Pacific Horizon Invstmnt Trst Full year results
Replacement RNS Announcement
Pacific Horizon Investment Trust PLC
GENERAL TEXT AMENDMENT
The following amendments has been made to the 'Pacific Horizon Investmnt Trst Full year results' announcement released on 06/10/2023 at 7:00am under RNS No 8970o.
Typo in the index name in the sentence above the Chairman's statement; it references 'MSCI China' and should read 'MSCI All Country Asia ex Japan'.
All other details remain unchanged.
The full amended text is shown below.
Legal Entity Identifier: VLGEI9B8R0REWKB0LN95
Results for the year to 31 July 2023
Regulated Information Classification: Additional regulated information required to be disclosed under the applicable laws and regulations.
The following is the results announcement for the year to 31 July 2023 which was approved by the Board on 5 October 2023.
Over the year the Company's net asset value total return* was -8.9% and the share price total return was -3.6%, compared with a total return of 0.8% for the MSCI All Country Asia ex Japan Index (in sterling terms)†.
Chairman's statement
The portfolio managers aim to invest in high growth companies in Asia, one of the fastest growing regions in the world. In the last year these markets have been influenced by weaker than expected post-Covid consumption recovery in China, ongoing geopolitical tension between the US and China and rising US interest rates and the consequent US dollar strength.
These have all challenged growth expectations and share price returns across the region, making for a challenging environment for growth investors. It is to be expected that there will be periods during which growth investment will not be rewarded. We are in such a phase now. As the portfolio managers present in their report however, over the longer terms excess returns have been considerable and the premium currently paid for growth is modest. While it is too early to forecast an immediate improvement in relative or absolute performance, it certainly looks as if growth share valuations are at attractive levels across the region.
Performance
In the year to 31 July 2023, the total return for the Company's net asset value per share (NAV) was a negative 3.6%* and for the share price a negative 8.9%*. This compared to a positive total return of 0.8%* for the MSCI All Country Asia ex Japan Index in sterling terms over the same period. The shares ended the period at an 8.0% discount to the NAV per share having been at a 2.7% discount a year earlier.
The notable positive stock contributors to the portfolio's relative performance over the year were Ramkrishna Forgings, Samsung Engineering and EO Technics and the notable detractors were Jadestone, Delhivery and JD.com. Fuller comment on the drivers to returns, and thoughts on companies and their prospects can be found within the Managers' review below.
Over the five years to 31 July 2023, the Company's NAV and share price total return were 82.4% and 62.4% respectively whereas the Company's comparative index returned 14.1% in sterling terms during the same period.
Environmental, Social and Governance ('ESG')
Your Board is committed to responsible investment. It agrees with the managers that a thoughtful approach is required when looking at ESG factors in emerging markets. It is not appropriate to impose a developed market standard on emerging markets companies indiscriminately. The economic miracle of the last forty years has resulted in over 800 million people in Asia being lifted out of poverty through economic reform and globalisation. This wealth is resulting in increased consumption and carbon emissions in Asia, but still far below the per capita levels seen in developed markets. Growth in carbon emissions has also been stimulated by the West moving carbon emitting industries to Asia, flattering developed markets' progress towards net zero.
The managers' view is that a precondition of a long-term investment is that the businesses they invest in must be sustainable. Asian countries need to transition to net zero and companies in Asia must play their part. The timescales for this will however be longer than in developed markets, reflecting their different starting points on their paths to prosperity.
We agree with the managers' approach of engaging and working with companies towards achieving positive change. We further endorse the view that the absolute levels of emissions are not the basis on which to judge a company but rather its approach to all aspects of ESG. For example, nickel mining is an activity that generates significant emissions, but nickel is a critical component in manufacturing electric vehicles.
Gearing
The Board continues to set the gearing parameters within which the portfolio managers are permitted to operate. These parameters are reviewed regularly and at present the agreed range of equity gearing is minus 15% (holding net cash) to plus 15%. As at 31 July 2023, gearing was nil, a position that has not changed since the start of the Company's financial year. However, the deployment of gearing is under active consideration at present.
The Company has a multi-currency revolving credit facility with The Royal Bank of Scotland International Limited for up to £100 million. This facility expires in March 2025 and provides for potential gearing of 17.2% at present.
Earnings and Dividend
Earnings per share this year were 4.56p per share, an increase from the 4.21p per share reported last year. After the deduction of the management fee and expenses, the Company is in a position to pay a final dividend. The Board is therefore recommending that a final dividend of 3.25p per share should be paid (3.00p per share paid in 2022), subject to shareholder approval at the Annual General Meeting ('AGM').
As highlighted in past reports, investors should not consider investing in this Company if they require income from their investment as the Company typically invests in high growth stocks with little or no yield.
Issuance, Share Buybacks and Treasury
During the financial year to 31 July 2023, 200,000 shares were issued from treasury at a premium to the Company's NAV per share and 979,012 shares were bought back at a discount, resulting in a year-on-year net 0.85% reduction in the amount of shares in issue. The issuance occurred early in 2023, following the announcement that the Company was being promoted into the FTSE 250 index, whereas the buybacks were undertaken over the course of the Company's financial year. Since the financial year end, a further 35,000 shares have been bought back.
At the forthcoming AGM in November, the Board will be seeking 10% non-preemptive issuance authority. Issuance will continue to be undertaken only at a premium to the NAV per share, thereby avoiding dilution for existing investors. When this authority is utilised in this manner, it enhances NAV per share, improves liquidity in the Company's shares and spreads the operating expenses of the Company across a wider base, thus reducing costs to each shareholder. Despite the net repurchase this year, ongoing charges for the year were 0.72% compared to 0.74% for the prior year.
As part of this year's AGM business, the Board will be asking shareholders to renew the authority to repurchase up to 14.99% of the outstanding shares on an ad hoc basis, either for cancellation or to be held in treasury, and also to permit the re-issuance of any shares held in treasury at a premium to the NAV per share; the Company has 993,012 shares held in treasury at present. The Board intends to use the buyback authority opportunistically, considering not only the level of the discount but also the underlying liquidity and trading volumes in the Company's shares. This approach allows the Board to seek to address any imbalance between the supply and demand for the Company's shares that results in a large discount to NAV whilst being cognisant that current and potential shareholders have expressed a desire for continuing liquidity.
Private Company Investments
In 2021, shareholders approved an increase in the maximum permissible investment in unlisted securities from 10% to 15% (such percentage being measured at the point of initial investment). As at 31 July 2023, the Company had 5.1% of its total assets invested in 5 private companies compared to 6.1% in 5 private companies a year earlier.
Rightly, there has been a lot of market focus on the reasonableness of private company valuations in the light of the share price volatility of listed companies. Baillie Gifford believes it takes a pro-active, robust approach to private company valuations, including using the services of Markit Valuation Services (now S&P Global) for external advice. The Board is comfortable that marked-to-market values are kept as current as possible for the purpose of calculating the Company's daily net asset value. Investors should be mindful however that such valuations, although based on many external (market) and internal (company specific) comparators and having considered a number of methodologies in line with International Private Equity and Venture Capital Guidelines, are necessarily subjective.
We are fortunate on the Board to have specific expertise in this area and we are comfortable with the strategy adopted by the managers to invest in later stage private companies. This is very different to being a venture capital investor which often involves taking seats on company boards and providing specific advice on managing aspects of the business. While private company investing has added risk, there appears to be the potential for commensurate reward.
Taking as an example one of our private company holdings, ByteDance, according to publicly sourced data, the company's full year EBITDA was US$25 billion. At our holding equity valuation of US$225 billion that implies an EBITDA multiple of 8x. This is a conservative valuation for a company which is achieving revenue and profit growth of more than 30% and 80% respectively year on year. It is the Board's view that exposure to companies like ByteDance is attractive and justifies the additional risks of investing in private companies. The Board is supportive of the managers continuing to invest in them.
Details on the process and quantum of private company valuations undertaken over the year can be found on page 36 of the annual report and financial statements, immediately after the Managers' review.
Changes to the Board
I joined the Board in 2017, becoming Chair at the conclusion of the Company's Annual General Meeting in 2019. Thanks to my predecessors, fellow Board members and the Managers, I have presided over a period where the Company has made considerable progress. The NAV of the Company has increased from £139 million on my joining to £580 million as at 31 July 2023, it has become a constituent of the FTSE 250 and provided a total return over the period of 150%, outperforming its comparative index by 115%. Whilst recent performance has reflected challenging market conditions and growth investing being seemingly out of favour, this is to be expected for an actively managed growth focussed long term investment strategy such as that used by the portfolio manager. I have every confidence that the approach will continue to reward patient long term shareholders in the future.
After considerable thought, I have decided I should stand down as Chair and a member of the Board. Someone new should have the opportunity of chairing this Company and it is time for me to pursue other roles. I will leave the Board once a suitable successor has been appointed, which is expected to be around the end of the first quarter of next year.
