Annual Financial Report

RNS Number : 3463O

Pacific Horizon Investment Tst PLC

15 September 2011

 

PACIFIC HORIZON INVESTMENT TRUST PLC

 

ANNUAL FINANCIAL REPORT

A copy of the Annual Report and Financial Statements for the year ended 31 July 2011 of Pacific Horizon Investment Trust PLC has been submitted electronically to the National Storage Mechanism and will shortly be available for inspection at http://www.hemscott.com/nsm.do

The Annual Report and Financial Statements for the year ended 31 July 2011 including the Notice of Annual General Meeting is also available on the Pacific Horizon's page of the Baillie Gifford website at:

www.pacifichorizon.co.uk

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 July 2011 which require to be published by DTR 4.1 is set out on the following pages.

Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement.

Baillie Gifford & Co

Company Secretaries

15 September 2011

Chairman's Statement

Performance

In the year to 31 July 2011 net asset value per share increased by 9.2%, compared to a 13.8% rise in the MSCI All Country Far East ex Japan Index (in sterling terms). The share price rose by 13.0% and the discount narrowed from 10.7% to 7.6%. Some of our top ten holdings performed strongly over the period, including Hyundai Mobis, a Korean auto parts supplier for the Hyundai Motor Group, and Baidu, a Chinese internet search business. Other strong performers included China National Building Material, a Chinese cement producer, China Life Insurance (Taiwan), a Taiwanese life insurer, and Bank Negara Indonesia, an Indonesian bank. All of these stocks rose by over 50% in sterling terms over the course of the Company's year. Most of the underperformance against the comparative index occurred in the first half of the year, caused by weakness in holdings in India and some industrial companies as well as a low weighting in the markets of Korea and Taiwan, which were both strong performers. The Managers' Report contains a more detailed explanation, together with a summary of the performance of the principal markets in which the Company is invested and the Managers' comments on them.

There was no gearing during the year and at the year end net current assets were equal to 1.1% of shareholders' funds. 

Earnings per share rose by 20% to 1.98p from 1.65p for the previous year. The Board is recommending that a dividend of 1.50p should be paid.

Comparative Index

Until 1 August 2011 the principal index against which performance was measured was the MSCI All Country Far East ex Japan Index (in sterling terms). From 1 August 2011, the comparative index will be the MSCI All Country Asia ex Japan Index (in sterling terms). The change was made to reflect better the Company's investible universe.

Continuation of the Company

At this year's Annual General Meeting ('AGM') the Directors are proposing, in accordance with the Articles, that the life of the Company be extended for a further five years. If the continuation vote were not to be approved, the Directors would convene a meeting, to be held on or around 30 November 2011, at which a further resolution would be proposed to wind up the Company voluntarily and to appoint a liquidator following which the Company's portfolio would be realised, with shareholders being entitled, in proportion to their respective holdings, to the net proceeds of the liquidation. At this meeting, in accordance with the Articles, every shareholder present in person or by proxy and entitled to vote should be obliged to vote in favour of the resolution to wind up the Company and any votes proposed to be cast against that resolution should not be counted as valid votes.

Your Directors are aware that performance in the volatile markets which have followed the financial crisis of 2008/9 has been disappointing. However, we are also aware that since Baillie Gifford were appointed Managers of the Company in 1992 performance has generally been good, and having conducted a thorough review of the Managers' approach and resources we judge them to have the right team to manage a portfolio in what we still consider to be a region with outstanding long term prospects for investment.

 

Your Directors therefore believe that it is desirable to extend the Company's life and recommend that shareholders vote in favour of the extension for a further period of five years.

Share buy backs

During the year the Company bought back a total of 1,355,000 ordinary shares, representing 1.7% of the issued share capital as at 31 July 2010, at a cost of £2,213,000. We shall be asking shareholders to renew the mandate to repurchase up to 14.99% of the outstanding shares at the forthcoming AGM. 

The Board is aware that one shareholder would like the Company to undertake a tender offer and some would like the Company to announce a stated discount level at which it would buy back stock for cancellation. Having heard the views of other shareholders, and considered market turbulence along with the Company's current size and liquidity, the Board is of the view that it would be in the best interest of shareholders overall to commit to buying back shares in an opportunistic fashion based on the Company's relative and absolute level of discount, rather than commit to a formula for redemptions.

Changes to the Board

Peter Mackay, my predecessor as Chairman, retired from the Board at last year's AGM and Michael Morrison, a Director since 2002, retired in March this year. Gerald Smith will not be standing for re-election at the coming AGM following his appointment as Baillie Gifford's Chief Investment Officer, but will continue to be accessible to us in his new role. I should like to thank all three for their service to the Company, and in particular Peter Mackay for his wise leadership of the Board. I am pleased to welcome to the Board Elisabeth Scott, who brings with her extensive experience of investment management in South East Asia. Shareholders will be asked to confirm her appointment at the AGM.

Annual General Meeting

This year's AGM will take place on 17 October 2011 at the offices of Baillie Gifford & Co in Edinburgh at 10.45am. Mike Gush, who manages your portfolio, will make a presentation and, along with the Board, will answer any questions. I hope to see as many of you as possible there.

