Discount and premiums have a tendency to mean revert, often quite quickly, and so I’m not given to favouring trusts that are trading at ratings much above their long-term averages, unless I can see a good reason. In the case of Pacific Horizon (which was trading at a premium of 6.3% as at 15 December 2021, versus a three-year average premium of 1.9% and a five-year average discount of 1.3%), I think it warrants a look because the current premium reflects a staggering uplift in its performance and, when looking at the current macroeconomic backdrop, I think there could be a good deal more of this to come.
Peer group topping performance
Pacific Horizon benefits from Baillie Gifford’s unashamedly long-term growth focused approach to managing money. The manager takes a genuinely long-term view – it wants to invest in the top 20% of the faster growing companies in Asia – and seeks out those companies it believes can grow their revenue and earnings at around 15% per annum for five years or longer. The approach has been very successful. Pacific Horizon is far and away the top performing Asia Pacific trust during the last couple of years and its outperformance of its peers has been blistering (its NAV total return over the three years to the end of October was 186%, while the best performing of its peers, Schroder Asia Total Return – another strongly performing trust – managed just 66%).
Performance driven premium rating
Not surprisingly, this has captured investors’ imaginations and its premium is underpinned by strong demand for the strategy. Such is investors’ faith in the approach that, following the announcement last June that its lead-manager since 2014 was stepping down, there was barely a dent on Pacific Horizon’s rating. It probably helped that his replacement had been working on the trust for a while.
Looking back, it is fair to say that Pacific Horizon has benefitted as investors have sought strategies that that can grow against a sluggish economic backdrop in the face of COVID. It is also true that it was held back by the value rally in November last year, and would likely be so again when we see a second value bounce once Omicron has been reigned in. However, for Pacific Horizon’s manager, these events, while significant, are largely short-term noise, and its performance makes this hard to refute.
Focusing on themes that will do well over the next five years and beyond
Emerging Asia remans a high growth and under-researched region. Its valuations are attractive relative to global equities, despite its markedly superior growth prospects, and it is at an early stage in its current economic cycle. The manager is investing in themes it expects to do well over the next five years and beyond – things such as electric vehicles, digitalisation and the commodities we will need to decarbonise our energy production. These themes will run and run and Pacific Horizon’s manager has shown it is adept at getting in early, plus many of the macro concerns that we had going into 2021 look likely to persist into 2022, so Pacific Horizon also looks well positioned in the short term. While I think that it is hard to see Pacific Horizon’s premium evaporating overnight, I am comforted by the fact that all of this growth potential could well make up for it and more, in the event that it did.