REG - Pacific Horizon - Pacific Horizon Investment Trust annual results
16/09/2022 09:00
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RNS Number : 7410Z Pacific Horizon Investment Tst PLC 16 September 2022
RNS Announcement: PHI Results
Pacific Horizon Investment Trust PLC ('PHI')
Legal Entity Identifier: VLGEI9B8R0REWKB0LN95
Regulated Information Classification: Notice of results.
Results for the year to 31 July 2022
The following is the results announcement for the year to 31 July 2022 which
was approved by the Board on 15 September 2022.
Chairman's Statement
Performance
I commented in my report last year that investors should expect that neither
the Company's absolute, nor relative, returns would be consistent. Sadly, this
cautionary note proved more prescient than I might have wished. In the year to
31 July 2022, the Company's net asset value per share (NAV) declined by 14.5%
compared to a negative total return of 8.2%(*) from the MSCI All Country Asia
ex Japan Index in sterling terms. The share price total return for the year
was a negative 19.3%, resulting in the shares ending the period at a 2.7%
discount to the NAV per share having been at a 3.2% premium a year earlier.
While this loss is disappointing, the causes of the weakness of Asian markets
are well understood: inflation, US dollar interest rate increases and
continued lockdowns in China have all led to market weakness. This does not
however explain the significant relative underperformance of the portfolio.
Your Board believes the interests of shareholders are best served through
having an actively managed portfolio. We believe the performance of the
Company supports this view. The underperformance of the Company in the short
term is significantly less than its outperformance in the longer term. The
volatility of performance, like the management fees, is a price to be paid for
the Company being managed on an active basis. Over the course of the last ten
years, shareholders have enjoyed approximately 6.7 percentage points a year of
excess returns above the comparative index†. Over the full period, this
equates to an aggregate of 174 percentage points of excess total return over a
passive investment strategy represented by the comparative index†.
The strategy that has achieved this outperformance is investment in high
growth companies that have the potential to make exceptional returns over the
long term. Growth investing has not been rewarded recently, in part because of
higher interest rates which growth companies can be particularly sensitive to.
Volatility may continue and further significant losses cannot be ruled out;
only an optimist would consider we are out of the woods yet. As you will see
in the Managers' Report below, it is their intention to continue to focus on
growth companies in the future. The Board believes that this strategy has the
potential to continue to serve shareholders well and that the Managers have
clearly demonstrated their ability as a growth investor in both the period
under review and over the long term.
Gearing
The Board continues to set and regularly review the gearing parameters within
which the portfolio manager is permitted to operate. At present, the agreed
range of equity gearing is minus 15% (holding net cash) to plus 15%. As at 31
July 2022, invested gearing was minus 1% compared to 4% at the start of the
Company's financial year, reflecting Mr Snell's current caution.
Gearing is achieved through the use of bank borrowings. At present the Company
has a three year multi-currency revolving credit facility with The Royal Bank
of Scotland International Limited for up to £100 million, which provides at
present for potential invested gearing of 15.5%.
Earnings and Dividend
Earnings per share increased to a positive 4.21p per share compared to a
deficit of 0.51p per share last year, resulting in the Company being in a
position to pay a final dividend. The Board is therefore recommending that a
final dividend of 3.00p should be paid, 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 Buy-backs and Treasury
Over the twelve months to 31 July 2022, the Company issued 3,645,257 shares at
a premium to NAV, being 4.1% of the shares in issue at the start of the
Company's financial year, and also bought back for treasury a total of 214,000
shares. All of the issuance occurred in 2021 and all of the buy-backs in 2022.
At the forthcoming AGM in November, the Board will be seeking 10% non
pre-emptive issuance authority. Issuance will continue to be undertaken only
at a premium to the NAV per share, thereby avoiding dilution for existing
investors. When the authority is utilised in this manner, it enhances NAV per
share, improving liquidity in the Company's shares and spreading the operating
expenses of the Company across a wider base, thus reducing costs to each
shareholder; ongoing charges for the year were 0.74% compared to 0.78% in the
prior year.
As part of this year's AGM business, the Board will also 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 Board intends to use the buy-back
authority opportunistically, taking into consideration not only the level of
any discount but also the underlying liquidity and trading volumes in the
Company's shares. This allows the Board to address any imbalance between the
supply and demand in the Company's shares that results in a large discount to
the NAV per share. The Board remains cognisant that current and potential
shareholders have expressed a desire for continuing liquidity.
The Board believes that the Company benefits from holding any shares that are
bought back in treasury, so that it has the ability to re-issue these shares
in the circumstances described above; 431,726 shares are held in treasury at
present.
Private Company Investments
Last year, shareholders approved a change in the Company's Investment Policy
which increased the maximum permissible investment in private companies from
10% to 15% (such percentage being measured at the point of initial
investment). As at 31 July 2022, the Company had 6.1% of its total assets
invested in 5 private companies compared to 7.2% and 7 private companies a
year earlier, Star Health & Allied Insurance Co having listed in December
2021 and Delhivery in May 2022.
Details on the process and quantum of private company valuations undertaken
over the year can be found immediately after the Managers' Review.
Governance and Stewardship
The Board has agreed with the Managers that they will consider Environmental,
Social and Governance ('ESG') factors as part of the investment process.
Baillie Gifford advised the Board that it aims to adopt a position of
supportive and constructive engagement without prescriptive policies or rules,
assessing matters on a case-by-case basis. Although Baillie Gifford has
clearly articulated ESG principles and a detailed policy framework, the Board
accepts that their application, particularly in some of the developing nations
of Asia, and in often quite complex situations, is necessarily subjective.
Some examples of such engagement can be found below. The Board reviews and
challenges the Managers' performance in meeting this ESG objective at each
Board meeting and also covers ESG matters with the Managers as part of an
annual strategy session.
A document outlining Baillie Gifford's Governance and Sustainability
principles can be found on the Baillie Gifford website at bailliegifford.com
and the Company's voting record can be found at page 37 of the Annual Report
and Financial Statements. Details of the Company's policy on socially
responsible investment can be found under Corporate Governance and Stewardship
on page 17 of the Annual Report and Financial Statements.
Annual General Meeting
This year's AGM will take place on 24 November 2022 at the offices of Baillie
Gifford & Co in Edinburgh at 11.00am and shareholders are encouraged to
attend. If doing so, please endeavour to arrive by 10.50am to allow time to
register. There will be a presentation from Mr Snell 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
This is not an easy investment environment. The immediate future is one of
elevated inflation levels, higher borrowing costs and likely tempered
consumption. It is therefore important that the Managers remain alert to new
investment opportunities, threats to existing holdings and maintain a close
scrutiny of firms' operational performance and financial resilience.
Further underperformance cannot be ruled out. However, a portfolio containing
both structural and cyclical growth companies seems prudent at present.
Patient investors could be rewarded with significant returns once stock
specific fundamentals reassert themselves.
Angus Macpherson
Chairman
15 September 2022
(*)Calculated on a total return basis. Source: Baillie Gifford/Refinitiv and
relevant underlying index providers.
† The MSCI All Country Asia ex Japan Index (in sterling terms) is the
principal index against which performance is measured. 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.
Managers' Review
Overview
Over the coming decades we believe Asia will be one of the world's fastest
growing regions and we strive to be invested in its fastest growing companies.
It is growth multiplied by growth or, as we like to call it, 'Growth²'.