Outlook

Despite the problems of debt and slow growth currently faced by the developed world the Board and Managers consider that the attractions of investing in the regions of the Asia-Pacific and Indian sub-continent remain strong. Continued urbanisation, industrialisation, the building of infrastructure, the emerging consumer class and generally sound fiscal management suggest continued growth in excess of that within the capacity of the developed world, and shareholders have the opportunity to take advantage of these trends by investing through a portfolio of companies with sound managements and strong competitive positions.

Jean Matterson

Chairman

9 September 2011

Past performance is not a guide to future performance.

Managers' Overview

In the year to 31 July 2011 markets in the region have performed well, especially for sterling based investors. The best performing markets in sterling terms were Thailand, the Philippines and Indonesia, all up over 35%.  The poorest performing markets in sterling terms were Vietnam, Hong Kong and India. A geographical review can be found under the Managers' Portfolio Review.

The most notable change to the distribution of the Company's assets by geography has been a large increase in Korea. This is a result of the number and quality of opportunities we are finding for investment, relative to those elsewhere, rather than an asset allocation decision. Small increases have also been made to Taiwan, the Philippines, and Singapore. These changes have been funded mainly through reductions in Hong Kong and China, India and Indonesia. In terms of industrial sector, changes in the portfolio have been minor. The largest increases have been in the Financials and Industrials sectors, with reductions principally in the Consumer Staples, Health Care and Telecommunication Services sectors. In accordance with our investment policy, which remains unchanged, these changes are driven by the merits of individual stocks and not an overarching top down view.

Over the course of the Company's year the most significant developments across the world occurred in regions outside those in which we invest, such as the debt problems of the developed world, the instability of the euro and the tragic earthquake and subsequent tsunami in Japan. Despite these external events, most Asian economies have enjoyed robust economic performance, with domestic demand remaining firm. During the second half of the period, inflationary concerns mounted and central banks responded by tightening monetary conditions through interest rate hikes and bank reserve requirement increases. These should be seen as sensible and proactive measures to prevent significant economic imbalances emerging and, in the absence of further exogenous shocks, should serve to make future growth all the more sustainable. Corporate governance has also been a topic of note, with first India and then China being the subject of investor scrutiny. Whilst such problems do come to the fore from time to time, we believe standards in the aggregate continue to improve with minority shareholders continuing to benefit as a result. Overall, we continue to consider that the markets in which we invest present an attractive prospect for shareholders in Pacific Horizon.

Over the past year we have continued to invest in companies with strong growth prospects and sustainable competitive advantages and which trade at low valuations relative to their prospects. We maintained a near fully invested position throughout the year and at the end of the year the cash balance was 1.1% of shareholders' funds.

Distribution of Portfolio and Movement of Indices

		% of total assets as at 31 July 2011	% of total assets as at  31 July 2010	Principal local indices % change in sterling terms
Hong Kong and China		34.9	40.1	1.4
Korea		21.0	14.5	29.8
Taiwan		13.4	11.8	18.1
Singapore		10.0	9.7	15.0
Malaysia		5.0	4.7	16.4
Indonesia		4.8	6.5	35.1
India		4.3	5.9	2.0
Thailand		3.2	3.4	36.7
Philippines		1.2	0.0	35.5
Vietnam		1.1	1.2	(23.6)
Net liquid assets		1.1	2.2
Pacific Horizon Investment Trust (NAV)		100.0	100.0	9.2
MSCI All Country Far East ex Japan Index (in sterling terms)				13.8

Source: Thomson Reuters Datastream/Baillie Gifford & Co

Past performance is not a guide to future performance.

Investment Changes (£'000)

	Valuation  at 31 July 2010	Net acquisitions/ (disposals)	Appreciation/ (depreciation)	Valuation at 31 July 2011
Hong Kong and China	51,372	(4,020)	547	47,899
Korea	18,567	3,931	6,355	28,853
Taiwan	15,079	2,802	599	18,480
Singapore	12,443	111	1,150	13,704
Malaysia	5,981	(151)	1,039	6,869
Indonesia	8,293	(3,028)	1,360	6,625
India	7,586	(1,115)	(534)	5,937
Thailand	4,298	(364)	478	4,412
Philippines	21	1,402	224	1,647
Vietnam	1,505	-	(46)	1,459
Total equities	125,145	(432)	11,172	135,885
Net liquid assets	2,794	(1,253)	(76)	1,465
Total assets	127,939	(1,685)	11,096	137,350

The figures above for total assets are made up of total assets less current liabilities.

Managers' Portfolio Review

Hong Kong and China

China's economic progress remains strong, with a proactive government looking to absorb excess liquidity and curb speculative exuberance. Inflationary concerns persist, although with monetary growth under control and trending lower we are relatively relaxed. Initial market focus was on the prospect of overheating, turning more recently to whether or not the tightening measures undertaken have been too aggressive. We believe that the government has exhibited sensible macroeconomic management to date, which should enable sustainable growth to be achieved. Indeed, unlike a number of countries around the world, China is firmly in control of her own destiny with enough financial firepower to counteract any slowdown should it be required. 

Despite the undoubted potential of both the Chinese economy and her companies, stockmarket performance was lacklustre over the period. Aside from the short term worries surrounding economic performance, there have been questions raised over both the funding of Local Government Financing Vehicles and the standards of corporate governance at Chinese companies. On this latter point, Real Gold Mining, a holding taken earlier in the year, remains suspended following a press article questioning the accuracy of its accounts and we have written down its value accordingly. Despite this disappointment, our belief in the prospects for our Chinese holdings has never been stronger. We continue to invest in a wide range of companies sporting excellent growth prospects, sustainable competitive advantages and attractive financial characteristics. Valuations look reasonable, giving an opportunity to invest at a level that should deliver meaningful returns.

