance of shares in issue	167,570,716	167,570,716	167,570,716
Shares repurchased and cancelled	(100,000)	-	-
Closing balance of shares in issue	167,470,716	167,570,716	167,570,716

7.         Net asset value per share

Net asset value per share is calculated by dividing shareholders' funds by the number of shares in issue at 31 March 2019 of 167,470,716 (31 March 2018 and 30 September 2018: 167,570,716).

8.         Financial instruments measured at fair value

The Company's financial instruments that are held at fair value comprise its investment portfolio. At 31 March 2019, all investments in the Company's portfolio were categorised as Level 1 in accordance with the criteria set out in paragraph 34.22 (amended) of FRS 102. That is, they are all valued using unadjusted quoted prices in active markets for identical assets (31 March 2018 and 30 September 2018: same).

9.         Events after the interim period that have not been reflected in the financial statements for the interim period

The directors have evaluated the period since the interim date and have not noted any significant events which have not been reflected in the financial statements.

 

END

 

 

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