Amazing results from Pacific Horizon – over the year ended 31 July 2020, Pacific Horizon generated returns of 39.9% in NAV terms and 57.5% in share price terms compared to 5.1% from the MSCI All Country Asia ex Japan Index in sterling. There will be a small dividend this year – just 0.25p – the manager targets capital growth rather than income but it is necessary to pay a dividend to maintain investment trust status. As the shares moved to trade at a premium to asset value, the board issued over 4m shares, expanding the trust by 7%.
Extract from the manager’s statement
“The top five positive contributors to relative returns versus the comparative index in the year were SEA Limited, L&C Bio, JD.com, Kingdee and Accton Technology; a total of 63 holdings outperformed on a relative basis. This really was a big-winners-take-all year, with these five names accounting for around 78% of the portfolio’s absolute return. This is in line with our continued investment philosophy of finding potential long-term winners, backing them, then running our winners and selling our losers.
We outperformed in all regions with the exception of Vietnam and India, both of which lagged the broader MSCI All Country Asia ex Japan index (in sterling terms). Singapore, South Korea, and China/HK were our largest positive contributors to relative performance at a regional level, with aggregate relative performance attribution of 30.5 percentage points. Stock selection in South Korea, where we outperformed the local index by 44.1 percentage points, was particularly noteworthy.
We also outperformed in most sectors, only underperforming in Consumer Staples and Energy. We have been adding to names in the Industrials and Materials sectors and our weight in them is now higher than the average for the year. Our Information Technology sector exposure accounts for 22.9% of the portfolio, slightly up from last year, while Consumer Discretionary remains our second largest sector weight, with Communication Services moving into third.
SEA Limited, our largest holding at the beginning of the year at 8.2% of total assets, is South East Asia’s biggest ecommerce and online gaming company. It rose 248% over the year in local currency terms (225% in sterling terms), up 222% from the March low. Its gaming division Garena, already flush with success from its global hit Free Fire, experienced a surge in users and revenues in May and June 2020, as gamers went online, especially in India, Indonesia and Brazil. We see Garena morphing into an emerging markets’ gaming powerhouse.
However, the real excitement lies in ecommerce. The ASEAN online markets have less than half the penetration of their Chinese counterpart and are showing much faster growth. We see gross merchandise value potentially soaring from US$32bn in 2020 towards US$200bn by 2025 and SEA Limited emerging as the leading ecommerce platform in the region. We would not be surprised if its new fintech business delivers similar value to its ecommerce division in five years’ time. We have been wrestling with how much exposure to allow ourselves to just one stock, however much we like it, and have reduced SEA Limited three times, at US$40, US$80 and US$105, with our average entry price at US$14. It remains around 9% of our portfolio. SEA Limited added 12.8 percentage points to the Company’s relative return.
Most years (with the probable exception of 2020) we spend time in South Korea looking at small cap biotech and technology companies, some of which even the domestic institutions have not heard of. The 2019 visit was productive. That year we came back with a number of new ideas, some of which we purchased. One was L&C Bio, a stock we had bought at IPO earlier in the year, and to which we added following our visit. The company runs Asia’s biggest human tissue bank and has developed various tissue regeneration and reconstruction techniques. We see its products growing in acceptance in South Korea and, more importantly, in China where we see a multibillion-dollar opportunity. The stock was up 555% for the year in local currency terms (507% in sterling terms), adding 3.3 percentage points to the Company’s relative return.
Our third key stock contributor was Kingdee, the Chinese enterprise resource planning (‘ERP’) software company we have owned since 2015. It was up 182% over the year in local currency terms (166% in sterling terms); the company has met our expectations with its successful move to a cloud service business enabling it to transform from a low margin one in a highly competitive market to a high margin business in a winner-takes-most world. This year the company emerged as a clear leader in the online cloud market. Covid-19 significantly accelerated the shift online among Chinese businesses. China’s ERP market today, at roughly Rmb 30bn, is only 0.03% of GDP versus 0.12% globally ex China, 0.22% in Germany and 0.24% in the US. The market has belatedly realised the revenue and margin potential of this company and re-rated the stock.
Outside of the top ten contributors to absolute performance, a further 20 stocks added roughly 10 percentage points to the portfolio’s return over the period. The biggest detractors to the portfolio’s performance were TSMC and Tencent where we are underweight. These are great businesses, but we believe that in general smaller companies have the greatest potential for outsized returns. Therefore, we seek to add value by moving down the market cap spectrum and investing in companies where there is the greatest growth potential. Our holdings in oil stocks China Oilfield Services and CNOOC also under-performed.
In terms of the regions where we invest, our Hong Kong and China weighting increased from 34.4% to 41.1% over the year. It remains the largest geographical weighting in the portfolio, followed by South Korea at 19.5%. Our India weight fell by 2.5 percentage points to 6.8%. The Vietnam weighting declined to 5.0% as a result of market movements rather than due to transactions.
Turning to unlisted holdings, we wrote down our holding in JHL Biotech following a lawsuit against the company for alleged technology theft in the US. We participated in a funding round for Zomato, a leader in online food delivery in India where we took a US$5m holding. We will continue to evaluate potential unlisted offerings while remaining alert to significant opportunities in listed markets.
In terms of portfolio positioning, the key change to highlight is our increased relative overweight exposure in both energy and commodities. We already had exposure to nickel miners via Nickel Mines and PT Vale Indonesia, a decision made on the back of the expected supply and demand gap in nickel due to growth in electric vehicles. We see significant upside to copper prices as well, and took a position in MMG, a Hong Kong miner with assets mostly in Peru. Lastly, we took a position in Merdeka Copper Gold, a fast-growing miner in Indonesia, partly in recognition that there will be consequences from unconventional monetary policy. The response to Covid-19 has increased our conviction and the portfolio has 3% exposure to rapidly growing gold and copper miners.”
PHI : Amazing results from Pacific Horizon