Over the period, Hong Kong ('HK') was the second worst performing market in which we invest. Given the large influence the mainland has over the stockmarket much of the relative weakness was due to short term worries about China's economic performance. This aside, HK remains a premier beneficiary of continued Chinese growth, while also having a notable role to play in the further internationalisation of the Renminbi.

There were a number of new purchases made during the year in HK and China. These included Ping An Insurance, a leading financial business in China, Ports Design, a high end fashion retailer expanding in the mainland, VTech, a niche electronics manufacturer based in HK and Angang Steel, a leading Chinese steel producer. Few themes can be identified amongst the sales, although concern over the situation in HK has contributed in part to sales of Hang Seng Bank, a leading HK bank, and New World Development, a HK property company.

Korea

Korea performed well over the period, with sterling returns of almost 30%. Relations with North Korea appear stable for now after a potentially difficult time following the shelling of a South Korean island by the North. Regional tensions are an area of concern, although one that international pressures should be able to keep in check. We made substantial additions to the Korean holdings over the course of the year. Additions to Hyundai Mobis, an auto parts company, have made it into one of the largest holdings and more recently we have also purchased a holding in Hyundai Glovis, a logistic business. Both companies are part of the Hyundai Motor Group and are key beneficiaries of the Hyundai and Kia marques' success. Other new buys included LG Corp, the holding company for the LG Group, and LS Corp, where we believe the growth potential from transmission network upgrades is being underpriced by the market. Sales of Mirae Asset Securities, a domestic stockbroker, Hyundai Development, a property company, and SK Telecom, a mobile phone operator, partially funded the new buys.

Taiwan

Taiwan posted a good performance in both local and sterling currency terms. We remain upbeat regarding the prospects of closer ties with the mainland, with a number of our holdings such as China Life Insurance (Taiwan) set to be potential beneficiaries. Changes to the Taiwanese holdings over the year have been limited. We have made a recent new purchase of China Steel, the leading Taiwanese steel manufacturer, and a complete sale of Vanguard International Semiconductor, a niche semiconductor manufacturer. We have also been adding to MediaTek, an integrated circuit design house, where we feel that short term concerns are offering an attractive entry point.

Singapore

The performance of Singapore has been good, albeit improved by a significant boost in sterling terms by the strength of its currency. Despite being one of the most open economies in which the Company invests, in times of uncertainty the Singaporean Dollar remains a safe haven currency. Limited changes have been made to the Singapore holdings with only one new purchase and one sale. Venture Corp, a niche electronic manufacturing services business, has been added given the potential for the business to improve margins as its product mix changes and KS Energy, an offshore services business, has been sold as a result of concerns over the future financing of the business.

Malaysia

Despite traditionally being one of the more defensive markets, Malaysia has posted a good performance in both local and sterling currency terms over the year. Economic performance continues to be good and the Economic Transformation Programme, a key initiative to deliver sustained growth and raise the standards of living, is progressing well. We made some small reductions to existing holdings to fund more exciting ideas elsewhere and took a new holding in CIMB, a leading Malaysian bank.

Indonesia

Benefiting from strong growth and a largely stable political environment, Indonesia has been one of the strongest performers over the Company's year, both in local and sterling currency terms. However, inflationary pressures persist and with the Central Bank perhaps somewhat slow to react there is a risk that from here a more difficult environment will evolve. We would raise a flag of caution regarding the political environment, with some developments in the background perhaps being the first straws in the wind that the elections in 2014 may not be as smooth as the market expects. Given the strong performance and almost universal belief that Indonesia has finally put its problems behind it, we have used our Indonesian holdings as a source of funds, reducing our banking holdings and selling Bakrie and Brothers, an Indonesian conglomerate.

India

Stockmarket returns in India were disappointing over the year as the country struggled in the face of rapid inflation, a rising oil price and corporate scandals. Reform remains a much needed step; however, despite the positive election result noted in this report last year, progress has been slow. Significant changes to the portfolio over the Company's year included a new purchase of GAIL (India), a gas utility business, and sales of Patni Computer Systems, an IT services business, and Jain Irrigation, an industrial company with a focus on micro-irrigation units.

Thailand

Thailand was the best performing equity market in sterling terms over the period. With strong economic performance delivered and with political unrest in check for the time being, investors have returned to what had become a very lowly rated market. The landslide win in July for the opposition PT party was taken very well with markets performing strongly towards the Company's year end. We made a new purchase of Bangkok Bank, a leading Thai bank, on expectations that in a better macroeconomic environment corporate spending may increase following years of underinvestment. We sold holdings in Esso Thailand, a refiner, and Thoresen Thai, a shipping company, as better investment opportunities have arisen.

Philippines

Like many other ASEAN markets, the Philippines was a strong performer in both local and sterling currency terms. Economic growth was strong with inflation under control and remittances continuing to flow in. Following the peaceful election last year, reforms have been slow to materialise. We made one new purchase during the year; Security Bank, a well run bank with strong growth prospects and an attractive valuation.

