Final results for Pacific Assets were released on Friday. Over the year to the end of January 2015 the fund generated a return on net assets of 32.6% and a return to shareholders of 37% both well ahead of the 24.1% return on the MSCI All Country Asia ex Japan Index. The dividend was maintained at 2.6p but the Board warns that the company’s high cash levels (about 11%) are holding back its ability to earn revenue and this might mean that the dividend is reduced in 2016. They feel though that the emphasis should be on keeping the fund’s strong record of capital growth going rather than focusing on growing or maintaining the dividend. The discount narrowed from 8.7% to 5.3%.
The manager’s report highlights the failures in the portfolio before the successes – they say it is best to focus in these so they can learn from their mistakes. The worst investment of the year was DGB Financial, a South Korean bank headquartered in Daegu. While the long-term outlook remains solid, the last twelve months have been difficult for the Bank as a combination of senior management transition, local market saturation and deteriorating asset quality have led to short-term uncertainty. They believe, in hindsight, they should have anticipated the deteriorating lending environment and trimmed our position earlier. Elsewhere, SembCorp Industries has struggled following a downturn in the marine and offshore division while both Towngas China and Standard Foods have seen their earnings slow as a result of the significant economic slowdown underway in mainland China.
The list of positives is longer, as you might expect given the fund’s performance. Five of the top ten contributors are Indian companies. Tech Mahindra and Marico added 4.5% to the fund’s net asset value. The other three Indian stocks in the top ten were Kotak Mahindra Bank, Dabur India and Tube Investment of India. The managers say, at first glance, this may appear to have been a successful call on the Indian stock market for 2014 but, in reality it was anything but. Each of the sixteen Indian companies within the portfolio are held for company-specific reasons, many of which have little if anything to do with the Indian economy. For example, Tech Mahindra’s sales are almost exclusively outside India and they think its strong share price is simply a result of the successful reincarnation of the company under new owners. While the landslide victory of Prime Minister Modi has led to a re-rating of many Indian companies during 2014, Tech Mahindra included, it is just as likely that a de-rating will follow at some point, once the political honeymoon period comes to an end. They are being ruthless in trimming or selling holdings that they think have become overvalued.
The other stocks making up the top ten were Delta Electronics (Thailand), Amorepacific, Taiwan Semiconductor, Manila Water and Kasikornbank.
PAC : Pacific Assets reports on profitable 2014