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Pacific Assets benefits from resurgence in out of favour holdings

Pacific Assets (PAC) has announced its annual results for the year ended 31 March 2021, during which it has benefited from a resurgence in some out of favour holdings. During the year, PAC provided NAV and share price total returns of 22.3% and 25.8% respectively. In comparison, the MSCI All Country Asia ex Japan Index provided a sterling adjusted total return of 30.7%. PAC aims to provide a return that exceeds CPI + 6%, which it has achieved.

Performance attribution – positive contributors to PAC’s returns

PAC’s results split the factors that benefited the Trust into five broad categories:

  • The first was a return to form of long-term holdings which had been out of favour in previous years. The Indian conglomerate Mahindra and Mahindra and the Taiwanese electronics component manufacturer Delta Electronics are leading examples. For the former a change of management, a more focused strategy, signs of improved capital allocation and a rebound in consumer sentiment in India drove performance. For the latter, increased demand for components for computers, industrial automation and electric vehicles renewed investor interest in the company. PAC has partnered with the families behind each of these companies for several years and the manager says that it was pleasing to see its long-term conviction in these franchises rewarded.
  • The second category was strength in the semiconductor supply chain. Most notable was Hoya Corp (Japan) which enjoys a dominant position in the manufacture of mask blanks, essential inputs in the manufacture of semiconductors by foundries such as Taiwan Semiconductor Manufacturing (Taiwan), which also contributed well for the Trust. Other direct and indirect beneficiaries of this stronger demand for semiconductors and electronics were Mediatek (Taiwan) and Voltronic (Taiwan).
  • A resurgence in economic activity in India was the third broad category. PAC’s manager says that comments from Vellayan Subbiah, the Managing Director of Tube Investments of India, articulate this well: “Tube has delivered strong results driven by revival in the economy and easing of the lockdown restrictions for Covid-19 … this momentum is likely to continue as the economy improves further”1. This revival also helped the other domestically focused franchises, such as Housing Development Finance Corporation (India) and Mahindra and Mahindra.
  • The fourth category was strong demand from Asian customers for the goods and services sold by businesses that are listed in Japan. Demand for paint, diapers and semiconductors increased throughout the year. Also, raw material cost weakness assisted margins at Nippon Paint and Unicharm producing a disproportionate increase in their earnings and returns.
  • The fifth and final contribution to NAV appreciation was driven by companies listed in mainland China that derive the majority of their earnings within China. Shenzhen Inovance Technology (China), the engineering partnership behind the design and manufacture of components for industrial automation, electric vehicles, and industrial robots, is a case in point and was one of the strongest contributors to the Trust during the year.

Performance attribution – detractors from PAC’s returns

The biggest detractor over the year was Philippine Seven, the exclusive local licensor of 7-11 convenience stores. There are almost 3,000 7/11 stores in the Philippines and at the height of the pandemic 30% of these stores were closed under government imposed quarantine. PAC’s report says that difficult times are an unfortunate fact of life and the manager’s instinct is to support companies during such times. The manager retains its confidence in the company and their management.

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