In the meantime, I would like to thank shareholders for giving me the opportunity to Chair the Company and wish the Managers, the Board and investors the best for the future.
The Company's portfolio managers
As announced in January, following consultation with the Board, Mr Ben Durrant was appointed as deputy portfolio manager of the Company, filling the role vacated by Mr Roderick Snell when he was promoted to become the Company's lead portfolio manager in June 2021.
Mr Durrant is an investment manager in Baillie Gifford's Emerging Markets Equity Team and joined Baillie Gifford in 2017 having previously worked for RBS in its Group Strategy and Corporate Finance Team. He is also the co-portfolio manager on the Baillie Gifford Pacific Fund alongside Mr Snell.
TCFD and Consumer Duty
Recently introduced regulations by the FCA require managers of UK based investment vehicles, such as Pacific Horizon Investment Trust, to produce product-level reports on the climate-related risks and opportunities in the respective investment vehicle. These are known as TCFD (Task Force on Climate-related Financial Disclosures) reports and they are based on historic data at a single point in time. The report produced by Baillie Gifford for our Company, as at the end of December 2022 and which will be updated annually, can be found at pacifichorizon.co.uk.
The FCA also introduced a new set of rules labelled as 'Consumer Duty'. Investment Trusts, like Pacific Horizon, are not directly in scope but Baillie Gifford, as the Company's Manager, is. The Duty raises the standard of care that FCA regulated firms, like Baillie Gifford, are expected to provide to retail consumers and includes a number of obligations that will need to be met. One of these obligations is to undertake an Assessment of Value on the 'products' managed. The relevant report on Pacific Horizon has concluded that it does provide value, meaning that distributors will be able to undertake their assessments and continue to make shares in Pacific Horizon available to current and potential shareholders. It should be noted that in addition to this new assessment, over the course of each and every financial year, the Company's Committees and Board assess various costs levied by third-party service providers as well as the Managers and Secretaries, the quality of service received along with performance; this will continue to be the case.
Annual General Meeting
This year's AGM will take place on 23 November 2023 at the offices of Baillie Gifford & Co in Edinburgh at 11.30am and shareholders are encouraged to attend. If doing so, please endeavour to arrive by 11.20am to allow time to register. There will be a presentation from the portfolio managers who, along with the Directors, will answer questions from shareholders. I hope to see many of you there.
Should the situation change, further information will be made available through the Company's website at pacifichorizon.co.uk and the London Stock Exchange regulatory news service.
Outlook
The invasion of Ukraine ended the geopolitical consensus that prevailed since the fall of the Berlin Wall. This consensus was an impetus for globalisation and a key component of growth in Asia. Today, we live in a much less certain time. It was perhaps inevitable that, as economic power shifted to the East, tensions with the hitherto economically dominant West were likely to grow.
US and Western sanctions on a seemingly increasing number of Chinese companies have made some of them uninvestible. There is little doubt that foreign disinvestment from China is impacting asset prices, at least in the short term. Should these sanctions be materially extended, in response for example to military action, there is a risk this could even render the market as a whole uninvestible.
Domestic considerations in China are also of concern. The Chinese Government is developing its own economic system, the success of which remains to be seen. Coupled with escalating tensions with the US, we recognise that in the future there is likely to be greater complexity and risk in securing investment exposure to the 'Asian economic miracle'.
Excess investment return is generated by judging and managing risks. On the basis of the information currently available, the Manager and your Board believe that the risks of investment in China and the broader Asian region are justified by the potential rewards. China is a critical trading partner of the West and only the most extreme geopolitical confrontation would justify the economic disruption of severing economic ties entirely.
More broadly, the economies of Asia including the Indian Sub-continent are, as outlined in the Managers' review, unencumbered by some of the issues affecting more developed markets, such as high levels of debt and elevated levels of inflation. The region is fostering competitive companies that are well placed to benefit from key drivers of long- term growth such as the rising wealth of the Asian consumer, the transition to renewable energy and an AI led digital age of innovation. However, it remains incumbent on our portfolio managers to unearth the right investments. This requires patience and fortitude, an approach that has served investors well in the past.
The region remains one of the fastest growing globally and company valuations, particularly when set against western peers, are undemanding; the Board is of the view that investing in the fastest growing companies in the fastest growing region still offers attractive long-term investment opportunities for patient growth investors. The portfolio managers call this 'growth squared'.
Angus Macpherson
Chairman
5 October 2023
*Baillie Gifford/Refinitiv and relevant underlying index providers. See disclaimer at the end of this announcement.
† The MSCI All Country Asia ex Japan Index (in sterling terms) is the principal index against which performance is measured.
For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.
Past performance is not a guide to future performance.
Managers' review
Overview
What defines us is growth. We believe Asia, ex Japan, including the Indian Sub-continent, will be one of the fastest growing regions over the coming decades and we strive to be invested in its fastest growing companies. It is growth multiplied by growth or, as we like to call it, 'Growth Squared' ('Growth²').
Such an investment style has been well rewarded over the longer term, with the Company's NAV outperforming the comparative index, the MSCI All Country Asia ex Japan Index (in sterling terms) by 68.3 percentage points ('pp') over the past five years, and 28.8pp over the past three years, while the share price outperformed by 48.3pp and 12.7pp over these time periods.
|
|
5 year |
3 year |
|
NAV total return* |
82.4% |
32.9% |
|
Share price total return* |
62.4% |
17.0% |
|
MSCI All Country C Asia ex Japan total return (in sterling terms)* |
14.1% |
4.3% |
By running a differentiated, high-conviction portfolio, there will inevitably be periods of time when our growth style of investing will be out of favour with the market, as has been the case recently. Over the year to 31 July 2023, the Company's NAV decreased by 3.6%, while the share price decreased by 8.9%, compared to the comparative index which rose 0.8% in sterling terms (all figures total return).
The period was characterised by significant volatility, primarily emanating from events in China. In aggregate, markets in the region fell nearly 20% to reach their nadir as President Xi cemented his grip on power during the 20th Chinese Communist Party Congress in October. Subsequently, Asian markets rallied hard as China abandoned its zero Covid policy, before retreating once again as the Chinese economy disappointed and concerns over the Chinese property sector intensified.
Markets will likely remain volatile as investors continue to grapple with an uncertain global economic outlook, heightened geopolitical risks, and perceived fragility in China. We, however, remain optimistic. Whilst many Western economies have experimented with money printing and ultra low interest rates, Asian economies are generally in superior health, will grow significantly faster and trade at a significant discount.
Events in China will continue to play an important role for investors, and whilst acknowledging the country faces several headwinds including increasing geopolitical tensions, we believe fears of an imminent collapse of the economy are misplaced. The government has moved to support the domestic economy, the regulatory crackdown on the technology sector has receded, and fears over the domestic property market appear overly pessimistic.
The broad exposure of the portfolio remains similar to last year, with significant positions in both cyclical growth, particularly materials and industrials, and secular growth, including technology and consumer companies. Geographically, notable additions were made to China and Vietnam. It is noteworthy that, over the next year, our holdings on average are valued at nearly the same price-to-earnings multiple as that of the comparative index (13.7x vs. 12.9x), yet they are expected to grow their earnings at nearly triple the rate (+14.8% vs. +5.7%).
Overall, we remain extremely positive on the long-term outlook for the region. Asia already cemented itself as the lead contributor to global demand growth, with China alone having contributed more to global growth in US dollar terms than the US over the past decade, while India is overtaking Japan. Asia is now better positioned financially than much of the developed world and, with a renewed investment cycle unfolding, Asian growth is likely to significantly outperform.
Philosophy
We are growth investors endeavouring to invest in the top twenty percent of the fastest growing companies in Asia. Across the region we have found the most persistent source of outperformance to be those companies that can grow their profits faster than the market, in hard currency terms, over the long term. This trend persists irrespective of starting valuations. Consequently, our research is singularly focused on finding those companies whose share prices can at least double, in sterling terms, on a five year view and we expect most of this doubling to come from earnings growth.
We are particularly interested in three specific and persistent inefficiencies:
01. Underappreciated growth duration
We believe one of the greatest investment inefficiencies is to be found in companies with excellent long-term earnings growth where profits are volatile from one quarter to the next. The market typically shows an aversion to such companies, preferring the predictability of smooth profit generation even if the long-term growth rate turns out to be a fraction of that achieved by firms more willing to reinvest in their business and with greater ambition. This presents us with exciting investment opportunities, but it requires an approach that allows near term volatility to be ignored.
02. Underappreciated growth pace
The market consistently underestimates the likelihood of rapid growth. The evidence shows that most investors cluster around a narrow range of earnings growth predictions, which can in turn lead to significant mispricing of those companies with the potential to grow very rapidly. Our process is focused on finding these companies. By looking further out and searching for low probability but high impact growth opportunities, we endeavour to outperform the broader market.