Our investment philosophy has added significant value for shareholders over
the long term. However, by running a differentiated, high conviction
portfolio, there will inevitably be short periods of time when we are out of
favour with the market, and this has been one such year.
Surging global inflation, exacerbated by events such as war in Ukraine and
continued lockdowns in China, led to rising interest rates, significantly
tighter global monetary conditions and volatile markets. Such an environment
has been a headwind for our growth-oriented investment style.
Consequently, after several years of extremely strong performance, this year
saw the Company's NAV and share price decreasing by 14.5% and 19.3%
respectively. This is compared to the comparative index, the MSCI All Country
Asia ex Japan Index, in sterling terms, which had a negative total return of
8.2%. Longer term performance remains strong; the Company's NAV having
outperformed the comparative index by 12.8 percentage points per annum over
the past 5 years.
Although the shorter-term outlook for Asian markets is uncertain, we remain
optimistic. Following the significant falls in share prices across the region,
valuations appear even more attractive, and we continue to have confidence in
the outlook for the companies in the portfolio. 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 (12.6 vs. 12.2), yet they
are expected to grow their earnings at a faster rate (14.7% vs. 9.1%).
The broad overall shape of the portfolio remains similar to last year, with
significant exposure to both cyclical growth, particularly materials and
energy, and secular growth, including technology and consumer, companies.
However, notable changes have included a significant reduction in India, which
funded increases in exposure to China, where we have been significantly
underweight for some time, and Indonesia.
Gearing was reduced from 4% to zero over the period, and the unlisted portion
of the portfolio decreased from 7.2% to 6.1% as two of our private companies
listed on public markets.
Our long-term enthusiasm for the region remains strong. The risks and
opportunities from increased disruption are here to stay. In our view, the
market's focus on geopolitics and capital flows misses the bigger picture:
that of a global rise in digital penetration, technological change and the
growth of the Asian middle class. These fundamentals will underpin development
in the region for decades to come. We believe that the best way to invest in
this rapidly changing growth market is to find its best long-term growth
companies.
Philosophy
We are growth investors endeavouring to invest in the top twenty percent of
the fastest growing companies in the region. We are patient and seek out
companies whose business models and management teams are likely to fulfil
their ambitions. We look for areas where our ideas give us an edge over the
market over a long timeframe.
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:
1) Underappreciated growth duration
We believe one of the greatest investment inefficiencies in Asia (excluding
Japan) 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.
2) 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. This requires us to think carefully about probabilities
and possibilities, to spend more time thinking about what can go right rather
than what can go wrong in any investment.
3) Underappreciated growth surprise
The final significant inefficiency in Asia (excluding Japan) lies in the
interaction between top-down and bottom-up investing. Asia (excluding Japan)
investors 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
2022)
20.1% 10.5%
One year forecast earnings growth (to 31 July 2023) 14.7% 9.1%
Estimated p/e ratio for the current year (to 31 July 2022) 12.6x 12.2x
Percentage in under £1bn market cap companies 16.1% 0.1%
Percentage in under £5bn market cap companies 48.8% 10.7%
Active share 83.3% n/a
Portfolio turnover 16.0% n/a
Data as at 31 July 2022, source: Baillie Gifford, UBS PAS, APT, MSCI (see
disclaimer at the end of this announcement).
As highlighted in the table above, the growth characteristics of the current
portfolio remain strong, with historic earnings growth and one-year forecast
earnings growth higher than the comparative index equivalents. The portfolio's
estimated price-to-earnings ratio for the current year is 12.6 versus 12.2 for
the comparative index. Over the longer term, we believe the higher growth
potential of our holdings more than justifies this multiple.
Portfolio Overview
By sector, the shape of the portfolio remains similar to the start of the
period. In absolute terms, our largest exposures remain focused on the key
themes of the rising middle class, technology and innovation. However, we also
have significant exposures to more cyclical industries including materials,
industrials and energy that respectively make up the first, second and fourth
largest relative positions, versus the comparative index, within the
portfolio. The portfolio's distribution of assets by geography and sector are
shown below.
There have, however, been notable reductions to some of our cyclical holdings,
in particular materials. Our exposure here can be divided into two - those
materials that are exposed to the green transition, such as nickel and copper,
and those that are not. It is in the latter where we have been reducing most
significantly with complete sales of companies including Tata Steel and Jindal
Steel & Power (both India steel companies), Vedanta (iron ore, zinc,
aluminium) and RUSAL (aluminium). Most of these positions were taken during
the Covid-19 pandemic when valuations reached extremely depressed levels
despite sound and growing operations. However, with share prices of companies
such as Vedanta having peaked at more than 500% from its Covid trough, we
struggle to make a case for doubling our money over the next five years.
Our remaining materials exposure is predominantly to those metals at the core
of the green revolution, copper and nickel. Copper, as the most cost-effective
conductive material, is critical to capturing, storing and transporting new
energy sources, and demand from green sources could easily grow ten-fold by
2030. To put that into perspective, green demand could match and quickly
surpass the incremental demand China generated during the 2000s which created
the last commodity super cycle. Nickel is a critical material in electric
vehicle batteries, and demand will likely significantly outstrip supply as
electric vehicle demand continues to grow exponentially.
By country there have been three noticeable changes.
The first is a reduction to our Indian exposure from a 28.9% absolute position
to 24.2% being a 10 percentage point relative overweight position to the 14.2%
of the comparative index. This reflects a mixture of macroeconomic factors and
valuations, albeit we remain enthused by the country's long-term prospects as
demonstrated by India still being the largest country overweight in the
portfolio.
The key issue for the country is rising energy prices. India is arguably the
most sensitive, large Asian country to high oil prices which will increasingly
strain the current account, currency and growth. This is against a backdrop of
rising domestic inflation, slowing domestic growth and already high
valuations.
Fortunately, this is unlikely to lead to a crisis of old, as India enters this
challenging period in reasonably sound financial strength with foreign
exchange reserves of nearly $600bn (roughly double 2012 when the country last
faced similar headwinds), decent import cover and a domestically focused
economy less exposed to the slowing global economy.
Sales were predominantly in 'old economy' sectors including, as mentioned,
materials and also housing (DLF) and banking (IDFC Bank). We are increasingly
enthused by the 'new economy', in which 4G mobile networks have brought the
internet to the masses and are catalysing the emergence of a new and exciting
breed of innovative technology focused companies. Our largest holding in this
new economy is Delhivery, the country's leading enabler of pan Indian
e-commerce logistics. This was a privately held investment that listed over
the period and now accounts for 5.5% of the portfolio. Other notable new
economy companies include Dailyhunt (private company, 4.1%) and Zomato (1.3%).
As noted earlier, reductions in India were used to fund opportunities in both
Indonesia and China. The macro-economic situation in Indonesia looks
increasingly favourable. The country is one of the biggest beneficiaries of
rising raw material prices across the region with significant exports of coal,
palm oil and nickel (the latter potentially making Indonesia a regional hub
for electric vehicle components). These exports will support a strong current
account, (which is likely to be in a surplus of c.$50bn by the end the of the
year), and the rupiah. Combined with an underleveraged banking system we
believe the domestic economy looks better placed than it has for many years.
During the period we purchased PT Astra International, Indonesia's leading
automotive distributor and Bank Rakyat, arguably the best micro finance
company in Asia.
Looking to North Asia, it has been a torrid time for investors in China.
