Pacific Horizon (PHI) – Strong stock selection delivers for Pacific Horizon’s shareholders. The company’s NAV rose by 13.6% on a total return basis. This was an outperformance of 7.6% of the company’s benchmark, the MSCI AC Asia ex-Japan index, which returned 6.0% on the same basis. The share price returned 26.9% (total return), an outperformance of 20.0%.
Strong stock selection delivers for Pacific Horizon’s shareholders
Jean Matterson, the chairman reported that relative returns were driven by stock selection, particularly in Korea, Hong Kong and China and in particular from particular healthcare and information technology names.
Baillie Gifford, the manager of the company commented that the year was one of two halves with the benchmark rallying strongly, up 9.3%, in the first half of the company’s financial year, and then consistently giving back its gains as the year end approached.
The manager went on to say that January was when the US dollar stopped falling and began a consistently strong rally and noted that it might be because investors were moving to perceived safe-havens following rising political risk, driven by the Trump administration. The manager’s opinion is that this apparent focus on geopolitics and capital flows misses the bigger picture, that of a global increase in digital penetration and the disruption that technology is bringing to society, combined with the strength of the US economy, and the relative economic resilience of the Asia-Pacific region.
In the Technology sector, Kingdee International Software and Sunny Optical Technology were the two best contributing stocks. Koh Young Technology, a small South Korean manufacturer of 3D optical inspection equipment, rose 72% and is now among our top 10 holdings. On the negative side, JD.com, was our biggest detractor, falling 20% over the year. The company’s revenue growth slowed and margins disappointed as competition from Alibaba increased and the company focused on investments in its logistics arm.
Holdings in South Korea performed very well, contributing significantly to performance over the year, rising on average 24.3% versus the country index which was down 0.4%.
Unlisted Investments and Investment Policy
The Board are seeking permission to allow up to 10% of total assets to be invested in unlisted companies.
Outlook
Jean Matterson, chairman
“We started 2018 in a positive fashion for equities across the Asia-Pacific region and Indian Sub-continent following a combination of a pickup in global growth and China’s resurgence, allied with a weak US dollar, which all pointed to a potential uptick in earnings and share prices. More recently, concerns over a possible global trade war have increased, initiated by the policies of the Trump administration, which could result in reduced growth of company earnings across the region, in part due to a strengthening US dollar. Whilst always cognisant of macro developments, including the uncertain outcome of the North Korea situation, the portfolio managers continue to see strong earnings growth from portfolio holdings, allied to significant earnings potential from businesses in a broad range of countries and sectors. The potential opportunities for investment have started to broaden and the Board remains confident that the region offers attractive investments for generating capital growth for the patient investor.”
Baillie Gifford, the manager
“It is our view that there is significant potential for positive returns from the region over the coming years. Our focus remains on investment in individual stocks which will benefit from the economic, social and technological changes in evidence across the region. The portfolio is fully invested, with gearing of 7.9%. In the near term, recent market noise over trade wars, slowing global growth and a rising US dollar are eclipsing the underlying reality. When the market returns to looking at fundamentals in Asia, it is our expectation that other investors will see what we already see: very healthy, growing economies, with cheap companies and undervalued currencies, creating significant opportunities for long term financial benefit for our shareholders.”
PHI : Strong stock selection delivers for Pacific Horizon’s shareholders.