03. Underappreciated growth surprise
The final significant inefficiency lies in the interaction between top-down and bottom-up investing. As investors in Asia, ex Japan, and the Indian Sub-continent, we do not have the luxury of ignoring macroeconomics. Purely bottom-up investment is a path to ruin in a universe where industrial and economic cycles can dominate investment returns over multi-year periods. The long-term earnings for a vast number of companies - notably in the financial, materials and industrial sectors - are determined by exogenous macro factors beyond their control. This also provides opportunities.
Our analysis shows that while it may pay to invest in those companies that display consistently high levels of profitability, the strongest returns are to be found in those companies that transition from poor levels of profitability to high - a 'growth surprise'.
This may seem obvious - rising levels of profitability are normally accompanied by a re-rating, thereby providing a two-fold kicker to share price performance - but identifying the drivers behind this change is the key and has been a significant source of outperformance for Pacific Horizon. We accept that timing these inflection points perfectly is impossible, but when you have an investment horizon measured over many years, successfully anticipating the future direction of travel is hugely valuable.
Importantly, we are agnostic as to the type of growth inefficiency we are exploiting and will invest wherever we are finding the best opportunities. At times this will lead to a concentration in particular sectors or countries, and at others to a much broader, flatter portfolio, but growth will always be the common theme.
|
|
Pacific Horizon |
MSCI AC Asia ex Japan Index |
|
Historic earnings growth (5 years trailing compound annual growth to 31 July 2023 |
9.8% |
7.3% |
|
One year forecast earnings growth to 31 July 2024 |
14.8% |
5.7% |
|
Estimated p/e ratio for the year to 31 July 2024 |
13.7x |
12.9x |
|
Active share |
82% |
n/a |
|
Portfolio turnover |
11.9% |
n/a |
Data as at 31 July 2023, source: Baillie Gifford, UBS PAS, APT, MSCI (see disclaimer at the end of this announcement)
Review
In the last Interim management statement we articulated three key reasons why Asian economies are generally far better positioned than in the past, especially when compared to developed markets.
They are:
• Asian balance sheets are in superior shape having lacked the profligate monetary and fiscal stimulus of the West. For example, China's Covid stimulus equated to c.10% of GDP compared to c.70% for many major European countries.
• Most of Asia maintained positive interest rates for many years, while Western markets operated with ultra-low or even negative rates. Arguably, it is Asian countries that behaved like orthodox developed countries while much of the developed world behaved like the emerging markets of old. (Perhaps we are seeing the beginning of 'converging markets').
• Capital flows into Asia have been negative for a decade and the region is therefore far less vulnerable to money outflows than in the past.
The result is that today Asia's financial position is superior to much of the developed world. Combine this with Asia's structurally faster growth rates and valuations at multi-year lows relative to developed markets, and the long-term outlook for Asian investors is very encouraging. This, however, has not been reflected in the recent performance of Asian markets, with China a significant concern amongst investors. China certainly faces a number of challenges, and there is no doubt that the country's lockdowns and regulatory crackdowns have inhibited consumer and entrepreneurial spirit, subduing the domestic economy. But the extreme pessimism over the economy is too one-sided.
There are a number of signs that household consumption in China is gaining momentum, with restaurant and bar sales up 12% and 17% in May and June compared to the same pre-lockdown months in 2019, while air passenger numbers are rapidly returning to pre-pandemic levels. Our consumer related holdings in China have posted impressive recent quarterly numbers: Alibaba's ecommerce business grew +14% year-on-year ('YoY'), Baidu's core advertising division grew +15% YoY and Kuaishou's short-form video sales grew +28%.
Improving consumer confidence will be key to accelerating economic growth and mobilising the c.US$7tn of additional household savings built up over the past couple of years. Time and patience is needed; after all China's serious Covid trauma only ended at the start of the year.
Increasing policy support is also likely to be a significant catalyst. Moderate financial easing is underway, but perhaps more importantly the government has clearly and very publicly stated its support for the private sector. Notably in July the CCP Central Committee and the State Council issued a joint statement on 'promoting the development and growth of the private economy'. It described the private sector as 'a driving force behind promoting the Chinese path to modernisation' and stated that the party wants to 'promote a bigger, better and stronger private sector'.
Combined with a less zealous regulatory approach in many other sectors, it seems clear that support is shifting behind the private sector, and the regulatory clampdown that particularly impacted technology and platform businesses for the past couple of years - and where we have significant holdings - is receding.
Despite these positive tailwinds, valuations remain extremely depressed. Stripping out cash and subsidiaries, Alibaba Group's core ecommerce business and Baidu's core online search business both trade on low single digit p/e multiples, while Ping An Insurance, China's leading private life insurance company, trades significantly below its book value.
We believe this presents us with a number of excellent long term investment opportunities and we increased our listed equity exposure to China by adding c.600 basis points ('bp') to Chinese companies. Most additions were made to internet firms, including Alibaba Group, JD.com (ecommerce), KE holdings (online property portal) and Baidu. We also added to two financial companies, the aforementioned Ping An Insurance and its subsidiary Ping An Bank. One new purchase was also made in Silergy, a leading designer of analogue chips in China (listed in Taiwan). Silergy has the largest market share among domestic designers and is likely to be a key beneficiary of Chinese attempts to become self-reliant in semiconductor chips.
Combined, these Chinese purchases took the portfolio's exposure to China to 34% compared to 17% eighteen months ago.
Just after period end, we also acquired a new holding in a private (unlisted) company, Micro Connect. The business makes loans to small and medium sized Chinese businesses which typically don't have access to formal credit in exchange for a daily percentage of the borrower's revenues (collected daily from the borrower's account) which are then packaged and sold on the Micro Connect exchange. The company was founded by the former long-time Hong Kong exchange CEO Charles Li, has a strong balance sheet and is already profitable.
Outside of China, we continue to believe Vietnam remains the best structural growth story of any Asian economy, driven by its successful export manufacturing base. After a period of significant market weakness, driven by a corruption clampdown and funding issues in the property sector, we took advantage of share price weakness by adding to our existing holding in Vinh Hoan (food processer) and making two new purchases: Mobile World, one of the country's leading electronics and grocery retailers; and FPT, Vietnam's largest information technology outsourcing company. This takes Vietnam to a 7% absolute position, and our second largest country overweight.
Funding came from three main sources. The most significant was a reduction to a number of smaller (<60bp) holdings in South Korea. These were across a range of sectors including green energy businesses (LG Energy Solutions, SK IE Technology and S-Fuelcell), cloud computing (Douzone Bizon) and speech recognition software (Flitto). However, due to some small additions to other names in South Korea, and the very strong performance of some of our holdings, notably EO Technics (laser manufacturer for semiconductors) and Samsung Engineering (engineering), our South Korea weighting increased modestly over the period to 18% absolute.
Towards the end of our financial year, we also exited our direct nickel exposures in Indonesia, selling both Nickel Industries and Vale Indonesia. We have become concerned by the huge capital investments into the nickel market, predominantly by the Chinese. In particular, it appears that the Chinese have successfully made the difficult process of High-Pressure Acid Leaching (which is used to convert non-battery grade nickel into battery grade nickel) commercially viable and this is likely to bring significantly more battery grade nickel to the market than expected.
We also reduced our exposure to India. Notable transactions included the sales of Zomato, the online food delivery businesses, as the company's unit economics are not as favourable as we hoped, and Star Health & Allied Insurance Co (health insurance). India, however, remains our second largest absolute (24%) and largest relative (+7.6pp) country position.
We are keeping our eye on several interesting developments in India. In particular, there are early signs that the country might finally be building up a successful export manufacturing industry. For years this has disappointed, with countries like Vietnam leading the way, but thanks to a number of government reforms and the establishment of several special economic zones, there are signs that manufacturing is starting to move to India. For example, Foxconn, Apple's iPhone manufacturer, is expanding in India with iPhone exports quadrupling to US$5bn for the fiscal year 2022-23. It is early days, but should India succeed in building up a strong export manufacturing base it has the potential to transform the economy over the coming years.
By sector, there have been limited changes, with the portfolio continuing to look different to many of our growth-focused peer funds. In absolute terms, our largest exposures remain focused on the themes of the rising middle class, technology and innovation. However, we have significant exposures to more cyclical industries including materials and industrials which make up the two largest relative positions within the portfolio.
Overall, the number of names in the portfolio reduced to 72 from 85 in the year to 31 July 2023. Private companies, of which there were five in the portfolio as at 31 July 2023, accounted for 5% of the portfolio, and invested gearing was nil.
Performance
As long-term growth investors, it is pleasing that over the past three and five years our portfolio generated significant value for shareholders. Recent periods have been more challenging as our growth style faced numerous headwinds, including soaring inflation and interest rates. This has been combined with generally poor Asian markets held back by increasing geopolitical tensions, weakness in China and a surging US Dollar syphoning liquidity from the region. Our portfolio maintains a strong growth bias; we have faith in the long-term growth prospects of the region and believe we are well placed to add significant value for shareholders when Asian markets turn.