Regulatory clampdowns on the private sector, increasing geopolitical tensions,
Covid-19 lockdowns and problems in the property market have led to a collapse
in investor sentiment: the MSCI China index is down nearly 50% since its 2021
peak, while many Chinese companies listed in the USA have fallen more than
70%.
Whilst we acknowledge many of these issues are serious, we believe investors
have become too pessimistic and significant long-term value may be emerging.
In the technology space in particular, valuations appear extremely compelling
(the core e-commerce business of Alibaba Group for instance trades on <5x
P/E multiples), and in the long term many of the technology regulations, such
as those combating monopoly practices in the internet sector, appear broadly
sensible and arguably put China at the forefront of internet regulations
globally.
We made significant additions to China taking it from a 18.1% position to
24.7%, making it the largest absolute country exposure in the portfolio
(albeit still a 5.2 percentage point relative underweight). The most notable
purchases were in the internet sector where new purchases were made in
Baidu.com, Meituan and Alibaba Group, whilst we also added to a number of
existing holdings including JD.com. Exposure to the Chinese consumer was
increased with new holdings in Midea and Zhejiang Supor Co, and we added to
our green technology holdings including LONGi Green Energy and Wuxi Lead
Intelligent Equipment Co.
Finally, we have been watching geopolitical developments in Taiwan extremely
closely, and it is perhaps here where the biggest risks to the region and our
portfolio lie. It seems inevitable that China's position on Taiwan will become
an ever more divisive topic with the West. China's ambitions for Taiwan are
clear - reunification by 2049, but president Xi desires it much sooner.
Whilst military action is likely unviable within the next five years,
increased non-military coercion appears likely to ratchet over the coming
years. This comes at a time of already increased tensions between China and
the West, and it is notable that an increasingly hawkish stance against China
is the one topic American politicians appear to agree on. The result is likely
to be rising Chinese and American tensions, and the world increasingly
splitting into two spheres of political, technological and economic
influences. We are considering the implications of such an eventuality
carefully.
Performance
We are long-term investors, running a high conviction growth portfolio that is
index agnostic. Performance will be volatile and there will be short term
periods when we underperform. It is pleasing that over the past 5 years, the
timescale on which we believe our performance should be judged, the portfolio
has generated significant value for shareholders. However, against an
extremely challenging global backdrop, performance over the past year, both in
absolute and relative terms, was weak.
Soaring inflation and rising interest rates were major headwinds for our
growth-oriented investment style. This was particularly pronounced in many of
our higher growth companies, where the net present value of the businesses
lies in cash flows far into the future and is greatly diminished by rising
discount rates.
In the previous year our performance was helped significantly by our
broadening of the portfolio into more cyclical growth companies.
Unfortunately, as the likelihood of a global recession increased during the
year, compounded by numerous world events including war in Ukraine, a European
energy crisis, Chinese lockdowns and increasing tensions over Taiwan, our
cyclical holdings were unable to offset the weakness elsewhere in the
portfolio.
By sector, the largest positive contributors to performance were Consumer
Discretionary, Energy and Industrials in that order. Consumer Discretionary
was led by Tata Motors (Indian automotive company that owns the Jaguar Land
Rover Brand) which was also the single largest stock contributor to returns.
The company continues to see a strong turnaround in its domestic automotive
business, with passenger vehicle market shares now nearing 15%, and commercial
vehicles sales improving. Longer term, it is the company's investment in
electric vehicles that could be most valuable. The company has approximately
90% market share of the domestic electric passenger car market, a strong EV
pipeline and is working with other Tata Group companies, including Tata Power,
Tata Chemicals, Tata Auto Components, to build an EV ecosystem called the
'Tata UniEVerse'.
Elsewhere in the Consumer Discretionary sector, it was what we did not own
that had the most positive impact on our relative performance. In particular,
a significant underweight position in Alibaba Group and not holding Tencent
were both top five stock contributors relative to the index. These companies
continued to be impacted in the first half of the period by the continued
regulatory clampdowns in China and broader negative investor sentiment towards
the country. After a very challenging few years, we are starting to see
opportunities emerge in China, and towards the end of the period started to
buy back into the Chinese internet companies.
Energy was our second-best performing sector, led by the oil and gas company,
Jadestone Energy, which benefitted significantly from the rising oil price
while continuing to operate its assets extremely efficiently. Industrials were
led by Delhivery, which listed at a premium to its unlisted valuation.
By country, Indonesia was our best performing market, led by our material
holdings including Merdeka Copper Gold and Nickel Mines. This was followed by
Russia, where our sole exposure was RUSAL, the aluminium producer listed in
Hong Kong (now sold), and South Korea.
By some margin Singapore was our largest detractor. This was almost entirely
due to the poor performance of Sea Limited, which fell 75.5% over the period
and accounted for roughly half of the portfolio's entire underperformance.
Operationally there were some moderate setbacks. The company's hit game, Free
Fire, appears to be reaching peak user numbers, and the company exited India
(having launched its e-commerce operations in August 2021) as it focused more
on profitability.
However, Sea Limited appears to be part of a broader trend of sentiment
turning against rapidly growing, loss making technology companies, especially
those in emerging markets listed in the United States. While many of these
share price corrections may be warranted, we believe the indiscriminate
selling across the sector has failed to discriminate between genuinely strong
long term business models and weaker players. With continued market share
gains across its key ASEAN markets and weakened competition, we continue to
believe Sea Limited is the best consumer play across the south east Asian
region.
China was the other key detractor to performance led by technology companies
Dada Nexus and Kingsoft Cloud. Unlike Sea Limited, operational deterioration
was more prominent, especially at Kingsoft Cloud Holdings where the company
has been losing market share and moves by the government to establish its own
cloud infrastructure suggest the market will become significantly more
competitive. This led to the holding being sold.
Our Korea and Taiwan exposure also underperformed, the former as a number of
our industrial cyclicals came under pressure, such as Koh Young Technology,
while Taiwan was the result of our underweight in TSMC.
By sector, the biggest detractor to our performance was Financials, which was
the best performing sector in the index (and along with Utilities the only
sector to produce positive absolute returns), but the largest underweight
position in the portfolio. There was also notable weakness in the Information
Technology and Communication Services for reasons already discussed.
Environmental, Social and Governance Considerations
As growth investors, we are attracted to companies whose products will benefit
from strong future demand. These companies not only have to produce better and
cheaper products and services than their competitors, but they must also be
alert for changes in the outlooks and attitudes of the societies of which they
are part.
Companies that fail to keep pace in this way tend to fail, either because of
falling consumer demand for their products or because of government
intervention in their activities. When taking investment decisions, we
consider the potential positive and negative impact on society that companies
may have, and how their commercial activities may be perceived by external
stakeholders in the future.
For our long-term investments to be successful, the companies in which we
invest must add value to society. This can be achieved in various ways. For
example, the products of our regenerative biotech company, L&C Bio, may
allow many to benefit from otherwise unachievable medical cures, our internet
companies provide goods and services at prices and in quantities previously
beyond the reach of many, while our technology holdings are enabling the
fastest increase in human connectivity and information on record.
Lastly, it is very important to us that the interests of minority shareholders
are upheld. We remain careful to make sure our investments are aligned with
those of majority shareholders and owners.
Outlook
We remain extremely positive on the long-term outlook for the region. The rise
of the Asian middle class, accelerated by technology and innovation, continues
to be one of the most powerful investment opportunities of the coming decade.