Vietnam

Vietnam was the weakest performing market over the financial year, posting a significant decline in local and sterling currency terms. Inflationary pressures remain fierce and the Central Bank has little latitude to intervene. The currency has been under pressure with further devaluations and concerns regarding the debt levels, balance of payments and credit quality. We remain optimistic regarding the long term outlook for the economy given the attractive structural features such as the demographic profile and geographic proximity to China, and valuations remain low. We retain two pooled holdings there.

THIRTY LARGEST EQUITY HOLDINGS at 31 July 2011 (unaudited)

Name	Country	Business	Value £'000	% of total assets‡
Samsung Electronics	Korea	Semiconductor manufacturer	7,063	5.1
Hyundai Mobis	Korea	Automotive parts producer	5,555	4.0
Kunlun Energy Company	HK/China	Oil and gas exploration and production	4,718	3.4
Taiwan Semiconductor Manufacturing	Taiwan	Semiconductor manufacturer	4,643	3.4
Baidu	HK/China	Internet search provider	4,210	3.1
CNOOC	HK/China	Oil and gas exploration and production	3,415	2.5
Ping An Insurance	HK/China	Life insurance provider	3,324	2.4
China Life Insurance (Taiwan)	Taiwan	Life insurance provider	3,199	2.3
Hyundai Marine and Fire Insurance	Korea	Non-life insurance provider	2,967	2.2
Singapore Exchange	Singapore	Stock exchange	2,805	2.0
Hon Hai Precision Industries	Taiwan	Electronic manufacturing services company	2,699	2.0
Hyundai Glovis	Korea	Logistics company	2,678	1.9
Sembcorp Marine	Singapore	Shipbuilder	2,490	1.8
ASM Pacific Technology	HK/China	Semiconductor equipment manufacturer	2,417	1.8
Samsung Fire & Marine	Korea	Non-life insurance provider	2,398	1.7
Kuala Lumpur Kepong	Malaysia	Palm oil producer and refiner	2,290	1.7
Parkson Holdings	Malaysia	Department store owner and operator	2,250	1.6
Li & Fung	HK/China	Supply chain management	2,189	1.6
MediaTek	Taiwan	Integrated circuit design house	2,182	1.6
LG Corporation	Korea	Holding company for the LG Group	2,072	1.5
SATS Limited	Singapore	Airport services provider	2,023	1.5
Ports Design	HK/China	Apparel retailer	1,874	1.4
China Petroleum & Chemical    Corporation	HK/China	Integrated oil and gas producer	1,784	1.3
CapitalMall Trust	Singapore	Real estate investment trust	1,782	1.3
Orion	Korea	Consumer conglomerate	1,745	1.3
China National Building Material	HK/China	Building materials manufacturer	1,677	1.2
ZTE	HK/China	Telecommunications equipment provider	1,668	1.2
Security Bank	Philippines	Commercial bank	1,625	1.2
Bank Negara Indonesia	Indonesia	Commercial bank	1,624	1.2
PT Telekomunikasi	Indonesia	Diversified telecommunications provider	1,618	1.2
			82,984	60.4

HK/China denotes Hong Kong and China

All stocks are listed overseas.

‡ Total assets less current liabilities.

DISTRIBUTION OF ASSETS

		At 31 July 2011 %		At 31 July 2010 %
Equities:	Hong Kong and China	34.9		40.1
	Korea	21.0		14.5
	Taiwan	13.4		11.8
	Singapore	10.0		9.7
	Malaysia	5.0		4.7
	Indonesia	4.8		6.5
	India	4.3		5.9
	Thailand	3.2		3.4
	Philippines	1.2		0.0
	Vietnam	1.1		1.2
Total equities		98.9		97.8
Net liquid assets		1.1		2.2
Total assets at fair value‡		100.0		100.0

‡ Total assets less current liabilities.

 

RELATED PARTY TRANSACTIONS

The Directors' fees for the year are detailed in the Directors' Remuneration Report in the Annual Report and Financial Statements. No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under section 412 of the Companies Act 2006. Mr GTE Smith, who was appointed as a Director of the Company on 1 February 2009, is a partner of Baillie Gifford & Co. Baillie Gifford & Co are appointed as investment managers and secretaries to the Company. The Managers may terminate the Management Agreement on six months' notice and the Company may terminate on three months' notice. The fee in respect of each quarter is 0.25% of total assets less current liabilities. The details of the management fee are as follows:

	2011 £'000		2010 £'000
Investment management fee	1,394		1,224

PRINCIPAL RISKS AND UNCERTAINTIES

As an Investment Trust, the Company invests in equities and makes other investments so as to achieve its investment objective of maximising capital appreciation, from a focused and actively managed portfolio of investments from the Asia-Pacific region including the Indian Sub-continent. In pursuing its investment objective, the Company is exposed to various types of risk that are associated with the financial instruments and markets in which it invests.

These risks are categorised here as market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. The Board monitors closely the Company's exposures to these risks but does so in order to reduce the likelihood of a permanent loss of capital rather than to minimise short term volatility. Risk provides the potential for both losses and gains. In assessing risk, the Board encourages the Managers to exploit the opportunities that risk affords.

The risk management policies and procedures outlined in this note have not changed substantially from the previous accounting period.

