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Pacific Horizon changes tender arrangements

Since its AGM in 2013, Pacific Horizon has asked shareholders each year for authority to implement, at the Board’s discretion, a bi-annual tender offer for up to 5% of its issued share capital (depending on the average level of its discount during the prior six month period).

The Board, taking into consideration the need for the fund to have sufficient of scale and liquidity as well as ongoing successful investment performance, and after feedback received from some of the company’s major shareholders, is proposing a change of approach to the tender offer mechanism.

No bi-annual tender offer resolution will be put before shareholders this year and for at least the next three years. Instead, the Board intends to seek shareholder authority at the 2018 AGM to implement, at the Board’s discretion, a tender offer for up to 25 per cent. of the  issued share capital should the NAV total return performance fail to exceed the performance of its comparative index by at least 1% a year over the three year period to 31 July 2019 (on a cumulative basis). If this performance target is not met, it is the Directors’ intention that they will, subject to having received shareholder authority, implement a tender at a 2% discount to net asset value less costs.

The Board is of the view that when market sentiment toward an asset class or investment style or type is poor, it can become the predominant factor in driving shareholder returns. The Board believes therefore that a longer-term tender mechanism associated with performance, rather than with market sentiment, is better aligned to the performance of the portfolio managers as well as being in the best interests of the company and its shareholders taken as a whole.

The announcement on the tender follows on from the release of Pacific Horizon’s annual results. In the year to 31 July 2016, the NAV total return was 13.3%. During the same period the comparative index, the MSCI All Country Asia ex Japan Index, total return was 16.2% in sterling terms. The share price total return was 10.9%, and the discount widened from 8.2% to 10.1%.

The managers say they are disappointed with this relative performance, but believe that their investment stance will be vindicated over the longer-term.

Tencent Holdings, which is the portfolio’s largest holding at just over 10%, significantly beat consensus earnings expectations recently, growing its revenues by 52% and net profit by 47% year on year, which, they say, is impressive for a $250bn company. With the second largest user base in the world after Facebook, they see tremendous opportunity for Tencent to monetise its network through games, video, music and advertising. Alibaba accounts for 3% of the portfolio and announced recent revenue growth of 59%. Five of the Company’s top six largest holdings and 25% of the portfolio as a whole represent companies that profit from the supply of information through their respective networks.

Technology holdings, in China and elsewhere, helped overall performance, with Sunny Optical, Tencent and NAVER being the top contributors to overall performance. On the other hand, not holding sufficient positions in TSMC and Samsung Electronics and severe weakness in some of their Chinese names: JD.com, Kingdee, Kingsoft and Jumei International dampened portfolio returns.

Their Korean healthcare investments experienced a mixed year. Pacific Horizon holds 9.2% of its portfolio in a number of small biotech companies in both Korea and Taiwan, all of which they believe are at or close to the leading edge of their technology specialisation or have a distinct technological manufacturing advantage. The volatility of this sector and the size of the individual companies has meant that they are under-researched and tend to have been overlooked by many institutional investors. By taking a long-term approach and by investing alongside management they believe they can add significant value to the Company over time from these investments.

PHI : Pacific Horizon changes tender arrangements

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