We are enthused by the number of exciting growth companies we can buy that are
exposed to these themes, many of which are now trading on historically low
valuations.
Against this long-term positive backdrop for Asia, we would however note that
shorter term there are many challenges facing global markets and rarely has it
been harder to predict outcomes. Our advantage in such a scenario is our
long-term investment approach, ignoring volatility and focusing on finding
great companies that will be winners in Asia over the coming decades.
We also see reasons for optimism. Many of the inflationary causes effecting
the world are likely to subside with the ending of lockdowns and related
monetary stimulus. Such a scenario would be extremely beneficial to the global
economy and very supportive to growth companies more generally. Asia itself
looks well placed, having run far more prudent fiscal and monetary policies
over the Covid crisis compared to the profligacy of many developed countries.
Over the coming years, the decent growth rates, sensible interest rates and
limited balance sheet expansion across much of Asia, is likely to compare very
favourably to other markets. The future is to the east.
(*) 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 committee at Baillie Gifford
which takes advice from an independent third party (S&P Global). The
portfolio managers feed into the process, but the valuations committee owns
the process and the portfolio managers only receive final valuation
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. 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 committee 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);
or 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 NAV. There is no delay.
The valuations committee also monitors relevant market indices on a weekly
basis and update valuations in a manner consistent with our external valuer's
(S&P Global) most recent valuation report where appropriate. When market
volatility is particularly pronounced the team undertake these checks daily.
Recent 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
Quantum of individual (lines of stock) reviewed 27
Quantum of revaluations post review 25
Percentage of portfolio revalued 2+ times 100%
Percentage of portfolio revalued 5+ times 50%
*Excludes Delhivery and Star Health & Allied Insurance Co which listed in
the period
Year to date, 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 † (14.70%) (19.31%)
*Excludes Dailyhunt (VerSe Innovation) following fund raise at a notably
higher valuation. Average movement in company value including Dailyhunt
results in (2%) compared to (14.7%) shown in table.
† Data reflecting period 1 August 2021 - 31 July 2022 to align with the
Trust's reporting period end
Share prices have decreased less than headline valuations because Baillie
Gifford typically holds preference stock, which provides downside 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 be normally be triggered in the event of a
corporate sale or liquidation.
Baillie Gifford Statement on Stewardship
Baillie Gifford's over-arching ethos is that we are 'actual' investors. We
have a responsibility to behave as supportive and constructively engaged
long-term investors. We invest in companies at different stages in their
evolution, across vastly different industries and geographies and we celebrate
their uniqueness. Consequently, we are wary of prescriptive policies and
rules, believing that these often run counter to thoughtful and beneficial
corporate stewardship. Our approach favours a small number of simple
principles which help shape our interactions with companies.
Our Stewardship Principles
Prioritisation of Long-term Value Creation
We encourage our holdings to be ambitious and focus their investments on
long-term value creation. We understand that it is easy to be influenced by
short-sighted demands for profit maximisation but believe these often lead to
sub-optimal long-term outcomes. We regard it as our responsibility to steer
holdings away from destructive financial engineering towards activities that
create genuine economic and stakeholder value over the long run. We are happy
that our value will often be in supporting management when others don't.
A Constructive and Purposeful Board
We believe that boards play a key role in supporting corporate success and
representing the interests of all capital providers. There is no fixed
formula, but it is our expectation that boards have the resources,
information, cognitive and experiential diversity they need to fulfil these
responsibilities. We believe that good governance works best when there are
diverse skillsets and perspectives, paired with an inclusive culture and
strong independent representation able to assist, advise and constructively
challenge the thinking of management.
Long-term Focused Remuneration with Stretching Targets
We look for remuneration policies that are simple, transparent and reward
superior strategic and operational endeavour. We believe incentive schemes can
be important in driving behaviour, and we encourage policies which create
genuine long-term alignment with external capital providers. We are accepting
of significant payouts to executives if these are commensurate with
outstanding long-run value creation, but plans should not reward mediocre
outcomes. We think that performance hurdles should be skewed towards long-term
results and that remuneration plans should be subject to shareholder approval.
Fair Treatment of Stakeholders
We believe it is in the long-term interests of all enterprises to maintain
strong relationships with all stakeholders - employees, customers, suppliers,
regulators and the communities they exist within. We do not believe in
one-size-fits-all policies and recognise that operating policies, governance
and ownership structures may need to vary according to circumstance.
Nonetheless, we believe the principles of fairness, transparency and respect
should be prioritised at all times.
Sustainable Business Practices
We believe an entity's long-term success is dependent on maintaining its
social licence to operate and look for holdings to work within the spirit and
not just the letter of the laws and regulations that govern them. We expect
all holdings to consider how their actions impact society, both directly and
indirectly, and encourage the development of thoughtful environmental
practices and 'net-zero' aligned climate strategies as a matter of priority.
Climate change, environmental impact, social inclusion, tax and fair treatment
of employees should be addressed at board level, with appropriately stretching
policies and targets focused on the relevant material dimensions. Boards and
senior management should understand, regularly review and disclose information
relevant to such targets publicly, alongside plans for ongoing improvement.
Environmental, Social and Governance Engagement
By engaging with companies, we seek to build constructive relationships with
them, to better inform our investment activities and, where necessary, effect
change within our holdings, ultimately with the goal of achieving better
returns for our shareholders. The three examples below demonstrate our
stewardship approach through constructive, ongoing engagement.
LONGi Green Energy
LONGi Green Energy is a China-based semi-conductor company mainly engaged in
the production of solar panels.
We engaged with LONGi Green Energy to address specific aspects of its supply
chain oversight process. The supply chain for LONGi Green Energy is complex
and extends into higher-risk countries and regions where monitoring can be
restricted. Our direct engagement with company management provided the answers
we required on on-site inspection, auditing and ongoing monitoring and
mitigation steps if breaches are discovered.
We also engaged with LONGi Green Energy to understand the company's efforts on
recycling and what factors hinder LONGi Green Energy from embracing a carbon
neutrality goal at present. From the conversation, we know that LONGi Green
Energy has recently formed a specialised team for recycling nearly retired
solar modules. LONGi Green Energy's latest ESG report and White Paper on
Climate Action detail the company's emission reduction targets. Based on a
2020 baseline, by 2030 carbon emissions within the scope of operations will be
reduced by 60 per cent and the carbon emissions intensity per ton of silicon
material, per watt of cell and per ton of glass will be reduced by 20 per
cent.
The company is a pioneer in setting a concrete fi rm-wide climate action plan,
joining various climate-related initiatives, and constructing its first
net-zero factory. We value the efforts and contributions of LONGi Green Energy
to China's wider decarbonisation and green transition.
Samsung Electronics
Samsung Electronics Co Ltd is a Korea-based company principally engaged in the
manufacture and distribution of memory chips, phones and electronic
components.
While Samsung discloses its carbon emissions, it is yet to disclose updated
carbon reduction targets. Through discussion with the company's sustainability
team, they recognised the importance of having carbon reduction targets and
explained that the process of defining and setting targets is under w ay. We
strongly encouraged these targets to be set in line with science-based
projections.
Following up on the progress Samsung Electronics was making towards
implementing its ESG strategy, we heard that Samsung has become a signatory to
the United Nations Global Compact earlier this year. In addition, the number
of employees working in the central ESG team has quadrupled in the past 12
months and is continuing to grow - emphasising the investment Samsung is
making to embed its sustainability strategy.