Market Risk

The fair value or future cash flows of a financial instrument or other investment held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - currency risk, interest rate risk and other price risk. The Board of Directors reviews and agrees policies for managing these risks and the Company's Investment Managers both assess the exposure to market risk when making individual investment decisions and monitor the overall level of market risk across the investment portfolio.

The Company may, from time to time, enter into derivative transactions to hedge specific market, currency or interest rate risk. During the year to 31 July 2011 no such transactions were entered into.

The Company's Managers may not enter into derivative transactions without the prior approval of the Board.

Currency Risk

The majority of the Company's assets, liabilities and income are denominated in currencies other than sterling (the Company's functional currency and that in which it reports its results). Consequently, movements in exchange rates may affect the sterling value of those items.

The Investment Managers monitor the Company's exposure to foreign currencies and report to the Board on a regular basis. The Investment Managers assess the risk to the Company of the foreign currency exposure by considering the effect on the Company's net asset value and income of a movement in the rates of exchange to which the Company's assets, liabilities, income and expenses are exposed. However, the country in which a company is listed is not necessarily where it earns its profits. The movement in exchange rates on overseas earnings may have a more significant impact upon a company's valuation than a simple translation of the currency in which the company is quoted.

Foreign currency borrowings can limit the Company's exposure to anticipated future changes in exchange rates which might otherwise adversely affect the value of the portfolio of investments. The Company had no borrowings in the year to 31 July 2011 or 31 July 2010.

Exposure to currency risk through asset allocation, which is calculated by reference to the currency in which the asset or liability is quoted, is shown below.

At 31 July 2011	Investments £'000	Cash and deposits £'000	Other debtors and creditors* £'000	Net exposure £'000
Hong Kong dollar	42,325	1,242	-	43,567
Korean won	28,853	-	3	28,856
Taiwan dollar	18,480	-	373	18,853
Singapore dollar	14,034	-	79	14,113
Malaysian dollar	6,869	-	16	6,885
Indonesian rupiah	6,625	-	31	6,656
Indian rupee	5,937	-	23	5,960
Other overseas currencies	12,762	-	66	12,828
Total exposure to  currency risk	135,885	1,242	591	137,718
Sterling	-	207	(575)	(368)
	135,885	1,449	16	137,350

*      Includes net non-monetary assets of £17,000.

At 31 July 2010	Investments £'000	Cash and deposits £'000	Other debtors and creditors* £'000	Net exposure £'000
Hong Kong dollar	47,857	2,709	(150)	50,416
Korean won	18,567	-	35	18,602
Taiwan dollar	15,079	10	178	15,267
Singapore dollar	12,999	-	108	13,107
Malaysian dollar	5,981	-	14	5,995
Indonesian rupiah	8,293	-	8	8,301
Indian rupee	7,586	-	33	7,619
Other overseas currencies	8,783	61	54	8,898
Total exposure to  currency risk	125,145	2,780	280	128,205
Sterling	-	98	(364)	(266)
	125,145	2,878	(84)	127,939

*      Includes net non-monetary assets of £10,000.

Currency Risk Sensitivity

At 31 July 2011, if sterling had strengthened by 5% in relation to all currencies, with all other variables held constant, total net assets and total return on ordinary activities would have decreased by the amounts shown below. A 5% weakening of sterling against all currencies, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts. The analysis is performed on the same basis for 2010.

	2011 £'000		2010 £'000
Hong Kong dollar	2,178		2,521
Korean won	1,443		930
Taiwan dollar	943		763
Singapore dollar	706		655
Malaysian dollar	344		300
Indonesian rupiah	333		415
Indian rupee	298		381
Other overseas currencies	641		445
	6,886		6,410

Interest Rate Risk

Interest rate movements may affect directly:

• the fair value of any investments in fixed interest rate securities;

• the level of income receivable on cash deposits;

• the fair value of any fixed-rate borrowings; and

• the interest payable on any variable rate borrowings.

Interest rate movements may also impact upon the market value of investments outwith fixed income securities. The effect of interest rate movements upon the earnings of a company may have a significant impact upon the valuation of that company's equity.

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions and when entering borrowing agreements.

The Board reviews on a regular basis the amount of investments in cash and fixed income securities and the income receivable on cash deposits, floating rate notes and other similar investments.

The Company may finance part of its activities through borrowings at approved levels. The amount of any such borrowings and the approved levels are monitored and reviewed regularly by the Board. Movements in interest rates, to the extent that they affect the market value of the Company's fixed rate borrowings, may also affect the amount by which the Company's share price is at a discount or a premium to the net asset value, on the assumption that the share price is unaffected by movements in interest rates.

The cash deposits generally comprise call or short term money market deposits of less than one month which are repayable on demand. The benchmark rate which determines the interest payments received on cash balances is the bank base rate.

Interest Rate Risk Sensitivity

The sensitivity analyses below have been determined based on the exposure to interest rates at the balance sheet date and with the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates.

If interest rates had been 100 basis points higher or lower (2010 - 100 basis points) and all other variables were held constant, the Company's total net assets and total return on ordinary activities for the year ended 31 July 2011 would increase/decrease by £14,000 (2010 - increase/decrease by £29,000). This is mainly due to the Company's exposure to interest rates on its floating rate cash balances.

Other Price Risk

Changes in market prices other than those arising from interest rate risk or currency risk may also affect the value of the Company's net assets.

