Witan Pacific releases circular ahead of proposed change of name to Baillie Gifford China Growth Trust

On 22 July 2020, the board of Witan Pacific (WPC)  announced it was to appoint Baillie Gifford as the company’s investment manager, subject to shareholder approval. WPC is proposing that subject to shareholder approval, its investment objective is changed to produce long term capital growth by investing predominantly in shares of, or depositary receipts representing the shares of, Chinese companies. Click here to access our initial coverage of this story, from 22 July.  

The company has today published a circular, including notice of a general meeting to shareholders with further details of the proposals. The circular details the benefits of the proposals, and the reasons why the board recommends shareholders vote in favour of the resolutions at the general meeting.

‘China provides a compelling investment opportunity that is currently underrepresented in global portfolios’

Susan Platts-Martin, chair of WPC, notes: “Following an extensive and competitive review of the company’s management arrangements, the Board is pleased to appoint Baillie Gifford as the company’s investment manager, subject to certain shareholder approvals. The board believes that China provides a compelling investment opportunity that is currently underrepresented in global portfolios. China’s domestic stock market and economy have grown to become the second-largest in the world and we believe that China will be one of the most important markets of the next decade. We are delighted that the Company will be able to access Baillie Gifford’s proven experience investing in China given its strong track record in this area. The Board believes that the move to a China growth strategy will provide shareholders with a truly differentiated investment proposition that should lead to a tightening of the discount and growth of the company through superior investment returns.”

Benefits of the proposals

The Board believes that the Proposals will have the following benefits for shareholders.

• An experienced investment manager with a long-term track record: Baillie Gifford has a strong track record investing in China over multiple decades
• China’s growth story: China’s middle class is now the largest in the world and its economy and domestic stock market are the world’s second-largest
• China’s investment story: China accounts for 18% of global market cap in MSCI investable indices yet only accounts for a 2.5%. allocation in global portfolios (source: MSCI, June 2019)
• Partial cash exit: the proposals allow Shareholders to realise part, and potentially all, of their investment in the company at a price close to the NAV per share

In addition, WPC notes that the proposals are expected to provide a modest uplift to NAV per Share for continuing shareholders should the tender offer be fully subscribed.

‘There are only two investment trusts focused on China whilst there are eight that focus on the Asia Pacific region’

WPC’s board and Baillie Gifford believe that China is central to the future of the Asia Pacific region and there is an exciting opportunity to re-position WPC, focusing it solely on what they believe to be one of the most important markets of the coming decades. In the announcement, it is noted that today there are only two investment trusts focused on China whilst there are eight that focus on the Asia Pacific region. The board and Baillie Gifford believe the opportunity is compelling: China’s economic success of the past 40 years is unsurpassed; its middle class already the largest in the world, and its economy and domestic stock market the world’s second-largest.

China’s growing competitiveness is being noticed. Baillie Gifford believes that technology is at the heart of US-China tensions. Baillie Gifford believes that China has proven its ability to deliver world-leading companies through investment, innovation and support. Baillie Gifford believes that dominance of old economy sectors such as construction and manufacturing is shifting to a lead in many new economy areas, such as e-commerce, online payments, renewable energy and healthcare.

WPC’s board and Baillie Gifford believe that the desire to invest directly into China will continue to grow. China accounts for 18% of global market cap in MSCI investable indices, 19 per cent. of global purchasing power by GDP and 31% of all global listed stocks in MSCI investable indices, yet only accounts for a 2.5% allocation in global portfolios (source: MSCI, June 2019).

‘The portfolio will consist of 40 to 80 securities and up to 20% of the total assets may be invested in unlisted securities’

In order to capitalise on this opportunity, the board is proposing that the investment objective and policy be revised so that the company will aim to produce long term capital growth by investing predominantly in shares of, or depositary receipts representing the shares of, Chinese companies. The portfolio will consist of a diversified portfolio of 40 to 80 securities and up to 20% of the total assets of the company may be invested in unlisted securities. The company will also be able to employ gearing, which typically would not exceed 20% of gross asset value at the time of drawdown.

The Board believes that the change in investment manager and the related adoption of the New Investment Policy will provide the following benefits to investors.