Li Ning
Li Ning is the leading domestic branded sportswear retailer in China. It is in
the midst of a turnaround where the company's sales are playing catch-up to
its strong brand image. The Chinese brand is attracting the younger market and
is driving a significant increase in sales.
In April, we met with the CEO on a range of issues. One of the areas we
wanted to learn more about was its approach to upholding international labour
standards in its sourcing practices and supply chains. Li Ning confirmed that
it does not use forced labour and provided more details on its supply chain
due diligence. Li Ning reaffirmed its commitment to zero forced labour and
supplier sourcing practices. We have encouraged further transparency in this
area and are following up with the company to learn more about its plans.
Review of Investments
A review of the Company's ten largest investments as at 31 July 2022 is given
below.
Delhivery
Delhivery is an Indian logistics company, and the leading independent provider
of end-to-end delivery services, with a national network used by all ecommerce
players. The scale and modernity of its network has allowed it to deliver both
the lowest costs and a reliable delivery experience, making it one of the
best-placed operators to benefit from the continued growth of Indian
ecommerce. This was previously a private company investment.
Geography India
Valuation £33,717,000
% of total assets* 5.5%
(Valuation at 31 July 2021 £19,501,000)
(% of total assets at 31 July 2021 2.6%)
(Net purchases in year to 31 July 2022 nil)
Samsung Electronics
Samsung is a global leader in semiconductors and electronics. Its core
business is highly cash-generative, and the group has the financial and human
capital that permits it to invest and innovate at scale.
Geography Korea
Valuation £33,653,000
% of total assets* 5.5%
(Valuation at 31 July 2021 £1,981,000)
(% of total assets at 31 July 2021 0.3%)
(Net purchases in year to 31 July 2022 £37,671,000)
Dailyhunt (VerSe Innovation)
A private company investment, Dailyhunt is an Indian consumer media company.
Its short form video and news aggregator apps are popular across the country.
Its localised and user-generated content ensures engagement, which is valued
by advertisers looking to reach the Indian mass-market.
Geography India
Valuation £25,235,000
% of total assets* 4.1%
(Valuation at 31 July 2021 £14,412,000)
(% of total assets at 31 July 2021 2.0%)
(Net purchases in year to 31 July 2022 £6,373,000)
Jadestone Energy
Jadestone Energy is an exploration and production company with oil and gas fi
elds across Asia-Pacific. They acquire smaller assets from the energy majors,
as well as bringing expertise to previously state-owned fields, investing to
boost production and extend their useful life.
Geography Singapore
Valuation £21,754,000
% of total assets* 3.6%
(Valuation at 31 July 2021 £16,920,000)
(% of total assets at 31 July 2021 2.3%)
(Net purchases in year to 31 July 2022 nil)
JD.com
JD.com is the largest Chinese retailer, via its dominant share in the online
ecommerce 3C market, and it is the second-largest player in overall Chinese
ecommerce. It has a strong logistics network and a focus on customer service,
which is driving increased revenue and market share.
Geography Hong Kong and China
Valuation £20,167,000
% of total assets* 3.3%
(Valuation at 31 July 2021 £14,885,000)
(% of total assets at 31 July 2021 2.0%)
(Net purchases in year to 31 July 2022 £6,345,000)
Merdeka Copper Gold
An Indonesian copper miner, with the rights to the country's second-largest
copper and gold deposits. Operationally, it has an attractive combination of
management with a track record, as well as supportive local shareholders.
Geography Indonesia
Valuation £17,027,000
% of total assets* 2.8%
(Valuation at 31 July 2021 £12,447,000)
(% of total assets at 31 July 2021 1.7%)
(Net purchases in year to 31 July 2022 £1,233,000)
Li Ning
Li Ning is the leading domestic branded sportswear retailer in China. It is in
the midst of a positive turnaround where the company's sales are playing
catch-up to its strong brand image. The Chinese brand is attracting the
younger market and is driving a significant increase in sales.
Geography Hong Kong and China
Valuation £16,368,000
% of total assets* 2.7%
(Valuation at 31 July 2021 £18,613,000)
(% of total assets at 31 July 2021 2.5%)
(Net purchases in year to 31 July 2022 nil)
Sea Limited
Sea Limited is one of the leading players in South East Asia within the gaming
markets and online ecommerce. It is an independent company with significant
backing from Tencent. Its markets have the potential to grow exponentially
over the next decade.
Geography Singapore
Valuation £13,839,000
% of total assets* 2.3%
(Valuation at 31 July 2021 £56,394,000)
(% of total assets at 31 July 2021 7.5%)
(Net purchases in year to 31 July 2022 £665,000)
Reliance Industries
The leading conglomerate in India, Reliance's interests span three industries
but all show ambitious long-term growth, characteristic of Mukesh Ambani's
leadership. Heavy investment into renewable energy and modern retail sit
alongside its Jio mobile network and long-standing petrochemicals business.
Geography India
Valuation £13,839,000
% of total assets* 2.2%
(Valuation at 31 July 2021 £7,015,000)
(% of total assets at 31 July 2021 1.0%)
(Net purchases in year to 31 July 2022 nil)
MMG
MMG is a Hong Kong listed mid-tier global resources company which explores,
develops and mines base metal projects around the world. Among its portfolio
holdings are world class copper assets in Peru.