The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Investment Managers. The Board meets regularly and at each meeting reviews investment performance, the investment portfolio and the rationale for the current investment positioning to ensure consistency with the Company's objectives and investment policies. The portfolio does not seek to reproduce the index. Investments are selected based upon the merit of individual companies and therefore performance may well diverge from the comparative index.

Other Price Risk Sensitivity

Fixed asset investments are valued at bid prices which equate to their fair value. A full list of the Company's investments is given on pages 14 and 15 in the Annual Report and Financial Statements. In addition, a geographical analysis of the portfolio, an analysis of the investment portfolio by broad industrial or commercial sector and a list of the 30 largest equity investments by their aggregate market value are contained in the Managers' Portfolio Review Section.

98.9% of the Company's net assets are invested in quoted equities. A 5% (2010 - 5%) increase in quoted equity valuations at 31 July 2011 would have increased total assets and total return on ordinary activities by £6,793,000 (2010 - £6,257,000). A decrease of 5% would have had an equal but opposite effect.

Liquidity Risk

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.

Liquidity risk is not significant as the majority of the Company's assets are investments in quoted securities that are readily realisable. The Board provides guidance to the Investment Managers as to the maximum exposure to any one holding and to the maximum aggregate exposure to substantial holdings.

The Company has the power to take out borrowings, which give it access to additional funding when required.

Credit Risk

This is the risk that a failure of a counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss.

This risk is managed as follows:

• Where the Investment Managers make an investment in a bond or other security with credit risk, that credit risk is assessed and then compared to the prospective investment return of the security in question.

• The Company's listed investments are held on its behalf by the Company's custodian, The Bank of New York Mellon (acting as agent). Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed. The Investment Managers monitor the Company's risk by reviewing the custodian's internal control reports and reporting its findings to the Board.

• Investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the Investment Managers. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations before any transfer of cash or securities away from the Company is completed.

• The creditworthiness of the counterparty to transactions involving derivatives, structured notes and other arrangements, wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest, are subject to rigorous assessment by the Investment Managers.

• Cash is only held at banks that have been identified by the Managers as reputable and of high credit quality.

Credit Risk Exposure

The exposure to credit risk at 31 July was:

	2011 £'000	2010 £'000
Cash and short term deposits	1,449	2,878
Debtors and prepayments	612	445
	2,061	3,323

The maximum exposure in cash during the year was £4,036,000 (2010 - £3,974,000) and the minimum (£330,000) (2010 - £366,000). None of the Company's financial assets are past due or impaired.

Capital Management

The Company does not have any externally imposed capital requirements. The capital of the Company is the ordinary share capital as detailed in note 11 and the reserves in note 12 in the Annual Report and Financial Statements. It is managed in accordance with its investment policy in pursuit of its investment objective, both of which are detailed on page 18 in the Annual Report and Financial Statements. Shares may be issued and/or repurchased as explained on pages 23 and 24 in the Annual Report and Financial Statements.

Fair Value of Financial Assets and Financial Liabilities

The Directors are of the opinion that the financial assets and liabilities of the Company are stated at fair value in the balance sheet:

Investments

31 July 2011	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Listed equity	135,551	-	312	135,863
Unlisted equities	-	-	22	22
Total financial asset  investments	135,551	-	334	135,885

31 July 2010	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Listed equity	125,124	-	-	125,124
Unlisted equities	-	-	21	21
Total financial asset  investments	125,124	-	21	125,145

Investments in securities are financial assets designated at fair value through profit or loss on initial recognition. In accordance with Financial Reporting Standard 29 'Financial Instruments: Disclosures', the preceding tables provide an analysis of these investments based on the fair value hierarchy described below, which reflects the reliability and significance of the information used to measure their fair value.

Fair Value Hierarchy

The fair value hierarchy used to analyse the fair values of financial assets is described below. The levels are determined by the lowest (that is the least reliable or least independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:

Level 1 - investments with quoted prices in an active market;

Level 2 - investments whose fair value is based directly on observable current market prices or is indirectly being derived from market prices; and

Level 3 - investments whose fair value is determined using a valuation technique based on assumptions that are not supported by observable current market prices or are not based on observable market data.

Other risks faced by the Company include the following:

Regulatory Risk - failure to comply with applicable legal and regulatory requirements could lead to suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report. Breach of Section 1159 of the Corporation Tax Act 2010 could lead to the Company being subject to tax on capital gains.

The Managers monitor investment movements and the level of forecast income and expenditure to ensure the provisions of Section 1159 are not breached. Baillie Gifford's Heads of Business Risk & Internal Audit and Regulatory Risk provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes.

Major regulatory change could impose unnecessary compliance burdens on the Company or threaten the viability of the investment company structure. In such circumstances representation is made to ensure that the special circumstances of investment trusts are recognised.

Operational/Financial Risk - failure of the Managers' accounting systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. The Managers have a comprehensive business continuity plan which facilitates continued operations of the business in the event of a service disruption or major disaster. The Board reviews the Managers' Report on Internal Controls and the reports by other key third party providers are reviewed by the Managers on behalf of the Board.

Discount Volatility - the discount at which the Company's shares trade can widen. The Board monitors the level of discount and the Company has authority to buy back its own shares.