As mentioned, over the year to 31 July 2023, the Company's NAV decreased by 3.6%, while the share price decreased by 8.9%, compared to the comparative index which rose by 0.8% in sterling terms - all figures total return. The majority of underperformance came from weakness in three significant holdings, all of which were among the top five absolute holdings at the start of the period: Jadestone (-ve 300bp to performance), Delhivery (-ve 230bp) and JD.com (-ve 110bp).
Jadestone is an oil exploration and production company, specialising in turning around small and medium sized assets, usually from larger companies looking to divest. Unfortunately, the company experienced a significant operational issue at its main cash producing asset, Montara in Australia, resulting in production halting for several months. The lack of cash strained the balance sheet at a time when the company was gearing up for a major investment phase to bring several new assets on stream, forcing it to undertake a rights issue. The next 12 months are critical with Jadestone's Akatara gas field due to come on stream in 2024 - the success of the company very much rests on this asset coming on stream in a timely manner.
Delhivery, India's largest private logistics company with a core focus on ecommerce logistics, was, until listing in May 2022, held in the portfolio as a private company. Due to strong share price performance, the company was a 5.5% holding at the start of the period. Unfortunately, Delhivery's quarterly results at the end of 2022 were weak. M&A integration challenges and a slowdown in broader ecommerce growth in India pushed the share price down by 52%. We are hopeful these issues are short term and with key private competitors finding funding far more difficult and Delhivery the clear number one player, we continue to have faith in the company (encouragingly, the shares have risen c.40% from their lows).
Like much of the technology space in China, JD.com was weak despite reasonable operational performance. Revenue growth was slower and competition increased at the margin, with ByteDance taking some low-end market share as it leveraged its large user base to enter the ecommerce market. Nevertheless, JD.com has focused on cost efficiencies resulting in improving profitability and is clearly demonstrating the benefits of its scale and in-house logistics capabilities.
By country, Singapore was the largest detractor due to the issues at Jadestone, followed by China.
More positively, a number of our companies performed strongly. Our top contributor to performance was Ramkrishna Forgings which rose 189% over the period. The company is one of the leading forging companies in India, focused on automotive and commercial vehicles. After completing a major capacity expansion over the past few years the company is seeing rapid sales growth amid a number of significant new order wins.
Other industrial companies in India also performed well, including Skipper, one of the leading manufacturers of telecom and power transmission towers, which rose +213% amid India's increasing demand for power infrastructure. Tata Motors was also strong as the domestic commercial vehicle and auto business continued to see buoyant demand while the company's electric vehicle investments impressed.
India was our second best performing market, but stock selection in South Korea was the most significant contributor. Samsung Engineering contributed 110bp thanks to continued strong order wins, especially from the Middle East and Mexico. EO Technics, which produces advanced lasers for semiconductor manufacturing, also contributed 110bp as the semiconductor cycle appears to have bottomed, and orders began to accelerate. We are excited for EO Technic's longer-term prospects; demand for its laser products is likely to hit an inflection point as semiconductors become smaller and more complex, at which point ceramic blades and drills will need to be replaced by lasers in the manufacturing process. We added significantly to this holding towards the end of the period.
By sector, Materials was the best performing mainly from strength in our copper companies MMG and Zijin Mining. This was followed by Real Estate, predominantly from strength in India, and Utilities where we had no holdings while the sector was down 18.5%. Our worst performing sectors were Energy due to the issues at Jadestone, followed by Communication Services and Consumer Discretionary due to the weakness in our Chinese names.
Environmental, social and governance ('ESG') considerations
Our long-term, active approach to investment is based on identifying and holding high quality growth businesses that enjoy sustainable competitive advantages in their marketplace.
To identify these kinds of businesses, we often look beyond current financial performance, undertaking proprietary research to build up our in-depth knowledge of an individual company and form a view of its long-term prospects. Material Environmental, Social and Governance matters which affect the financial condition or operating performance of a company, can positively or negatively influence long-term investment returns. Such issues are considered throughout the investment process through research, engagement and voting.
Our approach is guided by our ESG principles:
• Investment process founded on long-term ownership of growing businesses: we want to help these companies fulfil their potential and encourage them to ignore the short-term pressures of the market.
• Sustainability is central to our analytical task: businesses engaging in practices that are harmful to society may be capable of generating attractive returns in the short term but are unlikely to do so over the periods we seek to invest.
• We do not believe 'one size fits all': ESG practices need to be assessed on a case-by-case basis, not reliant on formulaic and backward-looking screens.
• Not seeking 'perfect' companies: we prefer to consider the likely direction of change in otherwise promising investments and engage accordingly.
Company engagement is key to our process. We encourage steps to maximise opportunities and minimise risks where we believe it is material to the success of the company. Engagement priorities are set through a combination of a subjective assessment of the materiality of an issue and our ability to influence, as well as use of more qualitative inputs to provide direction. We vote wherever possible and will vote against management if we believe that its actions are not in the interests of shareholders.
We are supported by a dedicated emerging markets ESG analyst and a further 40 analysts who are part of Baillie Gifford's wider ESG resource.
*Source: Baillie Gifford/Refinitiv and relevant underlying index providers. See disclaimer at the end of this announcement.
For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.
Past performance is not a guide to future performance.
Valuing Private Companies
We aim to hold our private company investments at 'fair value' i.e. the price that would be paid in an open-market transaction. Valuations are adjusted both during regular valuation cycles and on an ad hoc basis in response to 'trigger events'. Our valuation process ensures that private companies are valued in both a fair and timely manner.
The valuation process is overseen by a valuations group at Baillie Gifford, which takes advice from an independent third party (S&P Global). The valuations group is independent from the investment team with all voting members being from different operational areas of the firm, and the investment managers only receive final notifications once they have been applied.
We revalue the private holdings on a three month rolling cycle, with one third of the holdings reassessed each month. During stable market conditions, and assuming all else is equal, each investment would be valued two times in a six month period. For investment trusts, the prices are also reviewed twice per year by the respective investment trust boards and are subject to the scrutiny of external auditors in the annual audit process.
Beyond the regular cycle, the valuations team also monitors the portfolio for certain 'trigger events'. These may include: changes in fundamentals; a takeover approach; an intention to carry out an Initial Public Offering (IPO); company news which is identified by the valuation team or by the portfolio managers, or meaningful changes to the valuation of comparable public companies. Any ad hoc change to the fair valuation of any holding is implemented swiftly and reflected in the next published net asset value. There is no delay.
The valuations team also monitors relevant market indices on a weekly basis and updates valuations in a manner consistent with our external valuer's (S&P Global) most recent valuation report where appropriate.
Continued market volatility has meant that recent pricing has moved much more frequently than would have been the case with the quarterly valuations cycle.
|
Pacific Horizon Investment Trust |
|
|
Instruments (lines of stock reviewed) |
6 |
|
Revaluations performed |
39 |
|
Percentage of portfolio revalued 2+ times |
89% |
|
Percentage of portfolio revalued 5+ times |
33% |
In the year to 31 July 2023, most revaluations have been decreases. A handful of companies have raised capital at an increased valuation. The average movement in both valuation and share price for those which have decreased in value is shown below.
|
|
Average Movement in company valuation |
Average Movement In share price |
|
Pacific Horizon* |
(29.7%) |
(28.8%) |
* Data reflecting period 1 August 2022-31 July 2023 to align with the Trust's reporting period end.
Share prices have decreased less than headline valuations, which is a result of holding classes of stock with preferential liquidation rights and therefore provides down side protection.