Geography Hong Kong and China
Valuation £13,330,000
% of total assets* 2.2%
(Valuation at 31 July 2021 £20,152,000)
(% of total assets at 31 July 2021 2.7%)
(Net purchases in year to 31 July 2022 nil)
* For a definition of terms see Glossary of Terms and Alternative Performance
Measures at the end of this announcement
List of Investments as at 31 July 2022
Value % of total assets ‡
Name Geography Business £'000
Delhivery (p)# India Logistics and courier services provider 33,717 5.5
Samsung Electronics Korea Memory, phones and electronic
components manufacturer 33,653 5.5
Dailyhunt (VerSe Innovation) Series I Preferred(u)
India Indian news aggregator application 18,902 3.1
Dailyhunt (VerSe Innovation) Series Equity(u) India Indian news aggregator application 3,774 0.6
Dailyhunt (VerSe Innovation) Series J Preferred(u) India Indian news aggregator application 2,559 0.4
25,235 4.1
Jadestone Energy Singapore Oil and gas explorer and producer 21,754 3.6
JD.com HK/China Online mobile commerce 20,167 3.3
Merdeka Copper Gold Indonesia Indonesian miner 17,027 2.8
Li Ning HK/China Sportswear apparel supplier 16,368 2.7
Sea Limited ADR Singapore Internet gaming and ecommerce 13,839 2.3
Reliance Industries India Indian petrochemical company 13,389 2.2
MMG HK/China Chinese copper miner 13,330 2.2
Tata Motors ADR India Indian automobile manufacturer 13,230 2.2
Zijin Mining Group Co H Shares HK/China Gold and copper miner 12,014 2.0
Samsung SDI Korea Electrical equipment manufacturer 11,911 2.0
ByteDance series E-1 Preferred (u) HK/China Social media 11,731 1.9
Bank Rakyat Indonesia Consumer bank 11,325 1.9
LONGi Green Energy HK/China Chinese semiconductor manufacturer 11,220 1.8
HDBank Vietnam Consumer bank 9,922 1.6
Alibaba Group HK/China Online and mobile commerce 9,888 1.6
Samsung Engineering Korea Korean construction 8,979 1.5
Hyundai Mipo Dockyard Korea Korean shipbuilder 8,918 1.5
Star Health & Allied Insurance Co (p)‡ India Health insurance company 8,769 1.4
PT Astra International Indonesia Automobile distributor 8,717 1.4
Lemon Tree Hotels India Owner and operator of a chain of Indian
hotels and resorts 8,415 1.4
Dragon Capital Vietnam Enterprise
Investments Vietnam Vietnam investment fund 8,308 1.4
Midea A Shares HK/China Household appliance manufacturer 8,254 1.4
Metiuan HK/China Local services aggregator 8,093 1.3
Phoenix Mills India Commercial property manager 8,059 1.3
Zomato (p) India Online restaurant search, ordering and
discovery platform 7,939 1.3
Nickel Mines Indonesia Base metals miner 7,096 1.2
Value % of total assets ‡
Name Geography Business £'000
Jiangxi Copper Co HK/China Chinese copper miner 7,047 1.2
Indiabulls Real Estate India Domestic and commercial real estate
provider 6,998 1.1
Ramkrishna Forgings India Auto parts manufacturer 6,966 1.1
China Oilfield Services H Shares HK/China Oilfield services 6,921 1.1
MediaTek Taiwan Taiwanese electronic component
manufacturer 6,701 1.1
Hoa Phat Group Vietnam Steel and related products manufacturer 6,680 1.1
Zhejiang Supor Co HK/China Chinese manufacturer of cookware and
home appliance products 6,571 1.1
TSMC Taiwan Semiconductor manufacturer 6,455 1.1
Prestige Estate Projects India Owner and operator of residential real
estate properties 6,398 1.0
Ping An Insurance H Shares HK/China Life insurance provider 6,372 1.0
Geely Automobile HK/China Automobile manufacturer 6,187 1.0
Accton Technology Taiwan Server network equipment manufacturer 6,134 1.0
Military Commercial Joint Stock Bank Vietnam Retail and corporate bank 5,749 0.9
Coupang Korea Ecommerce business 5,526 0.9
Kingdee International Software HK/China Enterprise management software
distributor 5,490 0.9
Koh Young Technology Korea 3D inspection machine manufacturer 5,471 0.9
Baidu.com HK/China Internet provider 5,452 0.9
PT Vale Indonesia Indonesia Nickel miner 5,224 0.9
SDI Corporation Taiwan Stationery and lead frames for
semiconductors manufacturer 5,209 0.9
Ningbo Peacebird Fashion A Shares HK/China Chinese fashion 5,166 0.8
KH Vatec Company Korea Electronic component and device
manufacturer 5,089 0.8
EO Technics Korea Manufacturer and distributor of
semiconductor laser markers 5,001 0.8
Wuxi Lead Intelligent Equipment Co HK/China Manufacturer of electronic capacitors,
A Shares solar energy and lithium battery
equipment 4,875 0.8
HDFC India Indian mortgage provider 4,581 0.8
Flitto Korea Internet based service provider 4,479 0.7
PT Aneka Tambang Indonesia Nickel miner 4,215 0.7
Dada Nexus ADR HK/China Chinese ecommerce distributor of online
consumer products 4,142 0.7
Korea Zinc Korea Non-ferrous metals smelter and
manufacturer 3,785 0.6
PropertyGuru Singapore Real-estate platform 3,706 0.6
S-Fuelcell Korea Fuel cell manufacturer 3,314 0.5
Han's Laser Technology A Shares HK/China Electronic equipment manufacturer 3,203 0.5
Tsugami Precision HK/China Industrial machinery manufacturer 3,151 0.5
KE Holdings HK/China Chinese real-estate platform 2,559 0.4
KE Holdings ADR HK/China Chinese real-estate platform 560 0.1
3,119 0.5
L&C Bio Korea Medical equipment manufacturer 3,111 0.5
Value % of total assets ‡
Name Geography Business £'000
LG Chem Korea Producer of EV batteries 3,088 0.5
Chalice Mining HK/China Miner 2,899 0.5
Ping An Bank A Shares HK/China Consumer bank 2,783 0.5
CIMC Vehicles H Shares HK/China Manufacturer of trailers and trucks 2,767 0.5
SK IE Technology Korea Refining and chemical company 2,623 0.4
Policybazaar India Online financial services platform 2,616 0.4
Kaspi Kz JSX GDR Kazakhstan Kazakh fintech 2,582 0.4
Skipper India Transmission and distribution structures
provider 2,429 0.4
Hypebeast HK/China Digital media and ecommerce company 2,287 0.4
AirTac International Group Taiwan Pneumatic components manufacturer 2,180 0.4
Techtronic Industries HK/China Power tool manufacturer 2,168 0.3
Vinh Hoan Corporation Vietnam Food producer 2,027 0.3
China Conch Venture HK/China Provider of environmentally-friendly
building materials and solutions 1,933 0.3
Douzone Bizon Korea Enterprise resource planning software
developer 1,681 0.3
Nexteer Automotive HK/China Producer of automotive components 1,285 0.2
Huayu Automotive Systems A Shares HK/China Auto parts manufacturer 1,069 0.2
Binh Minh Plastics Joint Stock
Company Vietnam Plastic piping manufacturer 807 0.1
China Conch Environment Protection HK/China Provider of environmentally-friendly
building materials and solutions 788 0.1
Brilliance China Automotive (s) HK/China Minibus and automotive components
manufacturer 495 0.1
Chime Biologics (u) HK/China Biopharmaceutical company 139 0.1
Eden Biologics (u) Taiwan Biopharmaceutical company 138 0.0
Philtown Properties (u) Philippines Property developer 0 0.0
Total Investments 608,539 99.7
Net Liquid Assets‡ 2,011 0.3
Total Assets 610,550 1.00
HK/China denotes Hong Kong and China.
Details of the ten largest investments are given above 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 (unlisted) investment.
(p) Denotes listed security previously held in the portfolio as an unlisted
security.
(s) Denotes suspended investment.
# In line with the conditions of the IPO, investors with holdings prior to the
listing are subject to a lock in period preventing trading of the holding.
This expires on 24 November 2022.
‡ In line with the conditions of the IPO, investors with holdings prior to
the listing are subject to a lock in period preventing trading of the holding.
This expires on 10 December 2022.
Unlisted (private company) securities(†)
% Net liquid assets
Listed equities % Total
% assets
%
31 July 2022 93.6 6.1 0.3 100.0
31 July 2021 89.7 7.2 3.1 100.0
Figures represent percentage of total assets.
† Includes holdings in ordinary shares and preference shares.