• Access to Baillie Gifford’s China capability: Baillie Gifford has a strong team with substantial funds invested in China, having invested in the region for multiple decades
• Strong track record: The Baillie Gifford China Fund has a thirteen-year history, achieving top quartile performance over 1, 3, 5, and 10 years since inception
• A differentiated product: The ‘best ideas’ portfolio will consist of 40-80 listed and unlisted Chinese growth stocks from across the market capitalisation spectrum. This will be a differentiated product, characterised by Baillie Gifford’s long term time horizon, focus on identifying companies with strong growth potential, and experience investing in attractive unlisted securities
• Long term view: Baillie Gifford adopts a long term view with a typical investment horizon of five years and beyond, with turnover of its China portfolios typically 20% per cent. per annum
• Scale: Baillie Gifford is the largest manager of listed investment funds in the UK and currently manages 11 such funds with combined assets of approximately £20bn as at 30 June 2020

WPC believes that the change in investment manager and the adoption of the proposed strategy provide the scope for improved future long term performance and should enhance the appeal of the company. With the support of Baillie Gifford, the company will aim to attract new investors and, over time, seek to grow.

Baillie Gifford’s China equity strategy is managed by its emerging markets team, with research input from Baillie Gifford’s Shanghai office. Baillie Gifford’s emerging markets team comprises six investment managers and two analysts. Baillie Gifford’s Shanghai research platform, comprising three investment researchers, provides an ‘on-the-ground’ presence, further enabling Baillie Gifford to identify the next generation of exceptional companies. Additionally, the majority of Baillie Gifford’s 115 investors research Chinese companies as part of their own remit, and Baillie Gifford has built relationships with company founders, industry specialists and independent research providers.

Sophie Earnshaw and Roderick Snell will manage the portfolio on a day-to-day basis. Sophie Earnshaw is an investment manager in Baillie Gifford’s emerging markets equity team and has been co-manager of the Baillie Gifford China Fund since 2014 and is also a decision maker on the China A Share Fund. Roderick Snell is also an investment manager in Baillie Gifford’s emerging markets equity team and has managed the Baillie Gifford Pacific Fund since 2010 and been deputy manager of Pacific Horizon Investment Trust since September 2013.

Change of name to Baillie Gifford China Growth Trust proposed

The board are proposing to change the name of the company to the Baillie Gifford China Growth Trust plc following the general meeting, as it is the board’s opinion that the company will benefit from Baillie Gifford’s brand, including in respect of attracting potential new investors. The change of name is subject to Shareholder approval at the general meeting.

Tender Offer

Shareholders tendering in excess of 40%. of their shareholding may be able to realise those shares through the tender offer to the extent that other shareholders do not tender any of their shares or tender less than their basic entitlement. The board is satisfied that, following the tender offer, the company will remain an attractive size with sufficient liquidity. The board believes that this proposal is in the interests of all Shareholders.

New fee structure

Baillie Gifford will be paid an annual management fee of (i) 0.75%. of the first £50m of NAV; plus (ii) 0.65% of NAV between £50m and £250m; plus (iii) 0.55% of NAV in excess of £250m. Baillie Gifford has agreed to waive its investment management fee for the first six months following its appointment as a contribution to the costs that the company will bear in respect of the proposals. The management fee payable by the company under the new investment management arrangements (which includes company secretarial and administration services) will be lower than the management and administration fee arrangements that are currently in place.

Baillie Gifford has agreed to make a significant marketing contribution to the re-launch of the company and will also fund all investor marketing activity undertaken on behalf of the company during the first year of its management. As a result, the company will not make any contribution to the costs of marketing the company until 2022 at the earliest.

General Meeting scheduled for 16 September

The circular provides notice of a general meeting of the company to be held at 12 noon on 16 September 2020.

[As the circular points out, there are currently only two pure China investment trusts – not enough given the pace at which its ‘new economy’ sectors are evolving. China is on its way to becoming a tech behemoth capable of standing toe-to-toe with the US, while the resilience of its economy and equity markets through the pandemic is further reinforcing China’s standalone appeal.]

WPC: Witan Pacific releases circular ahead of proposed change of name to Baillie Gifford China Growth Trust