The share price movement reflects a probability weighted average of both the regular valuation, which would be realised in an IPO, and the downside protected valuation, which would normally be triggered in the event of a corporate sale or liquidation
List of Investments at 31 July 2023
|
Name |
Geography |
Business |
2023 Value £'000 |
2023 % of total assets |
|
Samsung Electronics |
Korea |
Memory, phones and electronic components manufacturer |
36,937 |
6.4 |
|
Ping An Insurance H Shares |
China |
Life insurance provider |
21,418 |
3.7 |
|
Ramkrishna Forgings |
India |
Auto parts manufacturer |
19,091 |
3.3 |
|
Delhivery p |
India |
Logistics and courier services provider |
18,399 |
3.2 |
|
Dailyhunt (VerSe Innovation) Series I Preferred u |
India |
Indian news aggregator application |
13,428 |
2.3 |
|
Dailyhunt (VerSe Innovation) Series Equity u |
India |
Indian news aggregator application |
2,462 |
0.4 |
|
Dailyhunt (VerSe Innovation) Series J Preferred u |
India |
Indian news aggregator application |
2,031 |
0.3 |
|
|
|
|
17,921 |
3.0 |
|
Zijin Mining Group Co H Shares |
China |
Gold and copper miner |
16,602 |
2.9 |
|
Tata Motors |
India |
Automobile manufacturer |
16,420 |
2.8 |
|
EO Technics |
Korea |
Manufacturer and distributor of semiconductor laser markers |
15,526 |
2.7 |
|
Samsung Engineering |
Korea |
Korean construction |
14,926 |
2.6 |
|
JD.com |
China |
Online and mobile commerce |
14,910 |
2.6 |
|
Alibaba Group |
China |
Online and mobile commerce |
14,237 |
2.5 |
|
MMG |
China |
Chinese copper miner |
14,237 |
2.5 |
|
Bank Rakyat |
Indonesia |
Consumer bank |
13,684 |
2.4 |
|
Samsung SDI |
Korea |
Electrical equipment manufacturer |
13,422 |
2.3 |
|
Reliance Industries |
India |
Indian petrochemical company |
12,397 |
2.1 |
|
Indiabulls Real Estate |
India |
Domestic and commercial real estate provider |
11,988 |
2.1 |
|
Li Ning |
China |
Sportswear apparel supplier |
11,503 |
2.0 |
|
Sea Limited ADR |
Singapore |
Internet gaming and ecommerce |
11,414 |
2.0 |
|
ByteDance Series E-1 Preferred u |
China |
Social media |
11,413 |
2.0 |
|
Merdeka Copper Gold |
Indonesia |
Indonesian miner |
10,170 |
1.8 |
|
Lemon Tree Hotels |
India |
Owner and operator of a chain of Indian hotels and resorts |
9,559 |
1.6 |
|
HDBank |
Vietnam |
Consumer bank |
9,521 |
1.6 |
|
Phoenix Mills |
India |
Commercial property manager |
9,448 |
1.6 |
|
Baidu.com |
China |
Internet provider |
9,272 |
1.6 |
|
PT Astra International |
Indonesia |
Automobile distributor |
8,782 |
1.5 |
|
Accton Technology |
Taiwan |
Server network equipment manufacturer |
8,531 |
1.5 |
|
Dragon Capital Vietnam Enterprise Investments |
Vietnam |
Vietnam investment fund |
8,232 |
1.4 |
|
Hoa Phat Group |
Vietnam |
Steel and related products manufacturer |
8,150 |
1.4 |
|
KE Holdings |
China |
Real-estate platform |
7,303 |
1.3 |
|
KE Holdings ADR |
China |
Real-estate platform |
655 |
0.1 |
|
|
|
|
7,958 |
1.4 |
|
Midea A Shares |
China |
Household appliance manufacturer |
7,941 |
1.4 |
|
Prestige Estate Projects |
India |
Owner and operator of residential real estate properties |
7,611 |
1.3 |
|
Skipper |
India |
Transmission and distribution structures provider |
7,610 |
1.3 |
|
Meituan |
China |
Local services aggregator |
7,560 |
1.3 |
|
Dada Nexus ADR |
China |
Chinese ecommerce distributor of online consumer products |
7,315 |
1.3 |
|
TSMC |
Taiwan |
Semiconductor manufacturer |
6,458 |
1.1 |
|
Zhejiang Supor Co A Shares |
China |
Chinese manufacturer of cookware and home appliance products |
6,243 |
1.1 |
|
MediaTek |
Taiwan |
Taiwanese electronic component manufacturer |
6,100 |
1.1 |
|
Jadestone |
Singapore |
Oil and gas explorer and producer |
5,932 |
1.0 |
|
China Oilfield Services H Shares |
China |
Oilfield services |
5,893 |
1.0 |
|
Hyundai Mipo Dockyard |
Korea |
Korean shipbuilder |
5,536 |
1.0 |
|
Coupang |
Korea |
Ecommerce business |
5,490 |
0.9 |
|
Military Commercial Joint Stock Bank |
Vietnam |
Retail and corporate bank |
5,448 |
0.9 |
|
TISCO |
Thailand |
Retail and corporate bank |
5,447 |
0.9 |
|
Koh Young Technology |
Korea |
3D inspection machine manufacturer |
5,169 |
0.9 |
|
Silergy |
Taiwan |
Semiconductor manufacturer |
4,979 |
0.9 |
|
Ningbo Peacebird Fashion A Shares |
China |
Chinese fashion |
4,961 |
0.9 |
|
HDFC |
India |
Indian mortgage provider |
4,872 |
0.8 |
|
LONGi Green Energy A Shares |
China |
Chinese semiconductor manufacturer |
4,855 |
0.8 |
|
SK hynix |
Korea |
Semiconductor manufacturer |
4,565 |
0.8 |
|
KH Vatec Company |
Korea |
Electronic component and device manufacturer |
4,331 |
0.7 |
|
Geely Automobile |
China |
Automobile manufacturer |
4,271 |
0.7 |
|
Kingdee International Software |
China |
Enterprise management software distributor |
4,172 |
0.7 |
|
CIMC Vehicles H Shares |
China |
Manufacturer of trailers and trucks |
4,154 |
0.7 |
|
SDI Corporation |
Taiwan |
Stationary and lead frames for semiconductors manufacturer |
4,148 |
0.7 |
|
Ping An Bank A Shares |
China |
Consumer bank |
3,767 |
0.6 |
|
Policybazaar |
India |
Online financial services platform |
3,725 |
0.6 |
|
Mobile World Investment Corporation |
Vietnam |
Electronic and grocery retailer |
3,400 |
0.6 |
|
Chalice Mining |
China |
Miner |
3,311 |
0.6 |
|
Property Guru |
Singapore |
Real-estate platform |
3,148 |
0.5 |
|
Vinh Hoan Corporation |
Vietnam |
Food producer |
2,907 |
0.5 |
|
Tsugami Precision |
China |
Industrial machinery manufacturer |
2,877 |
0.5 |
|
Wuxi Lead Intelligent Equipment Co A Shares |
China |
Manufacturer of electronic capacitors, solar energy and lithium battery equipment |
2,421 |
0.4 |
|
AirTac International Group |
Taiwan |
Pneumatic components manufacturer |
2,243 |
0.4 |
|
Techtronic Industries |
Hong Kong |
Power tool manufacturer |
2,088 |
0.3 |
|
Jio Financial Services |
India |
Financial service business |
1,273 |
0.2 |
|
Binh Minh Plastics Joint Stock Company |
Vietnam |
Plastic piping manufacturer |
1,235 |
0.2 |
|
Nexteer Automotive |
China |
Producer of automotive components |
1,111 |
0.2 |
|
Brilliance China Automotive |
China |
Minibus and automotive components manufacturer |
1,076 |
0.2 |
|
FPT |
Vietnam |
IT service provider |
944 |
0.1 |
|
Chime Biologics u |
China |
Biopharmaceutical company |
76 |
0.1 |
|
Eden Biologics u |
Taiwan |
Biopharmaceutical company |
17 |
<0.1 |
|
Philtown Properties u |
Philippines |
Property developer |
- |
- |
|
Total Investments |
|
|
572,748 |
98.7 |
|
Net Liquid Assets* |
|
|
7,607 |
1.3 |
|
Total Assets |
|
|
580,355 |
100.0 |
Details of the ten largest investments are given on pages 28 to 31 of the Annual Report and Financial Statements along with comparative valuations.
* For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.
u Denotes private company investment.
p Denotes listed security previously held in the portfolio as a private company investment.
|
|
Listed equities % |
Private company Investments* % |
Net liquid assets† % |
Total assets % |
|
31 July 2023 |
93.6 |
5.1 |
1.3 |
100.0 |
|
31 July 2022 |
93.6 |
6.1 |
0.3 |
100.0 |
Figures represent percentage of total assets.
*Includes holdings in ordinary shares and preference shares.
† For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.
Distribution of Total Assets†
Geographical Analysis
|
|
|
At 31 July 2023 % |
At 31 July 2022 % |
|
Equities: |
China |
28.5 |
20.4 |
|
|
India |
23.9 |
24.2 |
|
|
Korea |
18.3 |
17.4 |
|
|
Vietnam |
6.7 |
5.4 |
|
|
Taiwan |
5.7 |
4.5 |
|
|
Indonesia |
5.7 |
8.9 |
|
|
China 'A' shares |
5.2 |
7.1 |
|
|
Singapore |
3.5 |
6.5 |
|
|
Hong Kong Other |
0.3 0.9 |
4.9 0.4 |
|
Total equities |
98.7 |
99.7 |
|
|
Net Liquid Assets |
1.3 |
0.3 |
|
|
Total assets |
100.0 |
100.0 |
|
Sectoral Analysis
|
|
|
At 31 July 2023 % |
At 31 July 2022 % |
|
Equities: |
Information Technology |
22.0 |
19.5 |
|
|
Consumer Discretionary |
20.3 |
20.2 |
|
|
Financials |
12.9 |
9.9 |
|
|
Materials |
12.5 |
14.6 |
|
|
Industrials |
10.6 |
13.5 |
|
|
Communication Services |
8.6 |
9.6 |
|
|
Real Estate |
6.9 |
4.6 |
|
|
Energy |
4.3 |
6.9 |
|
|
Consumer Staples |
0.5 |
0.3 |
|
|
Healthcare |
0.1 |
0.6 |
|
Total equities |
98.7 |
99.7 |
|
|
Net liquid assets |
1.3 |
0.3 |
|
|
Total assets |
100.0 |
100.0 |
|
†For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.