Distribution of Total Assets‡
Geographical Analysis
At 31 July At 31 July
2022 2021
% %
Equities: Hong Kong and China 32.4 29.9
(inc. 7.1 A Shares(‡)) (inc 2.9 A Shares(‡))
Korea 17.4 14.5
Taiwan 4.5 3.5
Vietnam 5.4 5.6
India 24.2 28.9
Singapore 6.5 9.8
Indonesia 8.9 5.5
Other 0.4 2.1
Total equities 99.7 96.9
Net liquid assets 0.3 3.1
Total assets 100.0 100.0
Sectoral Analysis
At 31 July At 31 July
2022 2021
% %
Equities: Consumer Discretionary 20.2 13.8
Communication Services 9.6 13.3
Consumer Staples 0.3 0.1
Energy 6.9 4.0
Financials 9.9 8.6
Healthcare 0.6 4.0
Industrials 13.5 10.1
Information Technology 19.5 17.5
Materials 14.6 21.0
Real Estate 4.6 4.5
Total equities 99.7 96.9
Net liquid assets 0.3 3.1
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
For the year ended For the year ended
31 July 2022 31 July 2021
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains on investments - (118,594) (118,594) - 208,671 208,671
Currency gains - 1,292 1,292 - 35 35
Income (note 2) 11,067 - 11,067 3,561 - 3,561
Investment management fee (note 3) (4,036) - (4,036) (3,475) - (3,475)
Other administrative expenses (1,093) - (1,093) (729) - (729)
Net return before finance costs and taxation 5,938 (117,302) (111,364) (643) 208,706 208,063
Finance costs of borrowings (756) - (756) (465) - (465)
Net return before taxation 5,182 (117,302) (112,120) (1,108) 208,706 207,598
Tax (1,352) 5,288 3,936 706 (9,137) (8,431)
Net return after taxation 3,830 (112,014) (108,184) (402) 199,569 199,167
Net return per ordinary share (note 4) 4.21p (123.01p) (118.80p) (0.51p) 253.70p 253.19p
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
At 31 July 2022 At 31 July 2021
£'000 £'000 £'000 £'000
Fixed assets
Investments held at fair value through profit or loss (note 6) 608,539 725,122
Current assets
Debtors 1,248 1,387
Cash and cash equivalents 5,399 31,766
6,647 33,153
Creditors
Amounts falling due within one year (note 8) (1,620) (61,966)
Net current assets/(liabilities) 5,027 (28,813)
Total assets less current liabilities 613,566 696,309
Creditors
Amounts falling due after more than one year:
Provision for tax liability (note 10) (3,016) (9,078)
Net assets 610,550 687,231
Capital and reserves
Share capital 9,208 8,843
Share premium account 253,946 221,354
Capital redemption reserve 20,367 20,367
Capital reserve 319,573 433,041
Revenue reserve 7,456 3,626
Shareholders' funds 610,550 687,231
Net asset value per ordinary share* 664.55p 777.15p
Ordinary shares in issue (note 11) 91,860,961 88,429,704
* See Glossary of Terms and Alternative Performance Measures at the end of
this announcement.
Statement of Changes in Equity
For the year ended 31 July 2022
Share Share Capital redemption Capital reserve(†) Revenue reserve Shareholders'
capital
premium account
funds
reserve £'000 £'000
£'000 £'000
£'000
£'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 11) - - - (1,454) - (1,454)
Ordinary shares sold from treasury (note 11) - - - - - -
Ordinary shares issued (note 11) 365 32,592 - - - 32,957
Dividends appropriated in the year (note 5) - - - - - -
Shareholders' funds at 31 July 2022 9,208 253,946 20,367 319,573 7,456 610,550
For the year ended 31 July 2021
Share Share Capital redemption Capital reserve(†) Revenue reserve Shareholders'
capital
premium account
funds
reserve £'000 £'000
£'000 £'000
£'000
£'000
Shareholders' funds at 1 August 2020 6,317 40,048 20,367 233,472 4,199 304,403
Net return after taxation - - - 199,569 (402) 199,167
Ordinary shares bought back into treasury (note 11) - - - (2,132) - (2,132)
Ordinary shares sold from treasury (note 11) - 442 - 2,132 - 2,574
Ordinary shares issued (note 11) 2,526 180,864 - - - 183,390
Dividends appropriated in the year (note 5) - - - - (171) (171)
Shareholders' funds at 31 July 2021 8,843 221,354 20,367 433,041 3,626 687,231
† The Capital Reserve balance at 31 July 2022 includes investment
holding gains of £119,695,000 (31 July 2021 - gains of £287,279,000).
Cash Flow Statement
For the year ended For the year ended
31 July 2022 31 July 2021
£'000 £'000 £'000 £'000
Cash flows from operating activities
Net return before taxation (112,120) 207,598
Net losses/(gains) on investments 118,594 (208,671)
Currency gains (1,292) (35)
Finance costs of borrowings 756 465
Overseas withholding tax (1,288) (304)
Indian CGT paid on transactions (774) (135)
Corporation tax refunded - 992
Changes in debtors and creditors (589) 916
Cash from operations (‡) 3,287 826
Interest paid (765) (430)
Net cash inflow from operating activities 2,522 396
Cash flows from investing activities
Acquisitions of investments (197,017) (298,606)
Disposals of investments 196,116 98,014
Net cash outflow from investing activities (901) (200,592)
Cash flows from financing activities
Ordinary shares bought back into treasury (note 11) (1,454) (2,132)
Ordinary shares sold from treasury (note 11) - 2,574
Proceeds from Ordinary shares issued (note 11) 32,957 183,368
Borrowings drawn down 119,372 210,000*
Borrowings repaid (182,957) (172,471)*
Equity dividends paid - (171)
Net cash (outflow)/inflow from financing activities (32,082) 221,168
(Decrease)/increase in cash and cash equivalents (30,461) 20,972
Exchange movements 4,094 (1,352)
Cash and cash equivalents at 1 August 31,766 12,146
Cash and cash equivalents at 31 July 5,399 31,766
‡ Cash from operations includes dividends received of £10,279,000 (2021
- £3,858,000) and interest received of £6,000 (2021 - £66,000).
* In the year to 31 July 2021, the Company had separate drawdown and
repayment of borrowings. However, these separate cash flows had been netted
off in the cash flow statement rather than being presented gross. Adjustment
has been made to the prior year cash flow statement to gross up the cash flows
of the drawdown and repayment of borrowings. This adjustment does not impact
the net cash (outflow)/inflow from financing activities, the overall cash flow
position, the result or the net assets of the Company.
Notes to the Financial Statements
1. Principal accounting policies
The Financial Statements for the year to 31 July 2022 have been prepared in
accordance with FRS 102 'The Financial Reporting Standard applicable in the UK
and Republic of Ireland' and on the basis of the accounting policies set out
in the Annual Report and Financial Statements which are unchanged from the
prior year and have been applied consistently.
2. Income
2022 2021
£'000 £'000
Income from Investments
Overseas dividends 11,060 3,495
Other income
Deposit interest 7 66
Total income 11,067 3,561
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
Manager (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
2022 2021
£'000 £'000
Revenue return after taxation 3,830 (402)
Capital return after taxation (112,014) 199,569
Total return (108,184) 199,167
Weighted average number of ordinary shares in issue 91,063,205 78,661,987
The figures for net return per ordinary share are based on the above totals
for revenue and capital and the weighted average number of ordinary shares
(excluding treasury shares) in issue during the year.
There are no dilutive or potentially dilutive shares in issue.
5. Ordinary dividends
2022 2021 2022 2021
£'000 £'000
Amounts recognised as distributions in the year:
Previous year's final - 0.25p - 171
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 2022 of £3,830,000 which is available for distribution by way
of a dividend payment (2021- a revenue deficit of £402,000).
