Pacific Horizon (PHI), managed by Ewan Markson-Brown (pictured), has announced its interim results for the six months ended 31 January 2017. During the period, the Trust’s NAV total return was 9.7%. The share price total return was 8.0% as the discount widened from 10.1% to 11.4%. The Trust says that, over the same period the MSCI All Country Asia ex Japan Index’s total return was 10.4% in sterling terms. Although, in capital only terms, the relative performance of the Company’s NAV versus the comparative index was similar over the period at 9.4%. The Trust says that, in summary, portfolio gains in Hong Kong and China were partly offset by losses in South Korea. Reportedly, a number of its high conviction positions recorded significant share price increases, but the relative and absolute share price performance of many of its smaller companies, especially in the biotechnology sector, were weak and the relative underweight position in Samsung Electronics also detracted from returns.
PHI says that its Indian investments, which accounted for 17.0% of the Trust’s total assets at the end of January 2017, were a significant drag on relative and absolute performance, with the index rising only 2.7% in sterling terms. In absolute terms, the Philippines was the worst performing market in the region, down 9.3% in sterling terms, followed by Malaysia, which ended 1.9% lower in sterling terms. Both suffered from a strengthening US dollar. PHI does not have any direct listed exposure to either country. Hong Kong and China performed well as the market reacted positively to signs of an improving domestic Chinese economy. The best performing market was Taiwan, driven by Taiwan Semiconductor Manufacturing (TSMC), a portfolio holding, and the banking sector where, in contrast, we have little exposure.
In China, Geely Automotive rose 91% after announcing that sales had doubled over the year. PHI says that the company is incorporating technology and manufacturing process from its Volvo acquisition, propelling its strategy of transformation from being a low end domestic Chinese car company to a global automotive brand. Sunny Optical rose 56%. PHI says that it is the world leader in automotive cameras, a market which is growing at 30% per annum and where we PHI’s managers see it gaining market share from its current mid 30%.
Some of PHI’s smaller South Korean biotechnology stocks fell between 30-40%, driven by a number of external factors. First, a large South Korean biotechnology company, which PHI did not own and which had previously been awarded two international contracts in 2014, stopped clinical trials. Second, the impeachment saga of the South Korean President dramatically reduced investor confidence, notably among domestic retail investors who subsequently sold smaller South Korean companies aggressively. PHI says that, for all its South Korean biotechnology holdings, the news from the companies continued to be encouraging.
At 49.3% of total assets, technology companies continue to account for the largest proportion of the stocks held. PHI say that a number of these companies have great potential to benefit from economic advances expected in developed markets. It cites good examples as being TSMC, Hon Hai Precision Industries and SK Hynix (which rose around 60% in the period). PHI says that these are all companies which benefit from the smartphone and automation revolutions, either directly, by producing hardware, or indirectly, by managing the software that allows companies to harness these new business techniques.
PHI’s managers believe that artificial intelligence and a rapid increase in computing power will drive company fortunes over the coming years. In their view, a combination of big data, analytics and deep learning will allow huge costs to be removed from the economic system and significantly greater profits to be made. They believe that the spread and sophistication of e-commerce – particularly as ease of use improves – is going to dramatically reduce the cost base of companies undertaking business online, giving an even greater comparative cost advantage versus brick and mortar businesses. The conclusion is that the cost advantage will propel growth of those companies who have the ability and the determination to adopt these new approaches to doing business into the high 20% area for many years, allowing significant comparative economies of scale to be derived.
PHI’s manager says that, as a result of the growth of an ageing population and the arrival of new regenerative medicines, healthcare demand is, and will continue to be, a key growth sector globally. PHI has 5.7% of its total assets invested in South Korean biotechnology stocks which the manager believes can make a substantial improvement to the quality of people’s lives via regenerative and personalised medicine.
In terms of concentration, the top 10 holdings account for 40.4% of the Trust’s total assets and the top 30 account for 73.2%. The portfolio also has a bias to mid and smaller companies when measured against the comparative index and the majority of immediate peer trusts. The Company has potential gearing of 7.5% of assets and is fully invested at present.
In terms of outlook, PHI’s manager says that Asia ex Japan stands out as a region with high positive real economic growth in an otherwise slow growth world. It believes that India is likely to grow at an annual rate of 6%-9% due to its demographics, a rising middle class and the absence of an overhanging debt burden. Furthermore, it says that chinese growth is stabilising at around 4%-5% and Vietnam has the potential to grow at 6%-7% year on year. PHIs manager believes that the best way to generate long-term absolute and relative returns is to invest in growth companies in growth regions. It considers that, once near-term uncertainties are removed, the premium paid for this rapid growth will increase given its relative scarcity.
Pacific Horizon’s biotech positions and Samsung underweight lead to modest underperformance : PHI