Income Statement
The following is the preliminary statement for the year to 31 July 2023 which was approved by the Board on 5 October 2023.
|
|
2023 Revenue £'000 |
2023 Capital £'000 |
2023 Total £'000 |
2022 Revenue £'000 |
2022 Capital £'000 |
2022 Revenue £'000 |
|
Losses on investments |
- |
(25,404) |
(25,404) |
- |
(118,594) |
(118,594) |
|
Currency (losses)/gains |
- |
(791) |
(791) |
- |
1,292 |
1,292 |
|
Income (note 2) |
9,580 |
- |
9,580 |
11,067 |
- |
11,067 |
|
Investment management fee (note 3) |
(3,419) |
- |
(3,419) |
(4,036) |
- |
(4,036) |
|
Other administrative expenses |
(762) |
- |
(762) |
(1,093) |
- |
(1,093) |
|
Net return before finance costs |
5,399 |
(26,195) |
(20,796) |
5,938 |
(117,302) |
(111,364) |
|
Finance costs of borrowings |
(403) |
- |
(403) |
(756) |
- |
(756) |
|
Net return before taxation |
4,996 |
(26,195) |
(21,199) |
5,182 |
(117,302) |
(112,120) |
|
Tax |
(830) |
(1,256) |
(2,086) |
(1,352) |
5,288 |
3,936 |
|
Net return after taxation |
4,166 |
(27,451) |
(23,285) |
3,830 |
(112,014) |
(108,184) |
|
Net return per ordinary share (note 4) |
4.56p |
(30.05p) |
(25.49p) |
4.21p |
(123.01p) |
(118.80p) |
The total column of this Statement represents the profit and loss account of the Company. The supplementary revenue and capital columns are prepared under guidance published by the Association of Investment Companies.
All revenue and capital items in this Statement derive from continuing operations.
A Statement of Comprehensive Income is not required as the Company does not have any other comprehensive income and the net return after taxation is both the profit and comprehensive income for the year.
Balance Sheet
As at 31 July
|
|
2023 £'000 |
2023 £'000 |
2023 £'000 |
2023 £'000 |
|
Fixed assets |
|
|
|
|
|
Investments held at fair value through profit or loss (note 6) |
|
572,748 |
|
608,539 |
|
Current assets |
|
|
|
|
|
Debtors |
420 |
|
1,248 |
|
|
Cash and cash equivalents |
12,442 |
|
5,399 |
|
|
|
12,862 |
|
6,647 |
|
|
Creditors |
|
|
|
|
|
Amounts falling due within one year (note 7): |
|
|
|
|
|
Other creditors and accruals |
(1,163) |
|
(1,620) |
|
|
Net current assets |
|
11,699 |
|
5,027 |
|
Total assets less current liabilities |
|
584,447 |
|
613,566 |
|
Creditors |
|
|
|
|
|
Amounts falling due after more than one year: |
|
|
|
|
|
Provision for tax liability (note 8) |
|
(4,092) |
|
(3,016) |
|
Net assets |
|
580,355 |
|
610,550 |
|
Capital and reserves |
|
|
|
|
|
Share capital |
|
9,208 |
|
9,208 |
|
Share premium account |
|
254,120 |
|
253,946 |
|
Capital redemption reserve |
|
20,367 |
|
20,367 |
|
Capital reserve |
|
287,783 |
|
319,573 |
|
Revenue reserve |
|
8,877 |
|
7,456 |
|
Shareholders' funds |
|
580,355 |
|
610,550 |
|
Net asset value per ordinary share |
|
637.18p |
|
664.65p |
|
Ordinary share in issue (note 9) |
|
92,074,961 |
|
92,074,961 |
Statement of Changes in Equity
For the year ended 31 July 2023
|
|
Share capital £'000 |
Share premium £'000 |
Capital redemption £'000 |
Capital reserve £'000 |
Revenue reserve £'000 |
Shareholder's funds £'000 |
|
Shareholders' funds at 1 August 2022 |
9,208 |
253,946 |
20,367 |
319,573 |
7,456 |
610,550 |
|
Net return after taxation |
- |
- |
- |
(27,451) |
4,166 |
(23,285) |
|
Ordinary shares bought back into treasury (note 9) |
- |
- |
- |
(5,541) |
- |
(5,541) |
|
Ordinary shares sold from treasury (note 9) |
- |
174 |
- |
1,202 |
- |
1,376 |
|
Ordinary shares issued (note 9) |
- |
- |
- |
- |
- |
- |
|
Dividends paid during the year (note 5) |
- |
- |
- |
- |
(2,745) |
(2,745) |
|
Shareholders' funds at 31 July 2023 |
9,208 |
254,120 |
20,367 |
287,783 |
8,877 |
580,355 |
For the year ended 31 July 2022
|
|
Share capital £'000 |
Share premium £'000 |
Capital redemption £'000 |
Capital reserve £'000 |
Revenue reserve £'000 |
Shareholder's funds £'000 |
|
|
|
|
|
|
|
|
|
Shareholders' funds at 1 August 2021 |
8,843 |
221,354 |
20,367 |
433,041 |
3,626 |
687,231 |
|
Net return after taxation |
- |
- |
- |
(112,014) |
3,830 |
(108,184) |
|
Ordinary shares bought back into treasury (note 9) |
- |
- |
- |
(1,454) |
- |
(1,454) |
|
Ordinary shares sold from treasury (note 9) |
- |
- |
- |
- |
- |
- |
|
Ordinary shares issued (note 9) |
365 |
32,592 |
- |
- |
- |
32,957 |
|
Dividends paid during the year (note 5) |
- |
- |
- |
- |
- |
- |
|
Shareholders' funds at 31 July 2022 |
9,208 |
253,946 |
20,367 |
319,573 |
7,456 |
610,550 |
Cash Flow Statement
For the year ended 31 July
|
|
2023 £'000 |
2023 £'000 |
2022 £'000 |
2022 £'000 |
|
Cash flows from operating activities |
|
|
|
|
|
Net return before taxation |
(21,199) |
|
(112,120) |
|
|
Net losses on investments |
25,404 |
|
118,594 |
|
|
Currency losses/(gains) |
791 |
|
(1,292) |
|
|
Finance costs of borrowings |
403 |
|
756 |
|
|
Overseas withholding tax incurred |
(881) |
|
(1,288) |
|
|
Indian tax paid on transactions |
(180) |
|
(774) |
|
|
Changes in debtors |
523 |
|
(580) |
|
|
Change in creditors |
(11) |
|
(9) |
|
|
Cash from operations* |
4,850 |
|
3,287 |
|
|
Interest paid |
(403) |
|
(765) |
|
|
Net cash inflow from operating activities |
|
4,447 |
|
2,522 |
|
Cash flows from investing activities |
|
|
|
|
|
Acquisitions of investments |
(89,277) |
|
(197,017) |
|
|
Disposals of investments |
99,574 |
|
196,116 |
|
|
Net cash inflow/(outflow) from investing activities |
|
10,297 |
|
(901) |
|
Cash flows from financing activities |
|
|
|
|
|
Ordinary shares bought back into treasury (note 9) |
(5,541) |
|
(1,454) |
|
|
Ordinary shares sold from treasury (note 9) |
1,376 |
|
- |
|
|
Proceeds from ordinary shares issued (note 9) |
- |
|
32,957 |
|
|
Borrowings drawn down |
- |
|
119,372 |
|
|
Borrowings repaid |
- |
|
(182,957) |
|
|
Equity dividends paid |
(2,745) |
|
- |
|
|
Net cash outflow from financing activities |
|
(6,910) |
|
(32,082) |
|
Increase/(decrease) in cash and cash equivalents |
|
7,834 |
|
(30,461) |
|
Exchange movements |
|
(791) |
|
4,094 |
|
Cash and cash equivalents at 1 August |
|
5,399 |
|
31,766 |
|
Cash and cash equivalents at 31 July |
|
12,442 |
|
5,399 |
‡Cash from operations includes dividends received of £9,925,000 (2022 - £10,279,000) and interest received of £163,000 (2022 - £6,000).
Notes to the Financial Statements
1. Principal Accounting Policies
The Financial Statements for the year to 31 July 2023 have been prepared in accordance with FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' on the basis of the accounting policies set out below which are unchanged from the prior year and have been applied consistently.