2022 2021 2022 2021
£'000 £'000
Amounts paid and payable in respect of the financial year:
Proposed final dividend per ordinary share (payable 29 November 2022) 3.00p - 2,756 -
6. Fair value hierarchy
As at Level 1 Level 2 Level 3 Total
31 July 2022 £'000 £'000 £'000 £'000
Listed equities 570,801 495 - 571,296
Unlisted equities - - 4,051 4,051
Unlisted preference shares* - - 33,192 33,192
Total financial asset investments 570,801 495 37,243 608,539
As at Level 1 Level 2 Level 3 Total
31 July 2021 £'000 £'000 £'000 £'000
Listed equities 670,144 877 - 671,021
Unlisted equities - - 6,298 6,298
Unlisted preference shares* - - 47,803 47,803
Total financial asset investments 670,144 877 54,101 725,122
* The investments in preference shares are not classified as equity holdings
as they 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 2022 investments with a book cost of £23,341,000
(31 July 2021 - £8,167,000) 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.
Fair Value Hierarchy
The fair value hierarchy used to analyse the fair values of financial assets
is described below. The levels are determined by the lowest (that is the least
reliable or least independently observable) level of input that is significant
to the fair value measurement for the individual investment in its entirety as
follows:
Level 1 - 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 2022 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. Transaction costs
The purchases and sales proceeds figures include transaction costs of
£225,000 (2021 - £344,000) and £308,000 (2021 - £164,000) respectively,
total transaction costs being £533,000 (2021 - £508,000).
8. Borrowing facilities
During the year, the Company repaid its one year £60 million multi-currency
revolving credit facility with Royal Bank of Scotland International Limited
and obtained a new three year multi-currency revolving credit facility of up
to £100 million with Royal Bank of Scotland International Limited which
expires on 14 March 2025. At 31 July 2022 there were no outstanding drawings
(31 July 2021 - £20,000,000 and US$56,704,000 at interest rates of 0.65977%
and 0.74975% respectively). 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.
9. Analysis of change in net debt
At 1 August Cash Exchange At 31 July
2021 flows movement 2022
£'000 £'000 £'000 £'000
Cash and cash equivalents 31,766 (30,461) 4,094 5,399
Loans due within one year (60,783) 63,585 (2,802) -
(29,017) 33,124 1,292 5,399
10. Provision for deferred tax liability
The tax liability provision at 31 July 2022 of £3,016,000 (31 July 2021 -
£9,078,000) 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.
The capital gains tax is calculated based on how long an asset is held for.
11. Share capital
2022 2021
Number of Number of
shares shares
Allotted, called up and fully paid ordinary shares of 10p each 91,860,961 88,429,704
Treasury shares of 10p each 214,000 -
92,074,961 88,429,704
In the year to 31 July 2022, the Company issued 3,645,257 ordinary shares with
a nominal value of £365,000, representing 4.1% of the issued share capital at
31 July 2021, at a premium to net asset value, raising net proceeds of
£32,957,000 (2021 - 25,264,422 ordinary shares with a nominal value of
£2,526,000, raising net proceeds of £183,832,000).
In the year to 31 July 2022, 214,000 ordinary shares (representing 0.2% of the
issued share capital at 31 July 2021, were bought back at a total cost of
£1,454,000 and are held in treasury ,2021 - 325,134 shares (representing 1%
of the issued share capital at 31 July 2020, were bought back during the year
and subsequently reissued from treasury). At 31 July 2022 the Company had
authority to allot or sell from treasury 8,127,970 ordinary shares without
application of pre-emption rights and to buy back 13,041,612 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 2022 and 14 September 2022, no further shares were issued and
217,726 shares were bought back.
12. The financial information set out above does not constitute the
Company's statutory accounts for the year ended 31 July 2022 or 2021 but is
derived from those accounts. Statutory accounts for 2021 have been delivered
to the Registrar of Companies, and those for 2022 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.
13. Transactions with Related Parties and the Managers and Secretaries
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 fee arrangements are included in note 3 above.
14. The Annual Report and Financial Statements will be available on the
Company's page on the Managers' website pacifichorizon.co.uk
(http://www.pacifichorizon.co.uk) ‡ on or around 30 September 2022.
‡ Neither the contents of the Managers' website nor the contents
of any website accessible from hyperlinks on the Managers' website (or any
other website) is incorporated into, or forms part of, this announcement.
None of the views expressed in this document should be construed as advice to
buy or sell a particular investment.
Glossary of Terms and Alternative Performance Measures ('APM')
Total Assets
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.
2022 2021
Net asset value per share (a) 664.65p 777.15p
Share price (b) 647.00p 802.00p
(Discount)/premium ((b) - (a)) ÷ (a) (2.7%) 3.2%
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.
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.
2022 £'000 2021 £'000
Investment management fee 4,036 3,475
Other administrative expenses 1,093 729
Total Expenses 5,129 4,204
Average net asset value 691,596 538,343
Ongoing charges 0.74% 0.78%
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.
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.
Invested gearing is borrowings at par less cash and brokers' balances
expressed as a percentage of shareholders' funds.
2022 2021
£'000 £'000
Borrowings (at book cost) (a) - 60,783
Less: cash and cash equivalents (5,399) (31,766)
Less: sales for subsequent settlement (402) (1,066)
Add: purchases for subsequent settlement 466 -
Adjusted borrowings (b) (5,355) 27,951
Shareholders' funds (c) 610,550 687,231
Gearing: (b) as a percentage of (c) (1%) 4%
Potential gearing is the Company's borrowings expressed as a percentage of
shareholders' funds;
2022 2021
£'000 £'000
Borrowings (at book cost) (a) - 60,783
Shareholders' funds (b) 610,550 687,231
Potential gearing (a) as a percentage of (b) - 9%
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.
Sustainable Finance Disclosure Regulation ('SFDR')
The EU Sustainable Finance Disclosure Regulation (`SFDR') does not have a
direct impact in the UK due to Brexit, however, it applies to third-country
products marketed in the EU. As Pacific Horizon Investment Trust PLC is
marketed in the EU by the AIFM, Baillie Gifford & Co Limited, via the
National Private Placement Regime (NPPR) the following disclosures have been
provided to comply with the high-level requirements of SFDR. The AIFM has
adopted Baillie Gifford & Co's Governance and Sustainable Principles and
Guidelines as its policy on integration of sustainability risks in investment
decisions. Baillie Gifford & Co's approach to investment is based on
identifying and holding high quality growth businesses that enjoy sustainable
competitive advantages in their marketplace. To do this it looks beyond
current financial performance, undertaking proprietary research to build an
in-depth knowledge of an individual company and a view on its long-term
prospects. This includes the consideration of sustainability factors
(environmental, social and/or governance matters) which it believes will
positively or negatively influence the financial returns of an investment.
More detail on the Managers' approach to sustainability can be found in the
Governance and Sustainability Principles and Guidelines document, available
publicly on the Baillie Gifford website bailliegifford.com.
Taxonomy Regulation
The Taxonomy Regulation establishes an EU-wide framework of criteria for
environmentally sustainable economic activities in respect of six
environmental objectives. It builds on the disclosure requirements under SFDR
by introducing additional disclosure obligations in respect of alternative
investment funds that invest in an economic activity that contributes to an
environmental objective. The Company does not commit to make sustainable
investments as defined under SFDR. As such, the underlying investments do not
take into account the EU criteria for environmentally sustainable economic
activities.
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 £610.6 million
(before deduction of loans of nil) at 31 July 2022.
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
(http://www.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.
16 September 2022
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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