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Weiss Korea Opportunity has a great year

Weiss Korea Opportunity’s (WKOF’s) annual results to 31 December 2020 saw it deliver a total NAV return of 63.7%, which was well above the reference MSCI Korea 25/50 net total return index, which increased by 36.4% in sterling terms. WKOF’s outperformance continued following the period end. As at 31 March 2021, the NAV had increased by 7.1% since the year-end, compared to the reference index’s 5.1%. We note that over the year to end-December, WKOF’s discount narrowed slightly, from (3.6%) to (4.4%).

‘As well as a relatively controlled pandemic, large economic stimulus packages and surging demand from retail investors pushed markets upwards’

WKOF’s chairman, Norman Crighton, had this to say in his review of the year: “Reporting such outperformance to you seems incongruous in the middle of a pandemic. 2020 was a difficult year for everyone, not least the people of South Korea who suffered a total of 61,769 cases of infection and 917 deaths from COVID-19. However, given a population of 52 million, South Korea did a very good job at containing the virus in 2020.

The outperformance of Korean equity markets was driven by a number of factors; in addition to the relatively controlled pandemic, a series of large economic stimulus packages deployed by the South Korean government and surging demand from Korean retail investors for domestic stocks pushed markets upwards. In my semi-annual letter, I described a remarkable rebound from March lows. It continued with the KOSPI rallying a further 42% during the second half of the year.

WKOF is long the Korean equity market; this was a good year to be so. As detailed in the following Investment Managers Report, additional gains were mostly due to overweight positions in Korean companies whose common shares outperformed, as well as the narrowing of discounts of Korean preference shares held and the dividends received from portfolio companies.

As I reported to investors in 2018, WKOF intends to pursue a strategy of rebalancing the portfolio towards Korean preference shares trading at wider discounts. This continues to be the strategy and elevated volatility and trading volumes during the year presented opportunities for WKOF to actively trade around discount moves. WKOF’s ‘Portfolio Discount’ was over 49% at year-end. That is the widest discount WKOF has held since 2013, and the Board believes WKOF is well positioned for further outperformance.

WKOF has an active share repurchase program as part of its discount management strategy. During the period, the Board considered buying back shares on numerous occasions when the discount to NAV appeared to be wide. However, the Korean stock market was so volatile that it was very difficult to ensure that the discount quoted was achievable when realising part of the portfolio to fund buybacks. With the stock market moving 5% to 10% each day, I hope that shareholders can understand the difficulties the Board and the Investment Manager had during that difficult period.

The Board is authorised to repurchase up to 40 per cent of WKOF’s outstanding Ordinary Shares in issue as at 31 March 2021.4 Since Admission almost eight years ago, and as at 31 March 2021, WKOF has repurchased, at a discount to NAV, 13,190,250 Ordinary Shares of the original 105,000,000 Ordinary Shares issued at Admission. The Board also has in place standing instructions with WKOF’s broker, N+1 Singer Advisory LLP, for the repurchase of WKOF’s Shares during closed periods when the Board is not permitted to give individual instructions; such closed periods typically occur around the preparation of the Annual and Half Yearly Financial Reports. The Board intends to continue to aggressively repurchase Shares if WKOF’s shares are trading at a significant discount to net asset value. We will continue to keep Shareholders informed of any share repurchases through public announcements.

In accordance with WKOF’s Admission Document, adhering to the highest standards of corporate governance and providing our Shareholders with the greatest flexibility of almost any listed closed-end fund in the UK, WKOF offers Shareholders the regular opportunity to elect to realise all, or a part, of their shareholding in WKOF (the “Realisation Opportunity”) once every two years, on the anniversary of WKOF’s admission date. A circular with full details of the upcoming Realisation Opportunity was published on 03 March 2021. If any Shareholders elect for realisation, then on the Realisation Date, WKOF’s current portfolio will be divided into two pools: a Continuation Pool and a Realisation Pool. The Realisation Pool will be managed in accordance with an orderly realisation with the aim of making progressive returns of cash to holders of Realisation Shares. Given the performance of WKOF, not just recently but over its entire life, the discount protection measures WKOF has had in place since IPO, the potential to outperform going forward as well as many other measures mentioned below, the Board expects demand for this feature to be limited.

With WKOF approaching its 8th anniversary and having achieved such impressive results, the Board and the Investment Manager are working on a number of initiatives to broaden the shareholder base, increase liquidity for all shareholders and make WKOF more attractive to a wider audience. With the Portfolio Discount currently standing at around 48%, we believe that there is still significant potential for the portfolio to outperform in both absolute and relative terms. In February 2021 WKOF joined the Association of Investment Companies (“the AIC”) to give more people access to information on WKOF. Changes were also made to allow retail investors the ability to buy and sell shares of WKOF on various platforms such as Hargreaves Lansdown and Interactive Investor. Changes have also been made to the monthly reports and website, and this evolution will continue throughout 2021. In addition, WKOF has appointed Camarco to raise our profile in the press, which has already resulted in increased press coverage for WKOF. Please watch out for additional articles in the future. The Board and WAM continue to work on a number of other initiatives which will be announced in the coming weeks and months.

Since the Company launched 8 years ago, corporate governance has been of the utmost importance to the Board and the Investment Manager. Aligning the interests of Shareholders and the Investment Manager, protecting Shareholders from value destruction through a wide discount, and allowing Shareholders the ability to exit every two years are all features at the core of our philosophy. Similarly improving corporate governance across the corporate landscape in Korea, as well as within Korean companies, is the main driving force behind the past and future returns of the Company. The G of ESG, Environment, Social and Governance, has therefore clearly been of prime importance since launch. The E and S factors will never have the same prominence given that the Company’s investment objective is to invest in preferred shares which have limited voting rights. However, there is no doubt that factors represented by the letters ESG will be playing an increasingly crucial role in all decision making, whether operational or investment, for corporates and individuals alike.

Going forward, the Board would like to turn its attention to the E and S factors, ensuring that your Company remains at the vanguard of putting these criteria at the core of what we do. WKOF, like every other investment trust with no premises and no employees, can have a limited direct effect on E and S issues. However, your Board believes that you as Shareholders, our most important stakeholders, expect more from us as Directors. Therefore, with your backing, we would like to take an increasingly proactive approach and start a discussion with our counterparties on their ESG mitigation strategies. We will start by asking all of WKOF counterparties – the investment manager, broker, administrator, legal team, accountants and others, two questions:”

WKOF: Weiss Korea Opportunity has a great year

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