2. Income
|
|
2023 £'000 |
2022 £'000 |
|
Income from investments |
|
|
|
Overseas dividends |
9,417 |
11,060 |
|
Other income |
|
|
|
Deposit interest |
163 |
7 |
|
Total income |
9,580 |
11,067 |
|
Total income comprises: |
|
|
|
Dividends from financial assets designated at fair value through profit or loss |
9,417 |
11,060 |
|
Interest from financial assets not at fair value through profit or loss |
163 |
7 |
|
|
9,580 |
11,067 |
3. Investment Management Fee
The Company has appointed Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, as its Alternative Investment Fund Managers ('AIFM') and Company Secretaries. Baillie Gifford & Co Limited has delegated portfolio management services to Baillie Gifford & Co. Dealing activity and transaction reporting have been further sub-delegated to Baillie Gifford Overseas Limited and Baillie Gifford Asia (Hong Kong) Limited. The Managers may terminate the Management Agreement on six months' notice and the Company may terminate on three months' notice.
The annual management fee is 0.75% on the first £50 million of net assets, 0.65% on the next £200 million of net assets and 0.55% on the remaining net assets. Management fees are calculated and payable on a quarterly basis.
4. Net Return Per Ordinary Share
|
|
2023 Revenue |
2023 Capital |
2023 Total |
2022 Revenue |
2022 Capital |
2022 Total |
|
Net return after taxation |
4.56p |
(30.05p) |
(25.49p) |
4.21p |
(123.01p) |
(118.80p) |
Revenue return per ordinary share is based on the net revenue profit after taxation of £4,166,000 (2022 - net revenue profit of £3,830,000) and on 91,364,427 (2022 - 91,063,205) ordinary shares, being the weighted average number of ordinary shares in issue (excluding treasury shares) during the year.
Capital return per ordinary share is based on the net capital loss for the financial year of £27,451,000 (2022 - net capital loss of £112,014,000) and on 91,364,427 (2022 - 91,063,205) ordinary shares, being the weighted average number of ordinary shares in issue (excluding treasury shares) during the year.
Total return per ordinary share is based on the total loss for the financial year of £23,285,000 (2022 - total loss of £108,184,000) and on 91,364,427 (2022 - 91,063,205) ordinary shares, being the weighted average number of ordinary shares in issue (excluding treasury shares) during the year.
There are no dilutive or potentially dilutive shares in issue.
5. Ordinary Dividends
|
|
2023 |
2022 |
2023 £'000 |
2022 £'000 |
|
Amounts recognised as distributions in the year: |
|
|
|
|
|
Previous year's final dividend (paid 29 November 2022) |
3.00p |
- |
2,745 |
- |
We set out below the total dividends 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. There is a revenue surplus for the year to 31 July 2023 of £4,166,000 which is available for distribution by way of a dividend payment (2022- a revenue surplus of £3,830,000).
|
|
2023 |
2022 |
2023 £'000 |
2022 £'000 |
|
Amounts paid and payable in respect of the financial year: |
|
|
|
|
|
Proposed final dividend per ordinary share (payable - 30 November 2023) |
3.25p |
3.00p |
2,959 |
2,745 |
If approved, the recommended final dividend on the ordinary shares will be paid on 30 November 2023 to shareholders on the register at the close of business on 27 October 2023. The ex-dividend date is 26 October 2023. The Company's Registrars offer a Dividend Reinvestment Plan and the final date for elections for this dividend is 9 November 2023.
6. Fair Value Hierarchy
|
As at 31 July 2023 |
Level 1 £'000 |
Level 2 £'000 |
Level 3 £'000 |
Total £'000 |
|
Listed equities* |
542,048 |
1,273 |
- |
543,321 |
|
Unlisted company equities |
- |
- |
2,555 |
2,555 |
|
Unlisted company preference shares# |
- |
- |
26,872 |
26,872 |
|
Total financial asset investments |
542,048 |
1,273 |
29,427 |
572,748 |
|
As at 31 July 2022 |
Level 1 £'000 |
Level 2 £'000 |
Level 3 £'000 |
Total £'000 |
|
Listed equities |
570,801 |
495 |
- |
571,296 |
|
Unlisted company equities |
- |
- |
4,051 |
4,051 |
|
Unlisted company preference shares# |
- |
- |
33,192 |
33,192 |
|
Total financial asset investments |
570,801 |
495 |
37,243 |
608,539 |
* During the period, Brilliance China listed on the Hong Kong stock exchange having de-listed on 31 March 2021 and there was a demerger with Reliance Industries, where shares of Jio Financial Services were acquired but the company did not list until 21 August 2023.
# The investments in preference shares include liquidation preference rights that determine the repayment (or multiple thereof) of the original investment in the event of a liquidation event such as a take-over.
During the year to 31 July 2023 no investments (31 July 2022 - £23,341,000) were transferred from Level 3 to Level 1 on becoming listed.
Investments in securities are financial assets held at fair value through profit or loss. In accordance with Financial Reporting Standard 102, the tables above 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.
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 - using unadjusted quoted prices for identical instruments in an active market;
Level 2 - using inputs, other than quoted prices included within Level 1, that are directly or indirectly observable (based on market data); and
Level 3 - using inputs that are unobservable (for which market data is unavailable).
The Company's unlisted ordinary share investments at 31 July 2023 were valued using a variety of techniques. These include using comparable company performance, comparable scenario analysis, and assessment of milestone achievement at investee companies. The determinations of fair value included assumptions that the comparable companies and scenarios chosen for the performance assessment provide a reasonable basis for the determination of fair value. In some cases the latest dealing price is considered to be the most appropriate valuation basis, but only following assessment using the techniques described above.
7. Creditors - Amounts falling due within one year
|
|
2023 £'000 |
2022 £'000 |
|
Royal Bank of Scotland International Limited multi-currency revolving credit facility non-utilisation fee Investment purchases awaiting settlement Investment management fee Other creditors and accruals |
52
- 873 238 |
52
446 915 207 |
|
|
1,163 |
1,620 |
The Company has a multi-currency revolving credit facility with The Royal Bank of Scotland International Limited for up to £100 million, with a non-utilisation rate of 0.4%. This facility expires in March 2025. At 31 July 2023 there were no outstanding drawings (31 July 2022 - nil). The main covenants relating to the loan are that borrowings should not exceed 30% of the Company's adjusted net asset value and the Company's net asset value should be at least £300 million.
There were no breaches in the loan covenants during the year.
None of the above creditors at 31 July 2023 or 31 July 2022 are financial liabilities designated at fair value through profit or loss.
8. Provision for Tax Liability
The tax liability provision at 31 July 2023 of £4,092,000 (31 July 2022 - £3,016,000) relates to a potential liability for Indian capital gains tax that may arise on the Company's Indian investments should they be sold in the future, based on the net unrealised taxable capital gain at the period end and on enacted Indian tax rates (long term capital gains are taxed at 10% and short term capital gains are taxed at 15%). The amount of any future tax amounts payable may differ from this provision, depending on the value and timing of any future sales of such investments and future Indian tax rates.
9. Share capital
|
|
2023 Number of shares |
2022 Number of shares |
|
Allotted, called up and fully paid ordinary shares of 10p each Treasury shares of 10p each |
91,081,949 993,012 |
91,860,961 214,000 |
|
|
92,074,961 |
92,074,961 |
In the year to 31 July 2023, the Company issued 200,000 ordinary shares from treasury with a nominal value of £20,000, representing 0.2% of the issued share capital at 31 July 2022, at a premium to net asset value, raising net proceeds of £1,376,000 (2022 - 3,645,257 ordinary shares with a nominal value of £365,000, raising net proceeds of £32,957,000).
In the year to 31 July 2023, 979,012 ordinary shares, representing 1.1% of the issued share capital at 31 July 2022, were bought back at a total cost of £5,541,000 and are held in treasury (2022 - 214,000 shares, representing 0.2% of the issued share capital at 31 July 2021, were bought back during the year and subsequently reissued from treasury). At 31 July 2023 the Company had authority to allot or sell from treasury 8,964,320 ordinary shares without application of pre-emption rights and to buy back 13,374,618 ordinary shares on an ad hoc basis. Under the provisions of the Company's Articles of Association share buy-backs are funded from the capital reserve.
Between 1 August 2023 and 3 October 2023, no further shares were issued and 35,000 shares were bought back.
10. Transactions with related parties and the managers and secretaries
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.
Details of the management contract are set out in the Directors' report on page 61 of the annual report and financial statements. The management fee payable to the Manager by the Company for the year was £3,419,000 (2022 - £4,036,000) of which £873,000 (2022 - £915,000) was outstanding at the year end.
The Company is part of a marketing programme which includes all the investment trusts managed by the Manager. The Company's marketing contribution, recharged by the Manager, was £71,000 (£85,000).