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS

The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and accounting estimates that are reasonable and prudent; and

• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Under applicable laws and regulations, the Directors are responsible for preparing a Directors' Report (including a Business Review), a Directors' Remuneration Report and a Corporate Governance Statement that comply with that law and those regulations.

The Directors have delegated responsibility to the Managers for the maintenance and integrity of the Company's page of the Managers' website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The work carried out by the Auditor does not involve any consideration of these matters and, accordingly, the Auditor accepts no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

Each of the Directors, whose names and functions are listed within the Directors and Managers section confirm that, to the best of their knowledge:

• the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

• the Directors' Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

By order of the Board

JEAN MATTERSON

9 September 2011

INCOME STATEMENT

	For the year ended 31 July 2011				For the year ended 31 July 2010
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total £'000
Gains on investments	-	11,172	11,172		-	22,355	22,355
Currency losses	-	(76)	(76)		-	(153)	(153)
Income (note 2)	3,441	-	3,441		2,999	-	2,999
Investment management fee  (note 3)	(1,394)	-	(1,394)		(1,224)	-	(1,224)
Other administrative expenses	(307)	-	(307)		(293)	-	(293)
Net return on ordinary activities before taxation	1,740	11,096	12,836		1,482	22,202	23,684
Tax on ordinary activities	(194)	-	(194)		(187)	-	(187)
Net return on ordinary activities after taxation	1,546	11,096	12,642		1,295	22,202	23,497
Net return per ordinary share (note 4)	1.98p	14.23p	16.21p		1.65p	28.36p	30.01p

 The total column of this statement is the profit and loss account of the Company.

All revenue and capital items in this statement derive from continuing operations. No operations were acquired or discontinued during the year.

A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement.

BALANCE SHEET

	At 31 July 2011		At 31 July 2010
	£'000	£'000	£'000	£'000
FIXED ASSETS Investments held at fair value through profit or loss		135,885		125,145
CURRENT ASSETS
Debtors	612		445
Cash and short term deposits	1,449		2,878
	2,061		3,323
CREDITORS: Amounts falling due within one year	(596)		(529)
NET CURRENT ASSETS		1,465		2,794
TOTAL ASSETS LESS CURRENT LIABILITIES		137,350		127,939
CAPITAL AND RESERVES
Called-up share capital		7,693		7,829
Share premium		3,166		3,166
Special distributable reserve		11,020		13,233
Capital redemption reserve		18,100		17,964
Capital reserve		92,221		81,125
Revenue reserve		5,150		4,622
SHAREHOLDERS' FUNDS		137,350		127,939

NET ASSET VALUE PER ORDINARY SHARE	178.53p	163.42p
ORDINARY SHARES IN ISSUE	76,932,002	78,287,002

The Financial Statements of Pacific Horizon Investment Trust PLC (Company Registration No. 2342193) were approved and authorised for issue by the Board and signed on 9 September 2011.

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

 

For the year ended 31 July 2011

	Note	Called-up share capital £'000	Share premium £'000	Special distributable reserve £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 August 2010		7,829	3,166	13,233	17,964	81,125	4,622	127,939
Net return on ordinary activities after taxation		-	-	-	-	11,096	1,546	12,642
Shares purchased for cancellation	7	(136)	-	(2,213)	136	-	-	(2,213)
Dividends paid during the year	5	-	-	-	-	-	(1,018)	(1,018)
Shareholders' funds at 31 July 2011		7,693	3,166	11,020	18,100	92,221	5,150	137,350

For the year ended 31 July 2010

	Note	Called-up share capital £'000	Share premium £'000	Special distributable reserve £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 August 2009		7,829	3,166	13,233	17,964	58,923	4,736	105,851
Net return on ordinary activities after taxation		-	-	-	-	22,202	1,295	23,497
Dividends paid during the year	5	-	-	-	-	-	(1,409)	(1,409)
Shareholders' funds at 31 July 2010		7,829	3,166	13,233	17,964	81,125	4,622	127,939

*The capital reserve balance at 31 July 2011 includes investment holding gains on fixed asset investments of £37,635,000 (2010 - £31,504,000).

CASH FLOW STATEMENT
		For the year ended 31 July 2011			For the year  ended 31 July 2010
	Note	£'000	£'000		£'000		£'000
NET CASH INFLOW FROM OPERATING ACTIVITIES	7			1,484			1,153
TAXATION
Corporation tax paid		-				(140)
TOTAL TAX PAID				-			(140)
FINANCIAL INVESTMENT
Acquisitions of investments		(38,027)				(30,596)
Disposals of investments		38,345				31,751
NET CASH INFLOW FROM FINANCIAL INVESTMENT				318			1,155
EQUITY DIVIDEND PAID	5			(1,018)			(1,409)
NET CASH INFLOW BEFORE FINANCING				784			759
FINANCING
Shares bought back	7	(2,213)				-
NET CASH OUTFLOW FROM FINANCING				(2,213)			-
(DECREASE)/INCREASE IN CASH				(1,429)			759
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS
(Decrease)/increase in cash in the year				(1,429)			759
MOVEMENT IN NET FUNDS IN THE YEAR				(1,429)			759
NET FUNDS AT 1 AUGUST				2,878			2,119
NET FUNDS AT 31 JULY				1,449			2,878

