Pacific Assets Trust has published results for the 12 months ended 31 January 2022 and the figures are much improved on previous years when it suffered from relatively low exposure to China, although unfortunately still behind its performance objective. The net asset value per share total return of 9.1% compares with the return of the performance objective (inflation, as measured by CPI +6%) of 11.5% and the average of a peer group of Asian investment trusts (Pacific Horizon, Schroder Asia Total Return, Schroder Asia Pacific, Aberdeen New Dawn and Asia Dragon plus the iShares MSCI Asia ex Japan ETF) which showed a decline in net asset value of 1.7%. Every single trust in that peer group beat the ETF.
Shareholders will be asked at the AGM to approve a change to the investment objective to permit the use of gearing up to 10%. [It is a bit strange that it can’t do this already].
The dividend for the year is 1.9p.
Extract from the manager’s report
The divergence in performance between equity markets in China and India was highlighted in the interim report. During the remainder of the year, many equities in China suffered sharper falls while most equities in India recorded strong gains. Country weightings are purely an outcome – a residual – of bottom-up stock selection. Nonetheless, the large differential in performance between China and India complemented strong stock selection and helped to drive positive returns during the year. This report will outline the main drivers of performance and the most significant transactions made by the Trust. It will then illustrate how we examine international peers as a means of assessing possible pathways of development, also known as growth runways, using two of the smaller companies in the Trust as examples.
What contributed to our return?
Since 1988, the typical performance outcome of our investment philosophy has been the preservation of capital when markets are weak and steady, but trailing capital growth during rapidly rising markets. Last year local equity markets within the Asia Pacific region delivered both of these performance outcomes. Equities in Hong Kong, South Korea and China, in particular, fell sharply while equities in Taiwan and India were impressively strong. Within this context, our typical performance outcome was evident at the country level.
As always, we held true to our investment philosophy and we did not succumb to despondency in China or euphoria in India. Accordingly, the majority of the Trust’s investments in Hong Kong, South Korea and China fell less than local equity comparisons while the majority of investments in Taiwan and India failed to keep pace with markets that were driven by strong investor enthusiasm. This is evidenced by examination of the top ten contributors to performance.
Eight of the Trust’s top ten contributors were listed in India. India enjoyed a ‘blockbuster year’2 for new equity raisings in 2021. Record numbers, both in terms of the number of listings (63) and the value of capital raised (almost US$13 billion), were matched by bullish adjectives such as ‘wild’, ‘buzzing’ and ‘frenzy’. We tend not to participate in new issues unless we fully understand and can cross-reference the track record of the founders. Moreover, the pressures of being listed, with investors eager for quarterly updates, can have a corrosive influence on a culture, which we prefer to be long-term focused. For IPOs, it is often better to be patient and wait until a track record is established and the culture has settled. In this regard, it is noteworthy that, in accordance with our investment philosophy, the majority of the top contributors had been held in the Trust for over five years.
Examination of the Indian portion of the Trust shows that we held true to our investment philosophy and did not get carried away with over-exuberance. We did not participate in hot IPOs or invest in fashionable areas such as clean energy, fintech, electric vehicles or big data analytics. In stark contrast, the main business of the top contributor (Tube Investments) is the manufacture of bicycles. Tube Investments did not perform because it is fashionable. It performed because this family-controlled conglomerate is undertaking a powerful transformation under the excellent leadership of Vellayan Subbiah, a family member. Part of this restructuring involved the purchase and rejuvenation of another old franchise in India, CG Power and Industrial Solutions Limited, which is owned by the Trust and performed strongly over the period. Other strong contributors were Aavas Financiers, Dr Lal Pathlabs, Elgi Equipments, Tech Mahindra Mahindra & Mahindra and Marico. Each of these businesses boast high quality stewardship, improving franchises and robust financials. These were, at one time, each small businesses accounting for a small portion of the Trust, but they have grown into more significant holdings thanks to the long growth runways available in India and the rest of Asia.
Outside India, Techtronic Industries (Hong Kong), a manufacturer of power tools, Voltronic Power Technology (Taiwan), an original design manufacturer of uninterruptable power supplies and Silergy Corp, a manufacturer of analogue semiconductors in China for Chinese customers, contributed positively to the Trust’s performance.
What detracted from our return?
The most significant detractor of performance was Vitasoy International (Hong Kong) where politically motivated commotions, distinct from the management or the products – plant based beverages – of the company, conspired to disrupt sales in mainland China during the peak summer months. The quality of the stewardship, franchise and financials of Vitasoy is undiminished. In addition, we note that Vitasoy has renewed advertising activities, is placing orders with suppliers and has restarted production, which increases our confidence that the worst of this unfortunate episode is in the past. The rest of the detractors from performance were significantly smaller. Sometimes it is hard to determine any meaningful patterns in contributors or detractors. Last year, however, seven of the top ten detractors were either listed in, or had significant operations in, China. The seven companies are: Guangzhou Kingmed Diagnostics, Hualan Biological, Amoy Diagnostics, Vinda International, Vitasoy International, Pigeon Corporation and Unicharm.
Over the course of the year, the Chinese economy slowed and political headwinds strengthened. In pockets of the economy, notably property, there was economic stress. The second order impact of the weaker property sector was reduced confidence in banks, insurance and retail. The once popular internet and education sectors suffered from penalties as they were deemed to be no longer compatible with the common prosperity of the Chinese population. The combination of these connected but distinct factors reduced equity valuations of these sectors dramatically and almost all listed Chinese companies more generally. The Trust was not invested in any of these specific sectors and the focus on high quality sustainable businesses insulated the shareholders from the worst of the falls in China in 2021.
Covid restrictions and rising input costs were two additional factors impacting certain equities in the financial year. In this regard, lockdowns and reduced economic activity help to explain weak performance at Philippine Seven (Philippines) and Bank OCBC (Indonesia). Rising input costs, alongside weaker domestic demand in China, had a chilling effect on sentiment and operations at manufacturers such as Unicharm (Japan, Diapers), Pigeon Corporation (Japan, Baby accessories) and Vinda International (China, Tissues).
PAC : Pacific Assets has a better year