11. The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 July 2023 or 2022 but is derived from those accounts. Statutory accounts for 2022 have been delivered to the Registrar of Companies, and those for 2023 will be delivered in due course. The auditor has reported on these accounts; the reports were unqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report and did not contain a statement under sections 498 (2) or 498(3) of the Companies Act 2006.
The Annual Report and Financial Statements will be available on the Company's page on the Managers' website pacifichorizon.co.uk† on or around 17 October 2023.
Glossary of Terms and Alternative Performance Measures ('APM')
Total Assets
This is the Company's definition of Adjusted Total Assets, being the total value of all assets held less all liabilities (other than liabilities in the form of borrowings).
Shareholders' Funds and Net Asset Value
Also described as shareholders' funds, Net Asset Value ('NAV') is the value of all assets held less all liabilities (including borrowings). The NAV per share is calculated by dividing this amount by the number of ordinary shares (excluding treasury shares) in issue.
Net Liquid Assets
Net liquid assets comprise current assets less current liabilities, (excluding borrowings) and provisions for deferred liabilities.
Discount/Premium (APM)
As stock markets and share prices vary, an investment trust's share price is rarely the same as its NAV. When the share price is lower than the NAV per share it is said to be trading at a discount. The size of the discount is calculated by subtracting the share price from the NAV per share and is usually expressed as a percentage of the NAV per share. If the share price is higher than the NAV per share, this situation is called a premium.
|
|
2023 |
2022 |
|
Net asset value per share (a) |
637.18p |
664.65p |
|
Share price (b) |
586.00p |
647.00p |
|
(Discount)/premium ((b) - (a)) ÷ (a) |
(8.0%) |
(2.7%) |
Turnover
Turnover is calculated as the minimum of purchases and sales in a month, divided by the average market value of the portfolio, summed to get rolling 12 month turnover data.
Ongoing Charges (APM)
The total recurring expenses (excluding the Company's cost of dealing in investments and borrowing costs) incurred by the Company as a percentage of the daily average net asset value, as detailed below:
|
|
2023 £'000 |
2022 £'000 |
|
Investment management fee |
3,419 |
4,036 |
|
Other administrative expenses |
762 |
1,093 |
|
Total Expenses (a) |
4,181 |
5,129 |
|
Average net asset value (b) |
578,071 |
691,596 |
|
Ongoing charges ((a) ÷(b)- expressed as a percentage |
0.72% |
0.74% |
China 'A' Shares
A' Shares are shares of mainland China-based companies that trade on the Shanghai Stock Exchange and the Shenzhen Stock Exchange. Since 2003, select foreign institutions have been able to purchase them through the Qualified Foreign Institutional Investor system.
Treasury shares
The Company has the authority to make market purchases of its ordinary shares for retention as Treasury Shares for future reissue, resale, transfer, or for cancellation. Treasury Shares do not receive distributions and the Company is not entitled to exercise the voting rights attaching to them.
Unlisted (private) company
An unlisted or private company means a company whose shares are not available to the general public for trading and are not listed on a stock exchange.
Total return (APM)
The total return is the return to shareholders after reinvesting the net dividend on the date that the share price goes ex-dividend. In periods where no dividend is paid, the total return equates to the capital return.
|
|
|
2023 NAV |
2023 Share price |
2022 NAV |
2022 Share price |
|
Closing NAV per share/share price |
(a) |
637.18p |
586.00p |
664.65p |
647.00p |
|
Dividend adjustment factor* |
(b) |
1.0056 |
1.0057 |
1.0000 |
1.0000 |
|
Adjusted closing NAV per share/share price |
(c) = (a) x (b) |
640.75p |
589.34p |
664.65p |
647.00p |
|
Opening NAV per share/share price |
(d) |
664.65p |
647.00p |
777.15p |
802.00p |
|
Total return |
(c) ÷ (d) -1 |
(3.6%) |
(8.9%) |
(14.5%) |
(19.3%) |
* The dividend adjustment factor is calculated on the assumption that the final dividend of 3.00p (31 July 2022 - nil) paid by the Company during the period was reinvested into shares of the Company at the cum income NAV per share/share price, as appropriate, at the ex-dividend date.
Gearing (APM)
At its simplest, gearing is borrowing. Just like any other public company, an investment trust can borrow money to invest in additional investments for its portfolio. The effect of the borrowing on the shareholders' assets is called 'gearing'. If the Company's assets grow, the shareholders' assets grow proportionately more because the debt remains the same. But if the value of the Company's assets falls, the situation is reversed. Gearing can therefore enhance performance in rising markets but can adversely impact performance in falling markets.
Gearing is borrowings at book less cash and brokers' balances expressed as a percentage of shareholders' funds.
|
|
2023 £'000 |
2022 £'000 |
|
Borrowings (at book cost) (a) |
- |
- |
|
Less: cash and cash equivalents |
(12,442) |
(5,399) |
|
Less: sales for subsequent settlement |
- |
(402) |
|
Add: purchases for subsequent settlement |
- |
466 |
|
Adusted borrowings (b) |
(12,422) |
(5,355) |
|
Shareholders' funds (c) |
580,355 |
610,550 |
|
Gearing: (b) as a percentage of (c) |
(2%) |
(1%) |
Gross gearing is the Company's borrowings expressed as a percentage of shareholders' funds.
|
|
2023 £'000 |
2022 £'000 |
|
Borrowings (at book cost) (a) |
- |
- |
|
Shareholders' funds (b) |
580,355 |
610,550 |
|
Potential gearing (a) as a percentage of (b) |
- |
- |
Leverage (APM)
For the purposes of the Alternative Investment Fund Managers Regulations leverage is any method which increases the Company's exposure, including the borrowing of cash and the use of derivatives. It is expressed as a ratio between the Company's exposure and its net asset value and can be calculated on a gross and a commitment method. Under the gross method, exposure represents the sum of the Company's positions after the deduction of sterling cash balances, without taking into account any hedging and netting arrangements. Under the commitment method, exposure is calculated without the deduction of sterling cash balances and after certain hedging and netting positions are offset against each other.
Active share (APM)
Active share, a measure of how actively a portfolio is managed,
is the percentage of the portfolio that differs from its comparative index. It is calculated by deducting from 100 the percentage of the portfolio that overlaps with the comparative index. An active share of 100 indicates no overlap with the index and an active share of zero indicates a portfolio that tracks the index.
Compound annual return (APM)
The compound annual return converts the return over a period of longer than one year to a constant annual rate of return applied to the compound value at the start of each year.
Third Party Data Provider Disclaimer
No third party data provider ('Provider') makes any warranty, express or implied, as to the accuracy, completeness or timeliness of the data contained herewith nor as to the results to be obtained by recipients of the data. No Provider shall in any way be liable
to any recipient of the data for any inaccuracies, errors or omissions in the index data included in this document, regardless of cause, or for any damages (whether direct or indirect) resulting therefrom.
No Provider has any obligation to update, modify or amend the data or to otherwise notify a recipient thereof in the event that any matter stated herein changes or subsequently becomes inaccurate.
Without limiting the foregoing, no Provider shall have any liability whatsoever to you, whether in contract (including under an indemnity), in tort (including negligence), under a warranty, under statute or otherwise, in respect of any loss or damage suffered by you as a result of or in connection with any opinions, recommendations, forecasts, judgements, or any other conclusions, or any course of action determined, by you or any third party, whether or not based on the content, information or materials contained herein.
MSCI Index Data
Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.
Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an 'as is' basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the 'MSCI Parties') expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (msci.com).
Pacific Horizon Investment Trust PLC (Pacific Horizon) aims to achieve capital growth through investment in the Asia-Pacific region (excluding Japan) and in the Indian subcontinent. The Company has total assets of £580.4 million (before deduction of loans of nil) at 31 July 2023.
Pacific Horizon is managed by Baillie Gifford & Co Limited, the Edinburgh based fund management group.
Past performance is not a guide to future performance. Pacific Horizon is a public listed company and is not authorised or regulated by the Financial Conduct Authority. The value of its shares and any income from those shares can fall as well as rise and you may not get back the amount invested. Pacific Horizon invests in overseas securities, changes in the rates of exchange may also cause the value of your investment (and any income it may pay) to go down or up. Pacific Horizon invests in emerging markets where difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment. Shareholders in Pacific Horizon have the right to vote every five years, on whether to continue Pacific Horizon, or wind it up. If the shareholders decide to wind the Company up, the assets will be sold and you will receive a cash sum in relation to your shareholding. The next vote will be held at the Annual General Meeting in 2026. You can find up to date performance information about Pacific Horizon on the Pacific Horizon page of the Managers' website at pacifichorizon.co.uk.†
†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.
5 October 2023
For further information please contact:
Anzelm Cydzik, Baillie Gifford & Co
Tel: 0131 275 2000
Jonathan Atkins, Four Communications
Tel: 0203 920 0555 or 07872 495396
- ends -
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