NOTES
1.	The financial statements for the year to 31 July 2011 have been prepared on the basis consistent with the accounting policies set out in the Company's Annual Financial Statements at 31 July 2010. In accordance with The Financial Reporting Council's guidance on going concern and liquidity risk issued in 2009 the Directors have undertaken a rigorous review of the Company's ability to continue as a going concern. The Company's principal risks are market related and include market risk, liquidity risk and credit risk. An explanation of these risks and how they are managed is contained in note 17 to the financial statements. The Company's assets, the majority of which are investments in quoted securities which are readily realisable, exceed its liabilities significantly. The Company has no loans. In accordance with the Company's Articles of Association, shareholders have the right to vote on the continuation of the Company every five years, the next vote being on 17 October 2011. The Directors have no reason to believe that the continuation resolution will not be passed this year. After making enquiries and considering the future prospects of the Company and notwithstanding the above, the financial statements have been prepared on the going concern basis as it is the Directors' opinion that the Company will continue in operational existence for the foreseeable future. If the continuation resolution is not passed, the Articles provide that the Directors shall convene an Extraordinary General Meeting at which a resolution will be proposed to wind up the Company voluntarily. If the Company is wound up its investments may not be realised at their full market value. The Directors consider the Company's functional currency to be sterling as the Company's shareholders are predominantly based in the UK and the Company is subject to the UK's regulatory environment.
		2011 £'000		2010 £'000
2.	Income
	Income from investments	3,441		2,999
3.	Related party transactions
	The Directors' fees for the year are detailed in the Directors' Remuneration Report contained within the Annual Report and Financial Statements. No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under Section 412 of the Companies Act 2006. Mr Gerald Smith, who was appointed as a Director of the Company on 1 February 2009, is a partner of Baillie Gifford & Co. Baillie Gifford & Co are employed by the Company as Investment Managers and Secretaries under a management agreement which is terminable by the Managers on six months' notice and by the Company on three months' notice. The fee in respect of each quarter is 0.25% of the total assets less current liabilities.
		2011 £'000		2010 £'000
4.	Net return per ordinary share
	Revenue return on ordinary activities after taxation	1,546		1,295
	Capital return on ordinary activities after taxation	11,096		22,202
	Total net return	12,642		23,497
	Weighted average number of ordinary shares in issue	77,973,139		78,287,002
	Net return per ordinary share figures are based on the above totals for revenue and capital and the weighted average number of ordinary shares in issue each period. There are no dilutive or potentially dilutive shares in issue.

			2011	2010	2011		2010
					£'000		£'000
5.	Ordinary Dividends
	Amounts recognised as distributions in the period:
	Previous year's final (paid 1 November 2010)		1.30p	1.80p	1,018		1,409
	We also set out below the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of Section 1158 of the Corporation Tax Act 2010 are considered. The revenue for the year available for distribution by way of dividend for the year is £1,546,000 (2010 - £1,295,000).
	Dividends paid and proposed in respect of the financial year:
	Proposed final dividend per ordinary share (payable 24 October 2011)		1.50p	1.30p	1,154		1,018
	If approved, the proposed final dividend of 1.50p per ordinary share for the year ended 31 July 2011 will be paid on 24 October 2011 to shareholders on the register at the close of business on 7 October 2011. The ex-dividend date is 5 October 2011. The Company's Registrar offers a Dividend Reinvestment Plan and the final date for election for this dividend is 12 October 2011.
6.	The Company had no borrowings at 31 July 2011 or 31 July 2010.
				2011 £'000				2010 £'000
7.		RECONCILIATION OF NET RETURN BEFORE TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES
		Net return on ordinary activities before taxation		12,836				23,684
		Gains on investments		(11,172)				(22,355)
		Currency losses		76				153
		Increase in accrued income		(225)				(52)
		Increase in debtors		(1)				(10)
		Increase in creditors		217				70
		Realised currency loss		(76)				(153)
		Overseas tax suffered		(171)				(184)
		NET CASH INFLOW FROM OPERATING ACTIVITIES		1,484				1,153
8.	The Company has authority to allot shares under Section 551 of the Companies Act 2006. The Board has authorised the use of this authority to issue new shares at a premium of not less than 5% in order to enhance the net asset value per share for existing shareholders and improve the liquidity of the Company's shares. In the years to 31 July 2011 and 31 July 2010 no shares were issued. The Company has authority to buy back its ordinary shares. The authority was last renewed at the Annual General Meeting on 25 October 2010 in respect of 11,735,221 shares (equivalent to 14.99% of its issued share capital at that date). In the year to 31 July 2011 a total of 1,355,000 ordinary shares with a nominal value of £135,500 (2010 - £NIL) were bought back at a total cost of £2,213,000. At 31 July 2011 the Company had authority to buy back a further 10,380,221 ordinary shares.
9.	The Company incurred transaction costs on purchases of £84,000 (2010 - £90,000) and on sales of £89,000 (2010 - £83,000).
10.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 July 2011.  The financial information for 2010 is derived from the statutory accounts for 2010. Those accounts have been delivered to the Registrar of Companies. The Auditors have reported on the 2010 and 2011 accounts, their reports for both years were unqualified and did not contain a statement under Section 495, 496 and 497 of the Companies Act 2006. The statutory accounts for 2011 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.
11.	The Report and Accounts will be available on the Company's page on the Managers' website www.pacifichorizon.co.uk on or around 15 September 2011‡.
‡ Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement. None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

- ends -

 

END

 

 

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